Published: January 05 2009, 12:36 PM
by Dominic Schiavello

So now that we've covered the benefits to getting a good handle on costs, and how IT-service-based costing can help you understand your total service costs, let's take a look at how to actually make improvements to your cost structure.

In our discussion of aligning IT with the business, I introduced the concept of the Economics of IT, where issues affecting the whole business are considered macroeconomic and issues that affect the business unit are microeconomic.  This concept plays out when we're discussing ways to improve our cost structure as well.  Things we do at a macroeconomic level improve our cost situation across all services, whereas things we do at a microeconomic and operational level will improve things for specific services. In this post, I'll examine the macroeconomic view starting with CAPEX, which relates to your asset base. I'll follow up with a post on OPEX, which relates to the cost of goods sold (in our case, what we're producing is IT services).

CAPEX

Examine the IT asset base: What you've got and how well it's being utilized

With CAPEX, the first thing to examine is the IT asset base, in order to determine what assets you have (because you can't manage what you don't know). The second is to determine the current rate of utilization for each of the assets. To paraphrase a common message that's used in business, you need to "make your IT assets sweat for you."

There can be significant areas of waste that can be recaptured once you have a better handle on IT asset management. For example, analyst studies indicate that many organizations are actually over-licensed by as much as 20 percent. In other words, they've bought large software licenses (to use software packages throughout the company) but they're only using a small percentage. One CA client, for example, had a site-wide license for a product that cost $500,000 a year. When the firm utilized our IT asset inventory software to discover how many instances of that software was actually being used, it discovered that only five or six people actually had it installed. With each license costing less than $3,000, the firm was able to buy six licenses for $18,000, resulting in a savings of $482,000 annually.

An optimal IT asset management solution should include features for providing real control over your assets so you can assign resources to IT services more accurately, as well as features for IT governance, compliance, technology upgrades, and green IT. Governance is important because it helps align your IT budget with business objectives, which makes it easier for you to get budget support from the business for new initiatives. Compliance features will help you avoid paying the big financial penalties that result from non-compliance. Features that support technology upgrades help you budget the cost of a rollout more accurately, helping you avoid overpaying for licensing fees, for example. And finally, Green IT features allow you to identify and replace assets that are less energy efficient (I'll cover Green IT more in reference OPEX in my next post).

Server consolidation: The first technique to start reining in costs

After you examine the IT asset base, the second thing to examine is the possibility of server consolidation. It was pretty well established a number of years ago that a lot of IT assets are well underutilized. Because IT systems have to handle capacity for peak loads, during certain times of the day (or certain times of the month) when they're operating below peak, they're actually oversized. In fact, the majority of the time they run at really low utilization rates-some statistics have said that servers are only 25 percent utilized on average during a month. As a result, one of the big trends that developed about three or four years ago that is still ongoing is the trend of server consolidation: Instead of having lots of little machines that are dedicated to specific tasks, you consolidate them into bigger machines that can run a lot of these tasks at the same time. You basically run what you need to when you need to on those bigger servers and spread the load out during the monthly cycle.

Virtualization: To further rein in costs

The next phase of that is virtualization, a technique that lets you virtualize environments on physical hardware so that you can run, for example, multiple operating systems on the same hardware at the same time. So, you can run 20 or 30 copies of Windows Server on a machine, or you can run a mixture (some Windows, some Linux, as an example) and each one of those environments for all intents and purposes looks like a real environment that would normally take up a bit of hardware on the floor. And you can create these things on the fly and decommission them on the fly-adding them when you need them. So there are even more opportunities now to be able to combine that server consolidation with virtualization to really make your IT assets sweat. 

These three ideas-examining the IT asset base, server consolidation and virtualization-are broad brush strokes because every time we do these things, they affect every service that will eventually run on these. So overall from a capital expenditure side, we can reduce costs. But the caveat with CAPEX is that because you're buying equipment that has a lifespan, and you only realize the expenses year-by-year through depreciation, you can't actually just say you're going to drop your capital expenses, because these are ongoing, based on the life of the asset. But what you can do is control your future spend by utilizing the current assets better, so you can avoid having to purchase new assets.

To recap: You can't manage what you don't know, so the first thing is you need is to know what your asset base looks like. Then look at the current utilization and seek out opportunities for server consolidation and virtualization. And all three of these things combined will put you in a very good position to control your capital expenses.

Check back soon for ways to make macroeconomic improvements by reducing your OPEX.