Reducing IT costs is a great idea and all, but maybe you should take a closer look at administrative expenses instead.
That's the advice from Alinean Research. The ROI consultancy, based in Orlando, Fla., crunched several years' worth of financial data from 10,000 publicly held companies and found that IT departments have indeed reduced costs through consolidation and cutbacks. But sales, general and administrative costs (SG&A), have proved resistant to savings. Given that IT spending generally represents 3.5% of revenue, while SG&A represents 19% to 23%, the latter represents some significant opportunities for improving the bottom line, said Tom Pisello, Alinean's CEO.
"We found that when we compare current revenue and the revenue of the last five years with SG&A spending, the ratios haven't changed very much," Pisello said.
"Companies need the same amount of SG&A. If IT was doing what it was supposed to, those ratios would change. That just hasn't occurred at the macroeconomic level."
When IT spending was at its high five years ago, investment was directed at capturing new market share, not corporate efficiency. A lot of that money was squandered, Pisello said.
"When we look at some of the trends in spending today, a lot of IT is looking inward at cost reduction," he said. "CIOs are being treated like cost cutters, as opposed to holding the line or spending more on things that create greater efficiencies."
The remedy, according to Pisello, lies in three key areas: strategic planning in IT to reduce expenses, "knowledge capital," and tactical outsourcing.
A lot of the investments that have been made have not improved efficiency; rather, they have produced build-and-junk cycles wherein technology is abandoned before it has shown a return.
Executives need to understand the underlying business processes so they know when to abandon a project before they get in too deep. Streamlining the way an organization functions and doing strategic planning can ensure IT spending is directed wisely, Pisello said.
"Management has been drinking the technology Kool-Aid without understanding the true costs and business benefits," Pisello said. He recommends that companies look at IT investment with eyes focused on increasing the value of "knowledge capital."
Outsourcing, currently the smoking-hot trend in IT, holds promise as well, Pisello said. But it needs to be directed appropriately. Many organizations are turning to outsourcing as a cost-cutting measure but not taking the time to factor in the costs of managing those outsourced services. Many business processes are specific to individual companies, and an organization may be better off automating the processes in-house rather than doing wholesale outsourcing of IT, Pisello said. With tactical outsourcing, companies can free up resources for more high-impact projects.
"There's been very little IT accountability," Pisello said. "It's been seen as this black art, rather than a business process."
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