One of the most important aspects of managing an IT function from the business perspective is budget adherence and cost control. In today’s competitive markets and industry sectors, it is considered acceptable and also good practice for IT department heads to review spend periodically. Cost that is higher than it should be needs to be investigated thoroughly to ensure that the business is getting the best deal. Along with requests from senior management to revisit overheads with a view to reducing overall cost, those responsible for the technology budget should consider this process essential and perform it regularly. It’s no real surprise that a significant chunk of an organisation’s spend can be attributed to IT and associated technology – every department and individual user relies on IT infrastructure to perform their duties, with some leveraging cloud solutions that provide the necessary enrichment to existing functions. IT infrastructure and networks perform the base platform for any business to function – unfortunately, it can attract significant cost and overhead.
If you think about this, it is easy to understand how technology plays a pivotal role in any organisation’s success in fast paced and sometimes ruthless business environment, where the most competitive usually always succeed. Unfortunately, with everything else that needs attention in an IT department, reviews around annual costs for essential communications and associated technology are often pushed down the priority list. Quite often, this isn’t intentional, but the ugly subject of exceeding your departmental budget is one that virtually every IT Manager would rather avoid – especially when an explanation around spiralling costs is difficult to provide. Given this situation, the review process around existing contracts is a difficult one – particularly if they are based on technology that was required to perform a specific function a number of years ago, but has since been long forgotten and consigned to the “too hard” pile in terms of a suitable and more cost effective replacement.
Why the continual need to reduce technology costs ?
Driving down costs is the ultimate goal for any business in order to remain profitable, but the road to Eden is often paved with obstacles. Only recently, I was dealing with a legacy service attempting to reduce the annual cost because we used only a subset of the service offering, so it made perfect sense to rock the boat and threaten to go down the open source route (which of course is always much cheaper if not free – provided you do not need support). However, owing to the way the original contract was written, modification in this instance in terms of scaling back services was virtually prohibitive. Dependent on the contract term, it is often cheaper to take new services (which is usually always a new contract) and terminate the former. A word to the wise. If you decide to take a longer contract term in order to reduce the overall cost, it’s always a good idea to factor in breakpoints which would facilitate an earlier exit if this was necessary.
One of the issues that I find personally frustrating is that vendors never seem to contact you out of the blue and start the conversation with something like
“…..I see you’ve had a 2mb leased line from us for the last 5 years. That technology is old now, and we can upgrade you to a line that has double the speed with half the cost……”
No. This just doesn’t happen- at least, not to me anyway – over the course of my entire career it’s always been very much a one way street. Sadly, if you want the best deal, you have to scour the technology market on a regular basis looking for the optimum technical solution for the lowest possible cost – and play hardball when it comes to negotiation. In a bygone era, there were only a small percentage of vendors in the technology space that provided key services. The larger ones effectively cornered the market with their service offerings, and as a result, there wasn’t much competition. However, this has changed over the years. A good example in the UK is BT (British Telecom) – they were forced to open up their exchanges to third parties in an effort to decrease their monopoly, whilst at the same time, permitting smaller competitors to use their infrastructure to deliver a similar service for a significantly reduced cost. Whilst this fostered growth and market reach, it also meant a shark infested pool of vendors all competing in the same technology space. IT managers began to realise that this unprecedented uplift in choice could (and should) be used to their advantage, and the process of pitting vendors against each other in order to get the best deal became commonplace.
The point here is that vendors are never going to contact you and tell you they can save you money on what you’ve already spent. And why would they when you can compare situations like this to the gift that keeps giving ? Most legacy contracts are a guaranteed revenue stream for vendors. Often, they will perform maintenance on their own network infrastructure (using comms as an example here) that enables them to partner with newer technology providers and reduce their operational cost, but seldom pass these savings down to customers. Unfortunately, this is what profit is all about.
You wouldn’t shoot the golden goose if it still laid eggs…..
Ultimately, it is up to you to broker the best deal in order to realise savings whilst still leveraging the best breeds of technology. Photocopiers are the best example of how you be lured into a false sense of security believing you have achieved optimum value by leasing a machine – and then realise the cost of the consumables significantly outweighs the benefit of not having to purchase the machine outright. The principle idea of an OPEX (Operational Expenditure) is to effectively spread the cost of an asset over the life of the agreement rather than pay for it up front. This yields a positive benefit both in the sense that the business gains access to the latest equipment, and also does not have to pay the entire fee at once. At the end of the term, the business either pays a lump sum to acquire the machine as an asset, or begins a new arrangement with a newer model. It should be noted that the “lump sum” is often unattractive owing to the inevitable depreciation of an expensive asset (such as a copier for example), and most technology managers would rather consider a new lease agreement than purchase a machine that potentially has no real value going forward. Lease agreements are becoming more popular amongst firms, and not just around hardware.
Ways of getting a fairer deal to reduce overall cost
The software licensing model is becoming more attractive mainly thanks to the ability to go for flexible agreements that no longer tie you in to the traditional “lock in” period of around 3 years (think Office 365 enterprise agreements – with an E3 agreement for example, there is currently a minimum number of 250 seats in order to qualify – this figure is set to raise to 500 shortly). The main advantage of opting for a fixed 3 year term for licensing with a product like Office 365 is that the business can avoid any uplift in costs during the course of the contractual agreement. A classic example here is that since 2015, Microsoft has increased the price of their licensing by 22%. Another area where the more “old school” management tend to fall heavily on their own sword is to go for an outright license purchase without software assurance. Yes, it’s cheaper, but there are significant drawbacks. The first is the inability to obtain a direct upgrade to the next version, and (probably much worse from the financial perspective) is the fact that if you do upgrade, you need to purchase the licenses all over again. This is not cost effective at all, and quite often is a bad decision taken by anyone in control of an IT budget. 3 years sounds like a long time for a licensing agreement, but it really isn’t – and the money you save at the time is effectively negated by having to purchase new licenses all over again (often at a significant cost) each time an upgrade path is available. I know what you’re thinking – why not forget the upgrade then, and just stick with what you have ? This really isn’t a good idea given today’s technology environment, and it’s exposure to significant risk from the security perspective.
When assets and associated software are declared EOL (End Of Life) they should be replaced – just look at the recent WannaCry attack and the impact to the NHS. They were still running WindowsXP.
Managing a technology budget is a very demanding aspect of an IT manager’s role. Not only do you need to factor in necessary hardware replacements during the course of the financial year, but you have to be constantly aware of changing trends in the technology space that could have an impact on essential areas such as communications. These changes dramatically affect the service offering and their associated costs, and it’s always a good idea to push for more favourable contract terms in order to be able to leverage these changes and their associated benefits more frequently. One of the worst things I’ve seen over my career is sticking with one or two key vendors because you feel comfortable with them. This breeds complacency and contempt (and laziness), and can be nothing more than a gravy train for the vendors providing the service you have used for years. Ask yourself this. During your governance and review process for vendors, how often do they come to the table with ways to reduce cost, yet still provide an exceptional level of service ?
They don’t, do they ?