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Dana Gardner: Hi, this is Dana Gardner, principal analyst at Interarbor Solutions, and you’re listening to BriefingsDirect.
Today, we present a sponsored podcast executive interview that focuses on implementing the
best methods for higher cost optimization in IT spending. [See HP news from Software Universe on cloud enablement technologies.]To better define the challenges facing CIOs today, and to delve into what can help them properly react, we are here with Robin Purohit, Vice President and General Manager for HP Software and Solutions. Welcome back to BriefingsDirect, Robin.
Robin Purohit: Wonderful to be here again with you, Dana.
Gardner: Clearly, the cost-containment conundrum of "do more for less" -- that is, while still supporting all of your business requirements -- is going to be with us for quite some time. I wonder, Robin, how are CIOs reacting to this crisis, now that we're more than a full year into it?
Purohit: Well, just about every CIO I've talked to right now is in the middle of planning their
next year’s budget. Actually, it's probably better to say preparing for the negotiation for next year’s budget. There are a couple of things.The good news is that this budget cycle doesn’t look like last year’s. Last year’s was very tough, because the financial collapse really was a surprise to many companies, and it required people to very quickly constrain their capital spend, their OPEX spend, and just turn the taps off pretty quickly.
We saw a lot of CIOs getting surprised toward the end of year 2009 and the beginning of year 2010, and just having to stop things, even things that they knew were critical to their organization’s success, and critical to their business success.
So, the good news is that we're not in that situation anymore, but it's still going to be tough. What we hear from CIO Magazine is that about two-thirds of the companies out there plan to either have flat or down IT budgets for next year. A small amount are trying to actually increase spend.
Every CIO needs to be extremely prepared to defend their spend on what they are doing and to make sure they have a great operational cost structure that compares to the best in their industry.
They need to be able to prepare to make a few big bets, because the reality is that the smartest companies out there are using this downturn as an advantage to make some forward looking strategic bets. If you don't do that now, the chances are that, two years from now, your company could be in a pretty bad position.
Gardner: Given that we are either flat or refining still and that this might last right through 2010, it means we have to look at capital spending. I think probably a lot of costs are locked in or have been already dealt with. When it comes to this issue of capital spending, how are these budgets being managed?
Important things
Purohit: Well, with capital spend, there are a couple of pretty important things to get done.
The first is to have an extremely good view of the capital you have and where it is in the capital cycle.You need to know what can be extended in terms of its life, what can be reused and what has to be refreshed? Then, when you do refresh it, there are some great new ways of actually using capital on server storage and networking that's at a much lower cost structure, and much easier to operate, than the systems we had three or four years ago.
Quite frankly, we see a lot of organizations still struggling to know what they have, who is using it, what they are using it for, and where it is in the capital life cycle. Getting all of that information that is timely, accurate, and at your fingertips, so you can enter the planning cycle, is extraordinarily important and fundamental.
Gardner: It certainly seems that the capital spending you do decide on should be of a transformational nature. Is that fair?
Purohit: Yes, it's true. I should have said that. Capital, as we all know is not only the hardware, but software. A lot of our customers are taking a hard look at the software licenses they have to make sure they are being used in the best possible way.
"Today's innovation is tomorrow’s operating cost."
Now, the capital budget that you can secure needs to be used in very strategic ways. We usually advise customers to look in two buckets.
One, when you are going to deploy new capital, always make sure that it's going to be able to be maintained and sustained in the lowest-cost way. The way we phrase this is, "Today's innovation is tomorrow’s operating cost."
In the past, we’ve seen mistakes made, where people deployed new capital without really thinking how they were going to drive the long-term cost structure down in operating that new capital. So that's the first thing.
The second is, the company wants to see the CIO use capital to support the most important business initiatives they have, and usually they are associated with revenue growth, by expanding the sales force, and new business units, some competitive program, or eventually a new ecommerce presence.
New business agenda
It's imperative that the CIO shows as much as possible that they're applying capital to things that clearly align with driving one of those new business agendas that's going to help the company over the next three years.
They are clearly in bucket that either dramatically lowers the ongoing cost structure of new technologies, or clearly rides the capital spend with something that a line of business executive is trying to do over the next two or three years. They have the best chance of getting what they think is really necessary.
Gardner: It seems that in order to know whether your spend is transformational, you need to gain that financial transparency, have a better sense of the true cost and true inventory, and move toward the transformational benefits. But, then you also need to be able to measure them, and I think we are all very much return-on-investment (ROI) minded these days. How do we reach that ability to govern and measure once we put things into place?
Purohit: It's a great point. The reality is the CIO has been a bit of a cobbler’s child for some time. They've done a great job putting in systems and applications that support the business, so that a sales executive or a business unit executive has all of the business process automation and all of the business information at their fingertips in real-time to go, and to be competitive and be aggressive in the marketplace.
It's imperative that the CIO shows as much as possible that they're applying capital to things that clearly align with driving one of those new business agendas that's going to help the company over the next three years.
CIOs traditionally have not had that same kind of application. While they can go through a manual and pretty brutal process to collect all this information, they haven’t had that real-time financial information, not only in what they have or plan to do, but to track, on an almost weekly basis, their spend versus plan.
I guess, all the CFO cares about is whether you are on track on your financial variance, and if you aren’t on track, what are you doing to real-time optimize to the changing realities of the budget that are adjusting monthly these days for most CIOs.
This is where we really see an opportunity. They help customers put in place IT financial management solutions, which are not just planning tools -- not just understanding what you have -- but essentially a real-time financial analytic application that is timely and accurate as an enterprise resource planning (ERP) system, or a business intelligence (BI) system that's supporting the company’s business process.
Gardner: If we have a ratio in many organizations where we have 70 percent roughly for maintenance and support and 30 percent for innovation, we're going to need to take from Peter to pay Paul here.
What is it that you can do on that previously "untouchable" portion of the budget? How can we free up capacity in the data-center, rather than build a new data center, for example?
It's a cyclical thing
Purohit: The joke I like to tell about the 70:30 ratio is that, unfortunately, we've been talking about that same ratio for about 10 years. So, somebody is not doing something right. But, the realty is that it's a cyclical thing. Today’s innovation is tomorrow's maintenance.
It's important to realize that there are cycles where you want to move the needle and there are cycles where you can't. Right now, we are in a cycle where every CIO needs to be moving that 70:30 to 30:70. That's because, first of all, they'll be under cost pressure. I really believe that the leaders of tomorrow in the business world are going to be created during the downturn. That's historically what we’ve seen. McKinsey has some good write-ups about that.
It means that you need to be driving as much innovation as possible and getting to that 70 percent. Now, in terms of how you do that, it's making sure that the capital spend that you have, that everything in the data center you have, is supporting a top business priority. It's the most important thing you can do.
One thing that won't change is that demand from the business will all of a sudden strip your supply of capital and labor. What you can do is make sure that every person you have, every piece of equipment you have, every decision you are making, is in the context of something that is supporting an immediate business need or a key element of business operation.
When we work with a lot of customers, we help them do that assessment, and I'll give you one example. A utility company I worked with was able to identify up to $37 million of operational and capital cost savings in the first couple of years just by limiting stuff that wasn't critical to the business.
It also means there are more things and more new things to manage.
There are lots of opportunities to be disciplined in assessing your organization, both in how you spend capital, how you use your capital, and what your people are working on. I wouldn't call it waste, but I would call it just a better discipline and whether what you're doing truly is business critical or not.
Gardner: I suppose having that financial visibility and transparency that allows that triage to take place, and then moving towards this flip of 70:30 ratio, we have to involve people and process and not just technology, right?
Purohit: That's right. If you don't get the people and process right, then new technologies, like virtualization or blade systems, are just going to cause more headaches downstream, because those things are fantastic ways of saving capital today. Those are the latest and greatest technologies. Four or five years ago, it was Linux and Windows Server.
It also means there are more things and more new things to manage. If you don't have extremely disciplined processes that are automated, and if you don't have all of your team with one play book on what those processes are, and making sure that there is a collaborative way for them to work on those processes, and which is as automated as possible, your operating costs are just going to increase as you embrace the new technologies that lower your capital. You've got to do both at the same time.
Gardner: Now, HP Software Solutions has been describing this as operational advantage, and that certainly sounds like you're taking into consideration all the people and process, as well as the technology. Tell me a little more about what you’ve been doing in the past several months and how this will impact the market in 2010.
Best in class
Purohit: We talk about operational advantage, we talk first of all about getting close to a best-in-class benchmark of your IT costs as a percentage of your company’s revenue.
They say close to best, because you never want to race to the bottom and be the lowest-cost provider, if you want to be strategic. But, you'd better be close. Otherwise, your CFO is going to be breathing down your neck with lots of management consultants asking why you are not there.
The way you get there is through a couple of key steps that we have been recommending. First and foremost, you have to standardize and automate as much as you can.
The great news is that, right now, there is really sophisticated technology that we have. Many companies have to apply this to this problem, where you can take a lot of the stuff that you know how to do every day and that involves a lot of people, and eventually a lot of manual work that could be done incorrectly, if you are not careful.
Standardize and automate them to make sure they get done in a very efficient way, in the cheapest possible way, and in the same way every time. We've seen customers take $10 million of operating cost out in 6 to 9 months just by automating what they know to do and what they know they need to do repeatably every time.
We’ve done a ton of work to roll out and automate those best practices, and how to get the advantages of faster innovation using Agile development, without creating a bunch of risks as you move faster.
The second thing that we really work on with people is getting that financial visibility, and getting all of their financial information on labor, projects, capital, and plans in one place, with one data model, so that they have a coherent way to plan and optimize their spends.
Those two things are huge levers. The third thing that we've really started to work with people on is all of these innovation projects, which are really brand new innovative techniques, like Agile development?
How do you make that labor tool extremely effective using that new technique like Agile development? We’ve done a ton of work to roll out and automate those best practices, and how to get the advantages of faster innovation using Agile development, without creating a bunch of risks as you move faster. Those are three really fundamental elements of what we're doing right now.
Gardner: I suppose that when you are picking on something quite as complex as this, you need to have some goal and some vision and direction about what are the realistic goals for some of these cost optimization activities. You mentioned the percent of revenue for IT spend as one gauge. What sort of results do you think people can meaningfully and realistically get in terms of some of these larger metrics?
Important goal
Purohit: We've seen the best companies actually implement this swap from 30:70 to 70:30. So, getting to 30 percent of your spend on operating costs in this cycle, where you need to be investing for the future, is absolutely an achievable and important goal. The second thing is to make sure that you’re benchmarking yourself on this cost of IT versus revenue on the most important competitors in your industry.
The reason that I phrased it that way is that it's not a general benchmark and it's not just the lowest-cost provider in your geography or industry, but you want to know what your most important competitor is doing, using technology as an advantage for both cost structure and innovation.
You want to understand that, spending probably something similar to that, and then hopefully be smarter than them in how you implement that strategy. Those are two really important things.
The third thing is that, depending where your IT organizational maturity is, there are opportunities to take out as much as 5 to 10 percent of your operating cost just by being more disciplined.
Say that you're a new CIO coming to organization and you see a lack of standardization, a lack of centers of excellence, and a lot of growth through merger and acquisition, there is a ton of opportunity to take out operating cost.
We've seen customers generally take out 5 to 10 percent, when a new CIO comes on board, rationalizes everything that's being done, and introduces rigorous standardization. That's a quick win, but it's really there for companies that have been probably a little earlier in the maturity cycle of how they run IT.
The same thing is happening now that happened in 2001, when we had our last major downturn. In 2001, we saw a rise of outsourcing and off-shoring, particularly to places like India.
Gardner: Another way of reducing this percentage of total revenue, I have to imagine, from all the interest in cloud computing these days, comes from examining and leveraging, when appropriate, a variety of different new sourcing options, both, new and old. How does that relate to this cost optimization equation?
Purohit: That's a great point. The same thing is happening now that happened in 2001, when we had our last major downturn. In 2001, we saw a rise of outsourcing and offshoring, particularly to places like India.
That really helped companies to lower their cost structure of their labor dramatically and really assess whether they needed to be doing some of these things in-house. So, that clearly remains as an option. In fact, most companies have figured out how to do that already. Everybody has a global organization that moves the right labor to the right cost structure.
A couple of new things that are possible now with the outsourcing model and the cloud model -- whether you want to call it cloud or software as a service (SaaS) -- is that there's an incredibly rich marketplace of boutique service shops and boutique technology providers that can provide you either knowledge or technology services on-demand for a particular part of your IT organization.
That could be a particular application or a business process. It could be a particular pool of knowledge in running your desktop environment. There's really an incredible range of options out there.
Questions for the CIO
What every CIO needs to be doing is standing back and saying, "What do we really need to be the best at, and where is critical intellectual property that we have to own?" If you're not running at the best possible cost structure for that particular application or business process or you're not operating this infrastructure at the best possible cost structure, then why don't we give it to somebody else who can do a better job?
The cost structures associated with running infrastructure as a service (IaaS) are so dramatically lower and are very compelling, so if you can find a trusted provider for that, cloud computing allows you to move at least markets that are lower risk to experiment with those kind of new techniques.
The other nice thing we like about cloud computing is that there is at least a perception that is going to be pretty nimble, which means that you'll be able to move services in and out of your firewall, depending on where the need is, or how much demand you have.
It will give you a little bit of agility to respond to the changing needs of the business without having to go through a long capital-procurement cycle. The only thing I would say about cloud is be cautious, because it's still early, and we're seeing a lot of experimentation.
The most important thing is to pick cloud providers that you can trust, and make sure that your line of business people and people in your organization, when they do experiment, are still putting in the right governance approach to make sure that what's going out there is something that doesn’t introduce extra risk to your business.
There’s a lot of diligence that needs to be put in place, so that cloud becomes less an experiment and more a critical element of how you can address this cost-structure issue.
Trust your provider, if you are putting data out there in the cloud. Do you trust how that data is being handled? If that cloud infrastructure is part of a business critical service, how are you measuring it to make sure that it's actually supporting the performance availability security needs of what the business needs?
There’s a lot of diligence that needs to be put in place, so that cloud becomes less an experiment and more a critical element of how you can address this cost-structure issue.
Gardner: Now, when we talk about cost structure, I would think that's even more critical for these cloud providers in order for them to pass along the savings. They themselves must put into place many of the things we have talked about today.
Purohit: That's right. Cloud providers have to push the needle right to the edge in order to compete. They're using the best possible new technology around blade computing, virtualization, automating everything, new service oriented architecture (SOA) technologies, so that you can do small component applications and stitch them together super fast.
The right governance
That's the value that they're providing. Then, the challenge is that you've got to make sure that not only do they have the great innovation, and great cost structure, but you trust what they are doing and that they have the right governance around it. I think that's really going to be what separates the lowest-cost cloud providers from the ones that you want to bet your business on.
Gardner: Is there anything else you want to offer in terms of thinking about cost optimization and how to get through the next year or two, where we are flipping ratios but are also maintaining lower total cost?
Purohit: I want to go back to this innovation bucket, because, as I said, you don't want to come out of this cycle as a CIO who was associated only with lowering cost and didn't fundamentally move the needle out, making the business more competitive.
You have limited ability to make those bets. So, the best bets are ones that are very prevalent, very top of mind for the business executives who really change the dynamic in terms of competitiveness, sales productivity, or the way they engage their customers.
The most consistent project that we have seen, the kind of project we see out there that are good bets for those innovation dollars, is around a theme you call application modernization.
The most consistent project that we have seen, the kind of project we see out there that are good bets for those innovation dollars, is around a theme you call application modernization.
What's happening right now in the industry is what we believe is the biggest revolution in application technology of the enterprise in probably 10 years. That's a composite of things that you build applications with these new Agile development methods.
All of these rich Internet protocols are revolutionizing the way you visualize and interact with applications, crossing over from the consumer world into the enterprise world. A whole, new wave of application platform technology is being introduced by SAP, Oracle, and Microsoft. And, SOA is becoming very real, so that you can actually integrate these applications very quickly.
Our view is that the companies who use this opportunity to modernize their applications and have this rich interactive visual experience, where they can nimbly integrate various application components to innovate and to interact with their customers or their sales people better, are the ones that are going to emerge from this downturn as the most successful leveraging technology to win in the marketplace.
We really encourage customers to take a very hard look at application modernization, and are helping them get there with those scarce innovation dollars that they have.
Gardner: Very good. We've been discussing the need for implementing best methods and achieving higher cost optimization by looking at reverse ratios from maintenance and support to innovation and transformation. Helping us along our journey in our discussion, we've been joined by Robin Purohit, the General Manager and Vice President for HP Software Solutions. Thanks so much, Robin.
Purohit: Thanks, Dana.
Gardner: This is Dana Gardner, principal analyst at Interarbor Solutions. You have been listening to a sponsored BriefingsDirect Podcast. Thanks for listening, and come back next time.
Listen to the podcast. Find it on iTunes/iPod and Podcast.com. Download the transcript. Learn more. Sponsor: Hewlett-Packard.
Transcript of a BriefingsDirect podcast with HP's Robin Purohit on the challenges that CIOs face in the current economic downturn and how to prepare their businesses for recovery. Copyright Interarbor Solutions, LLC, 2005-2009. All rights reserved.
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