A Cost-Cutting Conversation Worth Having
In lean and mean times, small and midsize businesses often cut capital expenditures and discretionary operating expenses. Many companies defer hiring and limit their investments to those with short payback periods and a high return on investment. That is not surprising. These are natural reactions to economic uncertainty.
Information technology (IT) is certainly not immune to budget cuts in a slow economy. In most small and midsize companies, IT represents a big chunk of the operating budget-and a big opportunity for cost cutting. In fact, the question is no longer, whether IT expenses can be trimmed. In a recessionary environment, the real questions are how much of a company's IT budget is fat, how much is muscle, and how can you tell them apart?
For most companies, these questions have never been more important. The fact is that today, IT plays a key role in the success or failure of a business. An organization's IT infrastructure has become an essential component for doing business in a connected world where customer expectations and competitive threats are growing continually.
Companies must therefore be careful not to make the wrong cuts in the wrong areas. For instance, if your network were to go down, how long would your business survive? How long could you afford to be without e-mail access? How would your business be affected if you couldn't send out orders or proposals for a few days? And what would be the impact of losing all your business data for the past five years?
Fortunately, there is plenty of room for cutting IT costs without risking your business or your ability to serve customers. The secret lies in knowing where the fat resides-and in knowing how to trim that excess without affecting the meat and bone needed to maintain healthy business operations and develop a competitive advantage.
Based on our 17 years of experience working with small and midsize companies on their IT infrastructure, this report provides practical tips and objective recommendations to aid businesses in their cost-cutting effort during an economic downturn.
Where Do You Start?
There is no such thing as a foolproof template for IT cost reduction. Every company has different business objectives, competitive challenges, cost profiles, business models and IT requirements. However, when embarking on a strategic cost-cutting journey, it is helpful to break down IT into three main buckets:
Existing hardware and softwareExisting vendor agreementsCurrent IT staff or outsourced IT services provider
#1 -Maximize the Value of Your Hardware and Software
Hardware
As tempting as it may be to forgo new hardware purchases and software upgrades during lean times, in many cases it actually makes better economic sense to move forward with a technology refresh-even in a recession. Because most hardware carries only a three-year warranty from the manufacturer, a policy of if it ain't broke, don't fix it. will often drive up a machine's total cost of ownership (TCO) to a level far higher than if the hardware was replaced more frequently.
When carefully planned and executed, a shorter hardware replacement cycle keeps maintenance and warranty costs at a minimum by letting the manufacturer bear the costs of keeping your machines running. For instance, with a three-year warranty, your initial purchase price (IPP) on a laptop computer is your TCO. However, after three years, the warranty expires and your TCO starts to climb as the risk of service outages increases and maintenance costs are no longer covered by the manufacturer. As a result, years four and five add incrementally much more to TCO than did the first three years.
Is your recently purchased equipment running slower than you would like? While waiting for your next technology replacement cycle, there are simple things you can do to help boost the efficiency of your current PCs and servers. For instance, you should periodically:
Spring-clean hard drivesRun maintenance tasks (e.g., defragment drives)Uninstall applications that are no longer usedRun virus scans, even if you have anti-virus software
As insignificant as these tasks may seem, they can help boost the efficiency and speed of your machines dramatically. They can also keep you from having to buy new ones before your next scheduled refresh while boosting employee productivity and improving customer service.
Another area in which companies can often make significant improvement is system security. Something as simple as.locking down. (a simple measure that prohibits users from installing software or changing system settings) all PCs and laptops prevents malicious software from being unintentionally installed in users' machines-software that can lead to virus outbreaks, security breaches and productivity drains. In fact, according to the analyst firm Gartner, this security measure alone will reduce a company's total cost of ownership on a PC or laptop by 42 to 45 percent.1
Software and Operating Systems
Just because the software industry is continually rolling out new upgrades doesn't mean you need to follow their lead. Waiting at least six to 18 months before rolling out an operating system upgrade or an upgrade to an existing software package is a wise move. In many cases, not only are there often hidden training costs involved with a software upgrade, but there are performance issues to consider-from the standpoint of both your existing hardware and the instability inherent in most new software upon its release.
Security Software
When it comes to keeping your network secure, the best solution for most companies is to outsource the function to a hosted security provider. For one, the threat of phishing attacks, viruses and data leaks is higher than ever, and new threats surface daily. In fact, the enterprise gateway security company Secure Computing recently reported that the number of spam messages doubled from 60 billion in 2006 to 120 billion by November 2007.2 This is a troubling pattern, because spam often carries viruses and trojans and takes up so much valuable server space, which slows down the network. Another reason to outsource this function: Security software is only as good as its last patch or upgrade, and keeping up with the multitude of software options and antidotes is too difficult, costly and time-consuming for most companies.
#2 -Maximize the Value of Existing Vendor Agreements
Leasing vs. Buying
A thorough assessment of existing vendor contracts almost always turns up multiple opportunities to save costs without sacrificing quality. For instance, in most cases, leasing your computer hardware, copiers and software can translate into significant cash flow improvements.
The case for companies leasing their IT in a down economy is compelling. First, today's technology has a very limited shelf life. However, you don't have to absorb that depreciation in value. Leasing companies are offering leasing rates as low as 6 percent and even bundle all the equipment's associated soft costs (e.g., installation services) into their contracts.
Instead of having to make a large capital investment every three years, leasing allows you to keep revolving your contract and to pay a small, fixed monthly fee. The impact on cash flow can be dramatic. For instance, a $50,000 equipment replacement and software upgrade project can be leased for a monthly payment of around $1,500-a much more manageable expense in a climate where cash flow is king.
Internet/Telco
Telecommunications costs are often one of the top five expenses for small and midsize companies. But what is truly disturbing is that even after the BellSouth and AT&T merger, prices for bandwidth continue to collapse while telecommunications expenses for most businesses are flat or even growing. For one, according to Gartner, companies typically waste 10 percent of telecom budgets on outdated services or errors. Moreover, many companies do not realize they can renegotiate their contracts. And those who do aren't sure how to go about it or how to find areas of savings opportunities.
Once you know where to look, the savings in this area are often substantial. In fact, we continually save companies more than $2,000 per month, without sacrificing quality, just by renegotiating their Internet/telco contracts. If you are looking to do this on your own, always use one vendor for both services. This alone usually lowers your total cost. Furthermore, just as with insurance, it pays to keep reevaluating your service every year to make sure you are always getting the best deal possible.
#3 -Maximize the Value From Your IT Staff or Outsourced Provider
In a recession, it becomes even more important that you focus on maximizing the efficiency of the person or group in charge of running and maintaining your IT infrastructure-whether that individual is you, another employee or an outside provider.
Internal IT Resource
If you currently employ an internal resource, it's worth asking: Is information technology the only responsibility this individual has? If not, how much time and effort is this person investing to manage and maintain your IT? If this employee didn't have peripheral responsibility for IT, what other activities could he or she be working on that would add value to your company and your customers and help boost the bottom line? As a part time IT person, does this individual have the expertise to handle all your IT needs adequately, or do you still need to bring in an outside person on occasion?
If you are considering bringing on a dedicated IT employee, how do you know when having such a resource is a luxury? In the metro Atlanta area, a full-time IT staffer will easily command $5,000 per month plus benefits. You also have to factor in the hidden costs of training to keep this individual's knowledge base current in a field that is constantly evolving. How does that cost compare to outsourcing this function? And what are the quality and service-level tradeoffs of the different outsourcing options?
Hourly Outsourced Service Provider
If you are paying an outsourced provider by the hour, the question becomes: How do you minimize this expense? And when do you know if (or when) you've gone too far in cost cutting? In other words, how do you optimize the value of your hourly contract? A.duct tape. approach to IT maintenance and repair- one where you avoid calling the hourly-rate service provider every time you should-can lead to catastrophic equipment or software failure. The cost to recover from such an event can easily dwarf the cost of an extra service call when there was still time to prevent the problem altogether.
Managed Service Provider (MSP)
In the past few years, a trend has emerged for small and midsize companies that want big-company services at small-company prices: the IT managed service provider (MSP). This model is not for everyone. However, in light of the current economic slowdown, a growing number of businesses are finding that this approach makes better economic sense when cash flow, costs and risk exposure are all factored in. Most fixed-fee MSPs offer a number of benefits that are even more relevant in a recessionary environment. They include:
1. Ability to budget a predetermined annual amount for IT, which helps avoid budget spikes, spending surprises and last-minute breakdowns
2. Systematic preventative maintenance of the entire IT infrastructure and real-time monitoring for network instability or failures
3. Remote, large-company tools that allow immediate access to your IT network and problems, coupled with scheduled preventative on-site maintenance by certified network engineers
4. Bulletproofing your network for business continuity and disaster recovery, and fully documenting your network.
Because it is less costly to do.fire prevention. than it is to do.firefighting,. MSPs practice preventative maintenance. An MSP's cost structure and economy of scale can also give your business an important competitive advantage. Furthermore, because they charge a fixed monthly subscription fee, the burden of keeping your IT running efficiently falls on them. Companies considering this model should make sure that the MSP can both work remotely and come on site. Just as important, they should focus their search on MSPs that do not benefit financially when they recommend hardware or software purchases. That means they are not a vendor.
Scorecard Your Performance Before Making Big IT Decisions To find the.fat. in your IT budget and avoid cutting out meat and bone, a comprehensive and objective IT assessment is essential-one that scorecards your IT based on your unique business objectives. Especially in a recession, no business should make major IT decisions without such a careful review of their technology infrastructure.
This report provides a starting place for such an exercise. At a minimum, you should use the three major areas discussed in this document to determine where your business stands and where the opportunities for low-risk cost cutting lie.
However, companies that are serious about weathering the current economic downturn without negatively impacting their critical IT infrastructure would do well to engage an experienced third party to scorecard their IT performance. The ideal IT assessment should focus on scorecarding the following key areas:
IT infrastructureMaintenance practicesSecurityApplicationsNetwork security diagnosticsDocumentation of IT assets for business continuityAlignment of IT to the company's business objectives and strategic plan
The assessment should then lead to a technology roadmap that's tied to a budget. And this budget
should always take into account the current economic landscape and the company's goals and
objectives.
Many companies are surprised to find that, after conducting more than 500 IT assessments for small and midsize companies over the last 17 years, 70 percent of Insol assessments do not point to purchasing additional hardware or software. Instead, the opportunities for strategic cost reduction and service-level improvements almost always come from trimming fat from IT and using existing IT assets more efficiently.
About Insol
Founded in 1991, Insol is an Atlanta-based IT managed service provider (MSP). Our Insol is an IT service company that has been meeting the expanding IT requirements of its clients since 1991 by addressing the full life cycle of network services including evaluation, planning and implementation to management and maintenance. Insol continues its vision is to be a trusted advisor in the area of information technology for our small and mid-size business clients in Atlanta, by helping to ensure that their technology will meet their business goals. For more information, please visit http://www.insolnet.com/
In lean and mean times, small and midsize businesses often cut capital expenditures and discretionary operating expenses. Many companies defer hiring and limit their investments to those with short payback periods and a high return on investment. That is not surprising. These are natural reactions to economic uncertainty.
Information technology (IT) is certainly not immune to budget cuts in a slow economy. In most small and midsize companies, IT represents a big chunk of the operating budget-and a big opportunity for cost cutting. In fact, the question is no longer, whether IT expenses can be trimmed. In a recessionary environment, the real questions are how much of a company's IT budget is fat, how much is muscle, and how can you tell them apart?
For most companies, these questions have never been more important. The fact is that today, IT plays a key role in the success or failure of a business. An organization's IT infrastructure has become an essential component for doing business in a connected world where customer expectations and competitive threats are growing continually.
Companies must therefore be careful not to make the wrong cuts in the wrong areas. For instance, if your network were to go down, how long would your business survive? How long could you afford to be without e-mail access? How would your business be affected if you couldn't send out orders or proposals for a few days? And what would be the impact of losing all your business data for the past five years?
Fortunately, there is plenty of room for cutting IT costs without risking your business or your ability to serve customers. The secret lies in knowing where the fat resides-and in knowing how to trim that excess without affecting the meat and bone needed to maintain healthy business operations and develop a competitive advantage.
Based on our 17 years of experience working with small and midsize companies on their IT infrastructure, this report provides practical tips and objective recommendations to aid businesses in their cost-cutting effort during an economic downturn.
Where Do You Start?
There is no such thing as a foolproof template for IT cost reduction. Every company has different business objectives, competitive challenges, cost profiles, business models and IT requirements. However, when embarking on a strategic cost-cutting journey, it is helpful to break down IT into three main buckets:
Existing hardware and softwareExisting vendor agreementsCurrent IT staff or outsourced IT services provider
#1 -Maximize the Value of Your Hardware and Software
Hardware
As tempting as it may be to forgo new hardware purchases and software upgrades during lean times, in many cases it actually makes better economic sense to move forward with a technology refresh-even in a recession. Because most hardware carries only a three-year warranty from the manufacturer, a policy of if it ain't broke, don't fix it. will often drive up a machine's total cost of ownership (TCO) to a level far higher than if the hardware was replaced more frequently.
When carefully planned and executed, a shorter hardware replacement cycle keeps maintenance and warranty costs at a minimum by letting the manufacturer bear the costs of keeping your machines running. For instance, with a three-year warranty, your initial purchase price (IPP) on a laptop computer is your TCO. However, after three years, the warranty expires and your TCO starts to climb as the risk of service outages increases and maintenance costs are no longer covered by the manufacturer. As a result, years four and five add incrementally much more to TCO than did the first three years.
Is your recently purchased equipment running slower than you would like? While waiting for your next technology replacement cycle, there are simple things you can do to help boost the efficiency of your current PCs and servers. For instance, you should periodically:
Spring-clean hard drivesRun maintenance tasks (e.g., defragment drives)Uninstall applications that are no longer usedRun virus scans, even if you have anti-virus software
As insignificant as these tasks may seem, they can help boost the efficiency and speed of your machines dramatically. They can also keep you from having to buy new ones before your next scheduled refresh while boosting employee productivity and improving customer service.
Another area in which companies can often make significant improvement is system security. Something as simple as.locking down. (a simple measure that prohibits users from installing software or changing system settings) all PCs and laptops prevents malicious software from being unintentionally installed in users' machines-software that can lead to virus outbreaks, security breaches and productivity drains. In fact, according to the analyst firm Gartner, this security measure alone will reduce a company's total cost of ownership on a PC or laptop by 42 to 45 percent.1
Software and Operating Systems
Just because the software industry is continually rolling out new upgrades doesn't mean you need to follow their lead. Waiting at least six to 18 months before rolling out an operating system upgrade or an upgrade to an existing software package is a wise move. In many cases, not only are there often hidden training costs involved with a software upgrade, but there are performance issues to consider-from the standpoint of both your existing hardware and the instability inherent in most new software upon its release.
Security Software
When it comes to keeping your network secure, the best solution for most companies is to outsource the function to a hosted security provider. For one, the threat of phishing attacks, viruses and data leaks is higher than ever, and new threats surface daily. In fact, the enterprise gateway security company Secure Computing recently reported that the number of spam messages doubled from 60 billion in 2006 to 120 billion by November 2007.2 This is a troubling pattern, because spam often carries viruses and trojans and takes up so much valuable server space, which slows down the network. Another reason to outsource this function: Security software is only as good as its last patch or upgrade, and keeping up with the multitude of software options and antidotes is too difficult, costly and time-consuming for most companies.
#2 -Maximize the Value of Existing Vendor Agreements
Leasing vs. Buying
A thorough assessment of existing vendor contracts almost always turns up multiple opportunities to save costs without sacrificing quality. For instance, in most cases, leasing your computer hardware, copiers and software can translate into significant cash flow improvements.
The case for companies leasing their IT in a down economy is compelling. First, today's technology has a very limited shelf life. However, you don't have to absorb that depreciation in value. Leasing companies are offering leasing rates as low as 6 percent and even bundle all the equipment's associated soft costs (e.g., installation services) into their contracts.
Instead of having to make a large capital investment every three years, leasing allows you to keep revolving your contract and to pay a small, fixed monthly fee. The impact on cash flow can be dramatic. For instance, a $50,000 equipment replacement and software upgrade project can be leased for a monthly payment of around $1,500-a much more manageable expense in a climate where cash flow is king.
Internet/Telco
Telecommunications costs are often one of the top five expenses for small and midsize companies. But what is truly disturbing is that even after the BellSouth and AT&T merger, prices for bandwidth continue to collapse while telecommunications expenses for most businesses are flat or even growing. For one, according to Gartner, companies typically waste 10 percent of telecom budgets on outdated services or errors. Moreover, many companies do not realize they can renegotiate their contracts. And those who do aren't sure how to go about it or how to find areas of savings opportunities.
Once you know where to look, the savings in this area are often substantial. In fact, we continually save companies more than $2,000 per month, without sacrificing quality, just by renegotiating their Internet/telco contracts. If you are looking to do this on your own, always use one vendor for both services. This alone usually lowers your total cost. Furthermore, just as with insurance, it pays to keep reevaluating your service every year to make sure you are always getting the best deal possible.
#3 -Maximize the Value From Your IT Staff or Outsourced Provider
In a recession, it becomes even more important that you focus on maximizing the efficiency of the person or group in charge of running and maintaining your IT infrastructure-whether that individual is you, another employee or an outside provider.
Internal IT Resource
If you currently employ an internal resource, it's worth asking: Is information technology the only responsibility this individual has? If not, how much time and effort is this person investing to manage and maintain your IT? If this employee didn't have peripheral responsibility for IT, what other activities could he or she be working on that would add value to your company and your customers and help boost the bottom line? As a part time IT person, does this individual have the expertise to handle all your IT needs adequately, or do you still need to bring in an outside person on occasion?
If you are considering bringing on a dedicated IT employee, how do you know when having such a resource is a luxury? In the metro Atlanta area, a full-time IT staffer will easily command $5,000 per month plus benefits. You also have to factor in the hidden costs of training to keep this individual's knowledge base current in a field that is constantly evolving. How does that cost compare to outsourcing this function? And what are the quality and service-level tradeoffs of the different outsourcing options?
Hourly Outsourced Service Provider
If you are paying an outsourced provider by the hour, the question becomes: How do you minimize this expense? And when do you know if (or when) you've gone too far in cost cutting? In other words, how do you optimize the value of your hourly contract? A.duct tape. approach to IT maintenance and repair- one where you avoid calling the hourly-rate service provider every time you should-can lead to catastrophic equipment or software failure. The cost to recover from such an event can easily dwarf the cost of an extra service call when there was still time to prevent the problem altogether.
Managed Service Provider (MSP)
In the past few years, a trend has emerged for small and midsize companies that want big-company services at small-company prices: the IT managed service provider (MSP). This model is not for everyone. However, in light of the current economic slowdown, a growing number of businesses are finding that this approach makes better economic sense when cash flow, costs and risk exposure are all factored in. Most fixed-fee MSPs offer a number of benefits that are even more relevant in a recessionary environment. They include:
1. Ability to budget a predetermined annual amount for IT, which helps avoid budget spikes, spending surprises and last-minute breakdowns
2. Systematic preventative maintenance of the entire IT infrastructure and real-time monitoring for network instability or failures
3. Remote, large-company tools that allow immediate access to your IT network and problems, coupled with scheduled preventative on-site maintenance by certified network engineers
4. Bulletproofing your network for business continuity and disaster recovery, and fully documenting your network.
Because it is less costly to do.fire prevention. than it is to do.firefighting,. MSPs practice preventative maintenance. An MSP's cost structure and economy of scale can also give your business an important competitive advantage. Furthermore, because they charge a fixed monthly subscription fee, the burden of keeping your IT running efficiently falls on them. Companies considering this model should make sure that the MSP can both work remotely and come on site. Just as important, they should focus their search on MSPs that do not benefit financially when they recommend hardware or software purchases. That means they are not a vendor.
Scorecard Your Performance Before Making Big IT Decisions To find the.fat. in your IT budget and avoid cutting out meat and bone, a comprehensive and objective IT assessment is essential-one that scorecards your IT based on your unique business objectives. Especially in a recession, no business should make major IT decisions without such a careful review of their technology infrastructure.
This report provides a starting place for such an exercise. At a minimum, you should use the three major areas discussed in this document to determine where your business stands and where the opportunities for low-risk cost cutting lie.
However, companies that are serious about weathering the current economic downturn without negatively impacting their critical IT infrastructure would do well to engage an experienced third party to scorecard their IT performance. The ideal IT assessment should focus on scorecarding the following key areas:
IT infrastructureMaintenance practicesSecurityApplicationsNetwork security diagnosticsDocumentation of IT assets for business continuityAlignment of IT to the company's business objectives and strategic plan
The assessment should then lead to a technology roadmap that's tied to a budget. And this budget
should always take into account the current economic landscape and the company's goals and
objectives.
Many companies are surprised to find that, after conducting more than 500 IT assessments for small and midsize companies over the last 17 years, 70 percent of Insol assessments do not point to purchasing additional hardware or software. Instead, the opportunities for strategic cost reduction and service-level improvements almost always come from trimming fat from IT and using existing IT assets more efficiently.
About Insol
Founded in 1991, Insol is an Atlanta-based IT managed service provider (MSP). Our Insol is an IT service company that has been meeting the expanding IT requirements of its clients since 1991 by addressing the full life cycle of network services including evaluation, planning and implementation to management and maintenance. Insol continues its vision is to be a trusted advisor in the area of information technology for our small and mid-size business clients in Atlanta, by helping to ensure that their technology will meet their business goals. For more information, please visit http://www.insolnet.com/
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