Most analysts expect information-technology spending to increase about 2 percent this year, and in April research firm IDC found evidence that spending may actually decline slightly. Either way, IT still represents a huge corporate expense, accounting for about half of all capital spending and exceeding $500 billion annually. No wonder, then, that when times get tight executives turn to their companies’ IT budgets and get out their red pencils.
Let’s hope those pencils have sizable erasers, because IT spending has long defied any kind of simplistic analysis. Gauging the return on investment of specific projects is an exercise fraught with peril, and whether a company does or does not green-light an ambitious initiative, there is still plenty of infrastructure to pay for. The need to keep basic IT services up and running while also exploring the potential of new technologies is challenging under any conditions; during a downturn it becomes downright herculean.
Companies are now concluding that in order to control costs they must better understand them. Initial outlays for hardware, software, networks, and storage are far from the only costs. Maintenance, support, labor, and other expenses add to the total cost of ownership, or TCO. Increasingly, analyst firms are urging clients to get a grip on TCO as a useful benchmark by which to base purchasing decisions.
Earlier this year, for example, Gartner reported that effective management can cut the TCO for desktop PCs by 42 percent. A large company might use a volume discount to acquire a PC for a mere $1,200, but if it’s kept for four years the TCO could run as high as $5,867 — per year. The disparity between initial purchase price and actual cost of ownership can be traced to a host of indirect costs, everything from maintenance, support, and training to the multiple costs of downtime (repairs, loss of productivity, potential impact on customers or other aspects of the business, and so on).
Companies tend to overlook TCO and focus instead on the much more easily measured purchase price, but even here they often don’t do enough to drive down costs. Southern Co., an Atlanta-based electric utility, has consolidated all of its IT hardware procurement into a central vendor-management function that enables the company to take advantage of volume discounts and economies of scale. Previously, says Bart Wood, the company’s vice president of strategic planning and compliance of IT, individual departments bought and managed the contracts for their hardware needs. Southern first targeted hardware in its centralized approach and then added software, and has since saved millions.
Hartford Financial Services Group Inc. has launched a similar effort. “In effect, we are changing our vendor model from a transactional one to a more strategic one,” says Elizabeth Bock, senior vice president and CFO for Enterprise IT. It now assesses software needs across the entire company. “This allows us to create a forward-looking vendor strategy for driving cost down as opposed to just reacting to each transaction as a one-off,” she says.