1. Managing the 80% Problem
Using Activity and Quality management to
Combat the ‘ongoing support’ issue
cannibalizing IT budgets
5/7/2010 Copyright: Crocus Hill Associates, All rights reserved
2. Contents
The 80% problem what is it?
Why talk about it?
Where are these costs hiding (show me the coffin and a
stake …)?
What are the common approaches – do they work?
A different approach – Alphabet soup: ABC, TQC, Re
Getting started
Institutionalizing continuous improvement
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3. The 80% problem what is it?
Conventional wisdom and some accounting point to IT budgets
being cannibalized by ongoing support issues
– Legacy costs consume 70 – 80+% of total budgets
– Hardware budgets still consume > 50% of total costs
• Even though Moore’s law continues we can’t beat the total cost burden
• Infrastructure support costs are 30 – 40 + % of Hardware costs
We increase the burden every time we implement a new
application
– The expanding footprint of applications overwhelms productivity gains
– The expanding infrastructure footprint increases the support / patch /
maintenance burden in the data center
– Ongoing environmental support for old data centers takes people and
capital to keep up with new infrastructure demands
At the end of the day, it’s the ‘Golden Apple’, where everything
good we do today, inhibits our ability to do more in the future
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4. Why talk about it?
It was second among InfoWeek’s survey of CIO’s for 2010
1. The Cloud Imperative.
2. The 80/20 Spending Trap.
3. CIO-Led Revenue Growth And Customer Engagement.
4. Mastering End-to-End Business Processes.
5. Business Analytics and Predictive Analytics.
6. External Information vs. Internal Information.
7. CIO Priorities, CIO Compensation, CIO Evaluation.
8. Vendor Consolidation, With Radical Exceptions
9. The Mobile Enterprise and The Mobile Mindset.
10. The Transformation Quotient.
As has been the case for the last 20 years - "the new normal" for CIOs in
2010 will be to accomplish a whole lot more with a whole lot less
5/7/2010 4 Copyright: Crocus Hill Associates, All rights reserved
5. Why talk about it (continued)?
IT budget, even if developed bottom up is almost always capped
by G&A and expense ratios at budget time:
– Benchmarks of % of revenue, free cash flow, PBT / EBITDA, etc. make
budgets for SG&A a ‘solved for’ number.
– Sandbagged revenue estimates and escalating uncontrollable expense
costs (raw matl. , energy …) subtract from available cash.
– Additionally head count caps, caps on consulting and variable resources
constrain any flexibility that the CIO has.
Even the FASB ‘dodge’ of the last 10 years is falling short:
– Software and new development capitalization has resulted in a tidal
wave of depreciation washing over the budget ‘shores’.
– Free cash flow and debt covenants further constrain our ability to ‘grow
the pie’ from creative accounting.
– Conservative auditors and CFO’s seek to stop capitalization at the
earliest point in the implementation cycle.
In a ‘capped budget’ situation we are left with the untenable
choice to either cut service or cut development work
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6. Where are these costs hiding?
We all know where the costs are – Legacy, Legacy, Legacy
Infrastructure - hardware etc.
Infrastructure Labor - support
Infrastructure Labor - new
Application Labor - support
Application Labor - new
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7. Where are these costs hiding?
Break Fix and Support are the Killers
Audit
Work Request - Special
0% Break - Fix (problem
Project
Mgmt)
12%
36%
Core Activities
Support - Maintenance 4%
44%
Data Base Support
Project - Internal 2%
0%
Operations Support
2%
5/7/2010 7 Copyright: Crocus Hill Associates, All rights reserved
8. What are the common approaches – do they work?
Embrace a ‘religion’ – e.g. ITIL
– While service level control may manage demand, overall costs
rarely go down and often go up when formalisms are installed.
– However, the good news is that the discipline of formal processes
and databases provide the basis to measure work and potentially
to manage it better.
Give the problem to someone else – outsource
– Overall, the outsourcing equation may transfer responsibility to
more efficient organizations.
– However, it is still true that over 50% fail outright and more than
that go ‘upside down’ on costs in less than three years.
Benchmark – see who might be doing it better
– Comparisons in this area are risky, however, at a high level they do
provide a view into areas where there are opportunities to
improve practice.
– The bad news is that they don’t help in ‘root cause’ analysis. They
only identify areas of opportunity
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9. A different approach
Evaluate key
work
activities
Work
request
Understand
Pilot evaluate
Cost / quality
and expand
drivers
Labor
KPI’s
tracking
Re Engineer
Prioritize ‘Hit
service
List’
delivery
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10. Alphabet soup- Drive change through ABC, TQC and
Reengineering
Activity Based Costing to baseline work and standard costs
– Identify core deliverables and activities for each group
– Identify work at a low enough level to be actionable – activities that
can be eliminated, automated, restructured, or reorganized
– Understand the cross functional (IT group) costs
Total Quality Methods for priorities and root cause
– Pareto (Frequency) charting of incidents and activity volume
– Ishikawa (Fishbone) to outline drivers and root cause
– Plan-do-check-act cycle for change implementation
Use Reengineering principles to drive performance and
efficiency
– Eliminate unnecessary work / Restructure processes /Apply
automation only after optimization
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11. Use Activity Based Cost to develop standard costs
and linkage
Break down high level costs into standard work units
– At enough granularity to be able to establish standards
• Unix password reset…
– Identify cross functional (IT group) involvement in activities
• Identify who the participants are, their place in the workflow and
their estimate for their tasks
– Estimate standard work effort estimates for each activity
• Focus both on labor / effort as well as “$” costs
Develop workload model summarizing standard activity
costs into major accounting groups
– Break Fix
– Support / upgrade
– Enhancement
– New development etc.
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12. Use TQC to prioritize and analyze activities
Develop Pareto charts from tickets, service requests or other
estimating techniques to analyze frequency of activities
– May have to break ticket categories down to match with ABC
– Ultimately workload categorization standards must synchronize
across all accounting and work management systems
Combine with the data from the ABC analysis to understand
the total cost impact of the activity
– Model the total costs by matching the frequency of activities to the
standard cost for the work
Reconcile the cost with budget and headcount and redo
standards and volumes until budget, headcount and total
cost are close
– In first pass the model should be within 5-10% of explaining all work
and budget
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14. Each targeted initiative should work on both
reducing its frequency and cost
Drive down activity frequency with TQC
and root cause analysis
$
Activity Cost
Drive down activity cost
with process redesign
Activity Volume
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15. Use Root cause analysis to find drivers of
activities
Pareto Analysis
1200
1000
800 Evaluating the root cause or
600
400
200
drivers of efforts identifies
0 changes to reduce frequency
of support efforts
Improvement efforts
Training
Technology
Policy
Procedure
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16. Reengineer process to drive efficiency and cost
reduction
Eliminate
Reengineer
• Identifying workflow
activities that add
no value to the and process
product or service,
• Identifying
• Organize around outcomes, not
activities that add
no value for the tasks Apply
• Have those who use the output of
customer,
the process do the process
automation
• Subsume Information work into the judiciously
real work that produces the
information
• Treat geographically dispersed • Automate after a
operations as if they were working model has
centralized been piloted and
• Link parallel activities instead of implemented
integrating their results • Don’t pave over the
• Put the decision point where the cow path – restructure,
work is performed redesign then automate
• Capture data once at its source
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17. Sustaining change and continuous improvement
Work
It is necessary to establish or rework key IT management
request systems to monitor and manage this effort
– The ABC and initial quality initiatives can identify quick hit and
key process overhaul candidates
Labor
KPI’s
tracking – Over time, experience has shown that performance degrades
and sometimes costs are as high or higher than before the
reengineering effort
It is critical to establish a solid set of KPI’s around the
continued performance of these cost driving initiatives
– Work tracking and labor management systems need to be tied
together to provide management visibility into ongoing
operations
– A standard work breakdown structure is the critical link
between the work request (problem / request management)
system and the labor tracking system
– Management reports should tie both the volume of work and
the cost of work into a coherent management dashboard
– KPI’s and performance management systems need to support
continued improvement efforts
5/7/2010 17 Copyright: Crocus Hill Associates, All rights reserved
18. For more information
Additions, arguments,
corrections or for a copy of
this presentation:
Contact us:
Craig Bickel
craig629@comcast.net
612 978 3737 – Cell
612 216 2403 – Direct
5/7/2010 18 Copyright: Crocus Hill Associates, All rights reserved
