by: Randy Littleson
If you enter into conversation with any successful CEO you will quickly find a person with an excellent grasp of the company’s future vision. They will also be well versed in the makeup of the company's profit and loss statement and the revenues and expenses that contribute to them.
CEOs and senior managers relate to an IT department's costs—especially how much the IT department spends as a percentage of revenue. Most are strategic thinkers who do not want to get into the details of how a CIO is spending the company’s money. Yet, they usually have a picture of how much the company can afford for corporate services to support the revenue generating operations of the company and want to understand how that spend is changing and how that effects or benefits the business.
Astute executives want to know how the IT department in their company compares with the IT departments in similar companies. So using the IT expense as a percent of revenue figure lets them compare one IT shop to another and enables them to understand the potential benefit of any future technology investments.
For example, in a retail company, senior management will want to look at the percent of revenue figure for IT departments in other retail companies. If the technology expense in their industry sector is typically 2.5 percent to 3 percent and their IT department has a percentage much larger than that, they will need to understand why the IT department is not functioning as efficiently as others within the industry. They will also want to know what is being done to enable the company to beat the industry averages.
How Software License Optimization helps
IT costs are increasing anywhere from 3 percent – 9 percent per year (see the graph) and this is mainly due to software. This means that unless the company’s revenues are significantly increasing, unchecked software spending will drive IT as a percentage of revenue even higher.
Software License Optimization delivers two benefits in this area,
• It enables the organization to effectively use what is has, thereby limiting the requirements for an ever increasing budget
• It enables the business to understand how applications are actually being used so you can understand how effectively the investment is being used before making any future investment decisions
Assume that you are the CIO of a $35 billion manufacturing company. The company spends more than $1.4 billion annually in IT (4 percent of revenue) and $420 million (about 1 percent of revenue) on software licenses and maintenance. You have been given the task to reduce this to 2.5 percent of revenue in 5 years and to make 20 percent of the budget available for new projects.
As software licenses and maintenance will account for about 30 percent of the required savings, an optimization here of 20 percent can deliver a 6 percent savings contribution to the overall IT budget and a 0.25 percent improvement on IT as a percentage of revenue.
However this is not a onetime benefit. By eliminating the initial spend you also remove the wasted spend on un-needed annual support and maintenance in subsequent years and slow the growth of the software budget by putting in place stricter controls on justifying new purchases. Over 5 years this could contribute more than half of the overall required reductions in IT spend as a percentage of revenue. It can also help in limiting the software compliance risk potentially created by the use of new hardware optimization strategies such as virtualization and cloud computing.
Application Usage has Become Strategic
Application usage has turned strategic; in the enterprise, application usage has moved from aiding the business to running the business. The enterprise has awoken to realize that applications are one of the least well managed of all strategic corporate assets. We now see corporate procurement getting more and more involved, and in some cases assuming leadership, as the enterprise moves beyond a narrow focus on software price discounts to a broader strategy of optimizing enterprise-wide usage. IT and Procurement executives at the leading enterprises are seeking strategic solutions to drive these key initiatives and to deliver the information and savings they need to ensure their success.
What is your company doing to proactively manage applications usage and spend?