Managing The 80% Problem
- 1. Managing the 80% Problem Using Activity and Quality management to Combat the ‘ongoing support’ issue cannibalizing IT budgets 5/7/2010 Copyright: Crocus Hill Associates, All rights reserved
- 2. Contents The 80% problem what is it? Why talk about it? Where are these costs hiding (show me the coffin and a stake …)? What are the common approaches – do they work? A different approach – Alphabet soup: ABC, TQC, Re Getting started Institutionalizing continuous improvement 5/7/2010 2 Copyright: Crocus Hill Associates, All rights reserved
- 3. The 80% problem what is it? Conventional wisdom and some accounting point to IT budgets being cannibalized by ongoing support issues – Legacy costs consume 70 – 80+% of total budgets – Hardware budgets still consume > 50% of total costs • Even though Moore’s law continues we can’t beat the total cost burden • Infrastructure support costs are 30 – 40 + % of Hardware costs We increase the burden every time we implement a new application – The expanding footprint of applications overwhelms productivity gains – The expanding infrastructure footprint increases the support / patch / maintenance burden in the data center – Ongoing environmental support for old data centers takes people and capital to keep up with new infrastructure demands At the end of the day, it’s the ‘Golden Apple’, where everything good we do today, inhibits our ability to do more in the future 5/7/2010 3 Copyright: Crocus Hill Associates, All rights reserved
- 4. Why talk about it? It was second among InfoWeek’s survey of CIO’s for 2010 1. The Cloud Imperative. 2. The 80/20 Spending Trap. 3. CIO-Led Revenue Growth And Customer Engagement. 4. Mastering End-to-End Business Processes. 5. Business Analytics and Predictive Analytics. 6. External Information vs. Internal Information. 7. CIO Priorities, CIO Compensation, CIO Evaluation. 8. Vendor Consolidation, With Radical Exceptions 9. The Mobile Enterprise and The Mobile Mindset. 10. The Transformation Quotient. As has been the case for the last 20 years - "the new normal" for CIOs in 2010 will be to accomplish a whole lot more with a whole lot less 5/7/2010 4 Copyright: Crocus Hill Associates, All rights reserved
- 5. Why talk about it (continued)? IT budget, even if developed bottom up is almost always capped by G&A and expense ratios at budget time: – Benchmarks of % of revenue, free cash flow, PBT / EBITDA, etc. make budgets for SG&A a ‘solved for’ number. – Sandbagged revenue estimates and escalating uncontrollable expense costs (raw matl. , energy …) subtract from available cash. – Additionally head count caps, caps on consulting and variable resources constrain any flexibility that the CIO has. Even the FASB ‘dodge’ of the last 10 years is falling short: – Software and new development capitalization has resulted in a tidal wave of depreciation washing over the budget ‘shores’. – Free cash flow and debt covenants further constrain our ability to ‘grow the pie’ from creative accounting. – Conservative auditors and CFO’s seek to stop capitalization at the earliest point in the implementation cycle. In a ‘capped budget’ situation we are left with the untenable choice to either cut service or cut development work 5/7/2010 5 Copyright: Crocus Hill Associates, All rights reserved
- 6. Where are these costs hiding? We all know where the costs are – Legacy, Legacy, Legacy Infrastructure - hardware etc. Infrastructure Labor - support Infrastructure Labor - new Application Labor - support Application Labor - new 5/7/2010 6 Copyright: Crocus Hill Associates, All rights reserved
- 7. Where are these costs hiding? Break Fix and Support are the Killers Audit Work Request - Special 0% Break - Fix (problem Project Mgmt) 12% 36% Core Activities Support - Maintenance 4% 44% Data Base Support Project - Internal 2% 0% Operations Support 2% 5/7/2010 7 Copyright: Crocus Hill Associates, All rights reserved
- 8. What are the common approaches – do they work? Embrace a ‘religion’ – e.g. ITIL – While service level control may manage demand, overall costs rarely go down and often go up when formalisms are installed. – However, the good news is that the discipline of formal processes and databases provide the basis to measure work and potentially to manage it better. Give the problem to someone else – outsource – Overall, the outsourcing equation may transfer responsibility to more efficient organizations. – However, it is still true that over 50% fail outright and more than that go ‘upside down’ on costs in less than three years. Benchmark – see who might be doing it better – Comparisons in this area are risky, however, at a high level they do provide a view into areas where there are opportunities to improve practice. – The bad news is that they don’t help in ‘root cause’ analysis. They only identify areas of opportunity 5/7/2010 8 Copyright: Crocus Hill Associates, All rights reserved
- 9. A different approach Evaluate key work activities Work request Understand Pilot evaluate Cost / quality and expand drivers Labor KPI’s tracking Re Engineer Prioritize ‘Hit service List’ delivery 5/7/2010 9 Copyright: Crocus Hill Associates, All rights reserved
- 10. Alphabet soup- Drive change through ABC, TQC and Reengineering Activity Based Costing to baseline work and standard costs – Identify core deliverables and activities for each group – Identify work at a low enough level to be actionable – activities that can be eliminated, automated, restructured, or reorganized – Understand the cross functional (IT group) costs Total Quality Methods for priorities and root cause – Pareto (Frequency) charting of incidents and activity volume – Ishikawa (Fishbone) to outline drivers and root cause – Plan-do-check-act cycle for change implementation Use Reengineering principles to drive performance and efficiency – Eliminate unnecessary work / Restructure processes /Apply automation only after optimization 5/7/2010 10 Copyright: Crocus Hill Associates, All rights reserved
- 11. Use Activity Based Cost to develop standard costs and linkage Break down high level costs into standard work units – At enough granularity to be able to establish standards • Unix password reset… – Identify cross functional (IT group) involvement in activities • Identify who the participants are, their place in the workflow and their estimate for their tasks – Estimate standard work effort estimates for each activity • Focus both on labor / effort as well as “$” costs Develop workload model summarizing standard activity costs into major accounting groups – Break Fix – Support / upgrade – Enhancement – New development etc. 5/7/2010 11 Copyright: Crocus Hill Associates, All rights reserved
- 12. Use TQC to prioritize and analyze activities Develop Pareto charts from tickets, service requests or other estimating techniques to analyze frequency of activities – May have to break ticket categories down to match with ABC – Ultimately workload categorization standards must synchronize across all accounting and work management systems Combine with the data from the ABC analysis to understand the total cost impact of the activity – Model the total costs by matching the frequency of activities to the standard cost for the work Reconcile the cost with budget and headcount and redo standards and volumes until budget, headcount and total cost are close – In first pass the model should be within 5-10% of explaining all work and budget 5/7/2010 12 Copyright: Crocus Hill Associates, All rights reserved
- 13. Understand Impact and Set Change Agenda ABC analysis Infrastructure Applications Sys Admin Database Network PM BA PA Break Fix Activity 1 10 5 1 0 0 0 Analyze and Activity 2 Activity 3 1 20 0 5 5 3 0 1 0 2 0 10 Reconcile Activity 4 0 0 0 2 3 20 Support / Maintenance Activity 5 2 5 1 10 5 20 Activity 6 0 0 0 2 10 5 Activity 7 1 8 1 3 9 15 Activity 8 4 6 3 1 2 4 Upgrade / Enhancement Activity 9 6 3 3 0 0 0 Activity 10 2 4 0 3 6 10 Activity 11 9 3 4 6 8 22 Pareto Analysis 1200 1000 800 600 400 200 0 Prioritize and Focus $ Activity Cost This effort will identify and prioritize a portfolio Activity Volume of improvement initiatives 5/7/2010 13 Copyright: Crocus Hill Associates, All rights reserved
- 14. Each targeted initiative should work on both reducing its frequency and cost Drive down activity frequency with TQC and root cause analysis $ Activity Cost Drive down activity cost with process redesign Activity Volume 5/7/2010 14 Copyright: Crocus Hill Associates, All rights reserved
- 15. Use Root cause analysis to find drivers of activities Pareto Analysis 1200 1000 800 Evaluating the root cause or 600 400 200 drivers of efforts identifies 0 changes to reduce frequency of support efforts Improvement efforts Training Technology Policy Procedure 5/7/2010 15 Copyright: Crocus Hill Associates, All rights reserved
- 16. Reengineer process to drive efficiency and cost reduction Eliminate Reengineer • Identifying workflow activities that add no value to the and process product or service, • Identifying • Organize around outcomes, not activities that add no value for the tasks Apply • Have those who use the output of customer, the process do the process automation • Subsume Information work into the judiciously real work that produces the information • Treat geographically dispersed • Automate after a operations as if they were working model has centralized been piloted and • Link parallel activities instead of implemented integrating their results • Don’t pave over the • Put the decision point where the cow path – restructure, work is performed redesign then automate • Capture data once at its source 5/7/2010 16 Copyright: Crocus Hill Associates, All rights reserved
- 17. Sustaining change and continuous improvement Work It is necessary to establish or rework key IT management request systems to monitor and manage this effort – The ABC and initial quality initiatives can identify quick hit and key process overhaul candidates Labor KPI’s tracking – Over time, experience has shown that performance degrades and sometimes costs are as high or higher than before the reengineering effort It is critical to establish a solid set of KPI’s around the continued performance of these cost driving initiatives – Work tracking and labor management systems need to be tied together to provide management visibility into ongoing operations – A standard work breakdown structure is the critical link between the work request (problem / request management) system and the labor tracking system – Management reports should tie both the volume of work and the cost of work into a coherent management dashboard – KPI’s and performance management systems need to support continued improvement efforts 5/7/2010 17 Copyright: Crocus Hill Associates, All rights reserved
- 18. For more information Additions, arguments, corrections or for a copy of this presentation: Contact us: Craig Bickel [email protected] 612 978 3737 – Cell 612 216 2403 – Direct 5/7/2010 18 Copyright: Crocus Hill Associates, All rights reserved