This is part 1 of a 4 part series on IT optimization in the oil and gas industry.
When business prospers, IT departments often struggle to meet the demand for new capabilities. To maximize limited resources, most IT groups seek methods to collaboratively select and prioritize projects to ensure effective delivery to the business. The result is an improved IT and business partnership, coordinated decision making, and a pace that often brings complexities and increases to the IT budget. When revenues decline, IT departments discover the new increases to maintenance and support are difficult to sustain.
As revenues begin to decline with oil prices, IT is often asked to contribute to cost reductions with little regard for the new systems, integrations, and support required to continue delivery of services during the booming days. The memory of improvements provided by key projects and the impact on IT maintenance costs are quickly forgotten in the haste to reduce budgets. The IT leadership and business collaboration on how to improve the IT department’s cost structure also disappears quickly, as few people wish to help identify the best methods to reduce budgets. Let’s face it, deciding how to invest money is much more gratifying than deciding how to reduce spending.
This often leads to irrational cost cutting behavior resulting from a lack of transparency, impact analysis, and coordination. Many of the capabilities developed previously are impacted by a short-term focus of immediate budget reductions. Long-term views of IT strategy, architecture, delivery, and business alignment lose emphasis in the scramble to identify what is perceived as the lowest impact budget targets. Meanwhile, leaders work to limit the impact to their own areas of ownership, driving costs down in ways that are not sustainable or simply shift costs out of IT and back into the business, thereby eliminating value of the exercise. When IT is working to support business competitiveness, this type of gamification of the cost improvement process leads to failure.
Creating significant, sustainable, cost optimization requires a comprehensive approach that crosses all IT budget owners and maintains or improves business delivery. Knowing where to focus when times are tough is just as important, if not more so, than focusing on the right activities when revenues are climbing.
Optimize IT Spend
Cost cutting typically consists of a straight forward reduction target, pursed by unguided individual budget owners within their areas of responsibility. These targets are usually the same across the board, as this simple method seems to advocate fairness and a distribution of accountability. Everybody does their part and struggles equally with the burden. What if one area is far more critical to current operations than another? What if somebody has driven impactful efficiency programs for years? What if one area has run far looser with available budget, avoiding hard decisions, resulting in more reduction opportunities? While these questions may lurk beneath the surface, they never seem to come to light, perhaps even leading to dissention within the leadership. How could all of us have the same target?
Unlike straight line cost reduction tactics, IT Cost Optimization is a strategic approach which leverages collaborative processes and analytical models to improve IT value while supporting business alignment and optimizing service delivery requirements. The focus is not on individual budgets and “fair” targets across the organization. IT Cost Optimization provides a sustainable efficiency model across IT delivery and services, allowing for various levels of impact to individual budgets.
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Unlike cost cutting, there is a heavy dependency on opportunities which extend across budgets, requiring collaboration and transparency. This can necessitate a shift in management maturity requiring skill development. Leaders must change from a view of independent budget ownership and accountability to a view that encompasses an enterprise value focus. The goal is cumulative efficiency, and not a focus on any single area alone. Once targets are identified, analysis is conducted using a common approach and set of tools to ensure all opportunities are evaluated and selected fairly. When cost reductions are driven from a need to keep a company profitable during low oil price periods, the approach must be effective, measurable, and sustainable. The key tenets of an IT cost optimization program include:
- Quick-Win, Mid-Term, and Long-Term Focus: IT Cost Optimization is a capability development that is permanently incorporated into ongoing IT performance management. Cost metrics have a rightful place in every IT executive scorecard and dashboard, regardless of business conditions. When oil prices are down, additional clarification of the levers and delivery impacts should occur. This allows an immediate and balanced response to the environment which mitigates the prospective negative impact to the value chain.
- Business Delivery Focus: While IT groups quickly target easily obtained quick-wins, truly impactful cost targets, which extend and compound over time, are overlooked. The periodic scramble to find ten or fifteen percent in a downturn distracts from a focus of driving down cost while improving business value year-over-year. While many cost reductions begin within IT owned areas, it inevitably requires interaction, and perhaps even leadership, from within the business before significant improvements are identified.
- Target Maturity: IT vendors and contracts are easy targets and should always be considered as part of the optimization picture. However, limiting the focus to these areas limits the ability to extend significant business value. While pushing IT vendor savings is a logical start, identifying large improvements through enhanced delivery models and innovation is the crucial goal.
- Optimization KPI’s: The effectiveness of IT cost optimization cannot be measured within the silo of an IT budget alone. Shifting the budget over a few periods can be insignificant compared to the overall cost optimization IT could drive within an organization over time. IT optimization KPI’s should focus on enterprise value goals.
Lawrence Eribarne is a Principal at Enaxis Consulting with over 20 years of experience as a technology leader performing IT organizational transformations as both an industry leader and IT advisor. Lawrence has a cross-industry background covering media, technology, military, and a strong emphasis on energy and manufacturing.