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Fighting complexity in IT

Can companies make short-term cuts and still address costly longer-term issues of IT complexity? McKinsey says senior IT and business leaders must commit themselves to keeping both goals in mind.

Companies are swinging the ax at their spending on information technology.

They reduced expenditures on new hardware and software by 15 percent to 25 percent, on average, in 2002--a drastic turnaround from the 5 percent to 10 percent annual increases in new IT spending that were common during the past decade. Numbers of companies in North America and, to a lesser extent, in Europe are also reducing their total IT budgets, primarily by halting incomplete projects and laying off employees. Many of the cuts have been made to improve earnings, though they also reflect management's disappointment with the results of huge spending on technology during the high-tech bubble years of the late 1990s.

A few companies have decided that IT cost-cutting provides a great opportunity to untangle their systems and projects. Rather than taking the short-term view--"can we live without this piece of IT now?"-these companies are looking to the longer run, transforming their business activities and IT processes in ways that will strengthen their systems and, at the same time, eliminate the deeper causes of bloated IT spending. In a sense, the companies are finishing a job they didn't have time to complete during the bubble years.

IT costs soared in the 1990s as companies adopted systems and applications to support new channels and products, expansion into new markets and tighter coordination with suppliers. The pace of competition often meant that such companies implemented these systems quickly--in "Internet time"--without fully integrating them with existing systems (and retiring older ones) or making the business changes needed to exploit technology's potential for helping to automate and streamline business activities.

As a result, companies not only failed to get the benefits they expected from streamlining processes but also made the technology that supports them--and often the processes themselves--more complex to manage as well as more costly. IT then had to maintain the old systems alongside the new ones. A partially implemented e-procurement system, for instance, might force a purchasing department to manage some interactions electronically and others manually.

Pulling the plug on that unfinished system would certainly generate near-term cash. But the smarter move would be to finish the implementation and migrate the old procurement systems to the new one, thereby reducing both IT and business costs dramatically. By eliminating this kind of IT-related complexity, companies also position themselves to benefit after the economy turns around. When growth returns, so will the need to add systems, but companies will do so more quickly and far less expensively by pruning complexity now. Adding an application to a streamlined, integrated IT platform requires, for example, less systems-development and integration work.

Indeed, companies can make short-term cuts and, at the same time, address the costly longer-term roots of IT complexity, but only if senior IT and business leaders commit themselves to keeping both goals in mind. Companies are making big savings by rethinking the way they manage multiple channels--closing a Web site and admitting failure, for instance, or keeping the Internet channel and outsourcing a call center. The same treatment is being accorded to product portfolios supported by disparate and often uncoordinated IT systems: Banks and telecommunications companies, for example, are dropping some older offerings. Companies are also consolidating their database-management systems and other infrastructure technologies and redrawing their IT architecture--the blueprint for the IT structure supporting the business. And they are giving themselves the ability to take advantage of new outsourcing opportunities.

The cost of complexity
Technology should obviously make it possible to streamline processes and reduce costs. Often, it does. But during the 1990s, companies added wave after wave of novel technologies, often starting new projects before completing earlier ones, with disappointing results. By not fully changing business processes to reap the value of the new systems, these companies made processes more complex--not more streamlined--and added rather than subtracted costs, particularly IT costs.

In the 1990s, many companies implemented IT systems quickly--in "Internet time"--but didn't integrate them fully into older ones.
Mergers and globalization added to the complexity. Integrating and rationalizing systems after a merger can be a massive job that takes months, sometimes years, to complete. In the interim, companies may have to grapple with operating systems and business applications that don't mesh fully or even partially; trying to get data to flow between two recently merged companies is a straightforward aim, for example, but may turn out to be frustratingly difficult. Meanwhile, as companies expanded into new markets around the globe, they added systems to support new supply chains, local human-resources and legal requirements, new financial structures and the flow of information in a variety of languages.

Like the cost of a partially re-engineered process, the complexity of IT is notoriously hard to measure. What, for instance, is the cost of supporting both older manual and newly implemented electronic purchasing activities? The answer will depend largely on how a fully re-engineered purchasing process would be managed and thus the degree to which systems that supported the older process can be scaled back. Such assessments can never be exact.

Mushrooming IT budgets nonetheless provide a general sense of the cost of complexity. IT investments accounted for fully a third of all new investments made by companies around the world during the second half of the 1990s. More than 150 companies spent over $1 billion on technology operations in 2001; ten years ago, only 50 spent this much. Among Global 500 companies, overall IT budgets have more than doubled since the mid-1990s. Typically, companies have been spending 80 percent or more of their IT budgets to maintain existing systems. New ones were paid for with additional resources.

In the long run, the reduction of complexity makes it possible to do far more than control the purchase of new servers and software: It also helps companies to deflate their ballooning IT maintenance and development costs in a more general way and to address the data headaches that complex systems can cause. At one manufacturing company, for instance, the engineering department installed a system to track engineering changes. But the system didn't account for the way the purchasing and production databases logged data for retooled parts, so purchasing was never entirely sure that the company wasn't paying too much for some of them. Cutting the level of new IT investments won't solve this problem. The solution is to look at both IT and the business activities it supports.

A broader solution
In many companies, managers don't focus on untangling the complexity of IT; rather, they look at IT investment expenditures and, more broadly, at the total IT budget. Unfortunately, by treating decisions to cut IT spending merely as decisions about what a business can and can't live without today, executives rarely address, head-on, opportunities to reduce the complexity of IT. In our experience, many companies are trying to sustain as many of their existing projects as possible. They are scrapping expensive ones that are clearly in trouble and postponing or scaling down new applications, but on the whole they are trying to preserve their current IT landscape.

Rarely do discussions about IT cuts include any consideration of whether it makes sense to keep certain channels open, to provide certain services, or to sell certain products--even though these discussions may occur as top executives are re-evaluating the business itself. Unless executives look at both halves of the equation, IT cost-cutting decisions won't produce simpler, more efficient structures and processes, and attempts to reduce the complexity of IT become mere appendages of cost-cutting decisions. Yet it is possible to take a more balanced approach. We believe that companies can untangle most of their unwanted IT complexity by focusing on five specific activities, which together will help them transform the way they use and manage IT, thus making IT organizations leaner and companies better prepared for the end of the downturn.

During the 1990s, technology committees at many companies disbanded or stopped meeting--businesses had other things to worry about. But the revival of cost containment has brought a new motivation to these committees, which are going beyond unsophisticated budget slashing. At a few companies, reconstituted technology committees that include senior business and IT executives are analyzing the factors that underlie IT costs.

Consider the experience of one European insurance company that invested in new technology during the late 1990s to help automate its interactions with agents and to expand its direct reach to customers. The two electronic channels cost several million dollars each. On top of that, the company furnished its agents with expensive laptop computers.

As a result, the insurance company must manage four distinct, though often overlapping channels. Agents can submit paper records to the company for processing, or they can use their laptops to plan policies with customers and submit the documents electronically. The company also has a call center to answer questions from agents and

Getting data to flow between two recently merged companies is a basic but at times frustratingly difficult goal.
customers as well as a Web site that permits them to get information and submit forms.

The new systems have added costs both to the business and to the company's IT organization. Only about one-third of the agents submit records electronically, so the company has to maintain the old manual process alongside the new electronic one. Little new business actually comes in from the Web site, so it is essentially an expensive brochure that provides information duplicated by the call center and paper documents. Nonetheless, the company has added people and processes to manage the new channels and to coordinate the interactions between them and the old ones. On the IT side, the company must maintain both electronic channels in addition to the systems supporting the manual channel and the call center. Since each of these systems is linked to others within the company, whenever it wants to change a feature or function of either of them, the IT staff must manually update all the linkages among systems. The cost of managing these linkages can add up rather quickly.

By contrast, executives who have a better understanding of IT costs and their drivers not only think about ways a company can live without making functional changes to IT systems but also ask whether changes shouldn't be made to the business itself; in other words, they inquire into the root causes of IT complexity. If the whole problem can't be addressed at once, such managers can readily tackle one aspect of it immediately.

The insurance company, for instance, is currently assessing the future of its multimillion-dollar investments in the Internet and its electronic channel to agents as well as the linkages between these and traditional channels. The assessments were initiated by business executives in response to cost pressures. New agents no longer get expensive notebook computers running a sophisticated suite of applications, which fewer than half of the agents actually use. Instead, they get low-cost PCs to access a common extranet, where they can use core tools (such as tariff calculators) and access customer databases and marketing and sales information. The company has shaved off hundreds of thousands of dollars in IT hardware, software and service costs and modestly cut the cost of managing agents.

Moreover, IT leaders must improve the performance of their own organizations. During the boom years, the need to implement systems quickly trumped the discipline required to define the features and attributes of systems, to prioritize and manage investments, and to bring budgets under control. In other words, deficiencies in the structure of IT processes contributed to the complexity that now bedevils many organizations.

At some companies, chief information officers (CIOs) are correcting this problem by redoubling their efforts to control shrinking budgets more tightly and by making core IT processes, including software development and project management, more efficient. Rigorous IT processes will be needed to consolidate systems effectively, to overhaul the IT architecture, and to prepare to outsource business processes. Such IT processes will also help organizations guard against new complexity in the future.

In addition, CIOs recognize that they must bring discipline to the management and integration of the software packages they buy. Companies use many more such packages today and must continually integrate and migrate systems to new releases of this software.

Companies that were in a hurry to slam new systems in place accepted a diversity of hardware and software. As a result, these companies are now saddled with the costs of plurality, including a multitude of software licenses and higher development and maintenance expenses.

Rationalizing the muddle can require new investments. Reducing the number of database systems a company uses from 10 to just three, for example, could be quite costly and could take as long as two years to finish. In the longer term, however, this might be exactly what a company should do. We estimate that many companies would be able to reduce their IT infrastructure and application maintenance and development costs by up to 20 percent if they carefully pruned the number of technologies in use, such as database systems running on servers and operating systems running on desktop computers.

That course is a tough sell in today's environment--who now wants to commit money to what is in essence a technology infrastructure project? Yet this may actually be the best time to streamline IT. When the downturn ends and growth restarts, companies will have to add new systems. But trying to do so while consolidating a company's whole technology infrastructure is like rebuilding a wing of a plane while it is still in the air. The time to tackle these projects is now.

Companies can take an evolutionary approach to the problem by identifying and consolidating small systems first and then shifting the resources previously spent maintaining them to the development side and targeting larger systems for consolidation.

Reform the company's IT architecture
Taking a more holistic view of complexity and its elimination also requires companies to redraw their IT architecture--the blueprint for the way technology supports the business. The IT architecture provides the big picture for what applications support which processes, how applications interact and how they share data.

Companies that had no time to think through their evolving IT architectures patched in and interconnected so many new systems that they now face something that resembles a plate of cooked spaghetti. Redrawing the way the pieces of the IT puzzle fit together helps companies tighten the links between IT and the business, to the benefit of both. Just as important, with a leaner architecture, companies can add new functions or even new systems more quickly and cheaply.

By ignoring the way new IT systems fit into the corporate IT architecture, some companies inadvertently undercut their customer strategies. Such companies, for example, built the customer databases for their Internet channels

Companies that first build well-structured, modular business processes and IT systems architectures will gain most from outsourcing.
separately from their primary customer databases, usually because doing so helped them get their Web sites up and running faster. As a result, they now find it hard to understand the behavior of customers who use more than one channel, to migrate customers to new channels, and to market products or services to customers across channels.

Redrawing the company's architecture is a process that jointly involves IT and the business. Executives, basing their decisions on the current needs of the company and its future strategy, define the broad themes for organizing systems in groups: it may make sense, for example, to pool customer data by segment rather than continue to manage this data in divisional-, regional- or channel-support systems. Or the company may want to ensure that its human-resources systems are distinctly hived off from any older legacy system, so that if necessary they can be outsourced more easily later on. Then the company can identify the systems it wants to link together, define where and how it should do so, make clear interfaces for these new groupings and use modern middleware technologies to recode the connections. The goal is to turn a plate of spaghetti into something that looks more like a set of Lego blocks--modular, logical, with a minimum of interconnecting pipes.

The task can be accomplished in steps, with savings from each helping to fund the next. While overhauling a company's IT architecture can take three to five years to complete, the savings can start in less than a year and the payoff may be sizable. A large European retail bank, for example, has nearly finished overhauling its IT architecture, thereby gaining the ability to manage all of its channels and products and to introduce new products in less than half the time formerly needed. It has also cut its systems integration and maintenance and operations costs by 10 percent to 25 percent.

Plan for outsourcing
Outsourcing, viewed largely as a way to cut the cost of IT, is also a useful tool for reducing its complexity. Companies can prepare to outsource their business processes while at the same time targeting the fundamental business causes of IT complexity, consolidating their IT systems and redrawing their IT architecture.

Although companies have long outsourced all or major parts of IT operations, chief information officers now say they want to outsource smaller slices of the IT organization to best-of-breed specialty providers. To start with, such a CIO must simplify the IT activity that will be entrusted to them; to outsource PC maintenance and support cost-effectively, for instance, companies must standardize the hardware and software that all employees use.

In the decade ahead, more organizations may even outsource functional blocks of IT systems and the business activities associated with them, such as parts of the finance organization or of the order-fulfillment process. The outsourcing of business processes is picking up, but this market is still largely immature, with few providers and an uncertain track record. Nonetheless, if it evolves quickly--as many believe that it will--companies will have to ensure that their systems can mesh easily with those of contractors. Companies that first build well-structured, modular business processes and IT systems architectures will gain most from outsourcing. Meanwhile, they should develop a plan for finding, negotiating with and managing a number of outsourcing vendors.

Business and IT leaders must clearly cut the costs of their organizations. But they can also make the effort pay off more substantially if they use cost-cutting as an engine to drive changes in the way companies use and manage IT. A company that balances actions to reduce costs with initiatives to reduce the complexity of IT today will position itself much more strongly for success tomorrow.

For more insight, go to the McKinsey Quarterly Web site.

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