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There are many lean experts when you look across industries or business functions. We’re all familiar with lean terms such as lean manufacturing, Total Quality Management (TQM), kaizen, Six Sigma and the rest. When you boil these down and apply lean to IT, enterprises are presented with four guiding pillars for creating lean IT operations.
Guiding pillar No. 1: Eliminate waste
Trim the fat. Reduce costs. Focus on the highest value activities. To be clear, this is not a race to the bottom of low-cost IT. This is about focusing on value and eliminating that which is truly waste. IT leaders need to create a culture within IT where everyone is continuously seeking to improve efficiency.
Today, there is still a lot of “fat” in IT. Servers run at an average of less than 10 percent utilization. Storage can be anywhere from 25 percent to tapped out. Data center facilities are often grossly underutilized. And very few IT organizations have a process to identify services that are no longer in use or highly valued.
Guiding pillar No. 2: Focus on the customer
IT leaders need a process to understand what the customer values and how IT can most efficiently and cost-effectively deliver that value. In this case, the customer is usually an internal customer such as a line of business. The trick is to understand the measure of value that the user puts on IT products and services-not IT’s own measure of performance or quality.
Business users talk about e-commerce customer profitability, cost per transaction for an application, and quality and business performance of the application. IT needs to communicate with the customer using these same terms.
IT leaders should focus on delivering value to the customer and creating processes for discussing how value is delivered. Many people are talking about this in terms of cost transparency and tracking consumption, quality and utilization. These metrics should be reviewed quarterly so that IT can become aligned to business needs.
Implement a Methodology for Constant Improvement
Guiding pillar No. 3: Implement a methodology for constant improvement
Markets were created around software focused on measuring cost and quality, aligning resources, empowering workers and measuring team performance for manufacturing or corporations as a whole. IT needs data-driven processes and systems for intelligently and continuously reducing waste and increasing value. Lean IT will only meet its potential if there is a deep understanding of cost drivers, value chain and quality metrics, as well as a grassroots empowerment to act on that data.
Guiding pillar No. 4: Establish financial agility
A key component of lean is just-in-time (JIT) or flow. In the manufacturing industry, the net outcome is that “the factory” can adjust to business needs quickly in order to meet the changing needs of the customer. A lean IT department will be able to react to business fluctuations by reducing spending in down cycles, quickly ramping up in up cycles and rolling out new services quickly, as needed.
This requires a deep understanding of the cost structure, how those costs relate to business services and how those services are susceptible to business fluctuations. Such costs should be also broken down by fixed or variable, direct or indirect and CAPEX or OPEX. A lean, proactive IT department should plan for normal business cycle variances (that is, “What if business is down 10 percent this year? How is that going to affect IT and how can IT react? What if business grows by 15 percent over plan?”).
Understanding these business cycle variances allows a company to achieve financial agility. IT leaders should create teams, processes and development methodologies that will enable IT to make quick shifts or improvements to service-or to roll out new services-in a time frame that optimizes value for the organization.
Achieving lean IT in three steps
To achieve lean IT, companies must focus on three key objectives: become a world-class service provider to the business, establish ongoing IT/business dialogue and optimize IT decisions. Let’s take a closer look at each step:
Become a World-Class Service Provider to the Business
Step No. 1: Become a world-class service provider to the business
The first step in maximizing value and creating processes is to understand how IT technology maps to IT services. Such services can be broken down into user services (e-mail, desktops, telecom), business services (revenue-producing services such as trading application, CRM, etc.) and shared infrastructure services (data centers, compute capacity, storage, disaster recovery, etc.).
Second, IT should calculate the fully loaded cost of IT services including hardware, software, labor (project and maintenance), facilities and overhead. Companies should have a system to track costs over time, enabling teams across IT to understand how their domains contribute to the cost of IT services.
Third, IT should understand the individual unit costs for IT (that is, “What is my cost per gigabyte of Tier 1 storage? What is my cost per virtual machine? What is my monthly cost to support this application or that server?”). This single step is possibly the most powerful in eliminating waste. Most IT managers would like to eliminate costs and make better decisions but they have very little insight into the true costs of IT. For example, the CIO of a large, nonprofit healthcare system performed a deep cost analysis and found that, by moving a portion of the organization’s non-mission-critical storage to Tier 2, the company could reduce storage costs by 66 percent.
Next, IT leaders should also overlay consumption or utilization of IT services with cost. IT organizations can only start to understand where there are opportunities to move towards lean IT by looking at cost and utilization metrics side by side. IT organizations should leverage automation to help them compare utilization and cost information.
By aligning around IT services, putting systems in place to measure cost of delivery, and enabling processes for tighter communication and transparency, IT moves from a cost center to a true service provider. While this is interwoven in everything we’ve discussed, it is fundamental to achieving lean IT. You can’t understand the cost and value of a service unless you understand the TCO of that service. The better IT can understand the costs per service, the better it can eliminate waste, become leaner and provide higher value.
Establish Ongoing IT/Business Dialogue
Step No. 2: Establish ongoing IT/business dialogue
IT must sit down with the business groups it supports and start a proactive dialogue about aligning IT services with business value. IT can do this by showing the business leaders the costs and value of IT services consumed by the business units. When business leaders understand that there is a real cost-value trade-off in services and service levels, they’ll be motivated to reduce spend and focus on high-value services.
For example, a Fortune 500 financial services company calculated the TCO of the “products” that it offers to its business units. From there, the organization generated a transparent, monthly summary for its business unit leaders, including the cost and consumption of services. The company used this visibility into costs to accelerate infrastructure standardization and reduce demand for low-value and unused IT services. As a result, the company estimates that it identified approximately $100 million in unrecovered IT spend and approximately $10 to 20 million in direct cost reduction.
Optimize IT Decisions
Step No. 3: Optimize IT decisions
Achieving visibility into the cost of IT services can help organizations optimize their IT decisions. Businesses can now answer some of today’s toughest questions, including the following six:
1. What infrastructure hardware is most cost-efficient to maintain?
2. Should I deploy virtualization across more of my infrastructure?
3. Should I move some of our IT services to the cloud? If so, which ones?
4. How much storage should I purchase to support the growth of our company?
5. How much money will I save by consolidating my data centers?
6. What are the support costs for my IT services and how can I optimize?
In summary, these few steps are critical to enabling IT to become lean. The good thing is that modest progress on each front shows monumental gains in efficiency. But, as much as systems can enable powerful insight and collaboration, it is organizational change and empowerment that makes lean movements catch on. Those organizations that have implemented these steps have seen cost savings of 10 to 15 percent in the first year and on the order of 10 percent in following years.
Sunny Gupta is co-founder, President and CEO of Apptio. Sunny’s career in enterprise software spans more than 16 years, with roles in general management, strategic marketing, product management and business development. Most recently he was the Executive VP of Products at Opsware, and was responsible for all of the company’s product businesses (up to its acquisition by HP for over $1.6 billion). Prior to Opsware, Sunny was the co-founder and CEO of iConclude, which pioneered the IT runbook automation market (and drove its acquisition by Opsware for $62 million in less than two years from inception).
Before founding iConclude, Sunny ran the Java/.NET Performance Management Product Group for Mercury Interactive (acquired by HP for approximately $4 billion) and served as VP of Marketing and Business Development at Performant (acquired by Mercury Interactive). He also served as General Manager of Business Development at Rational Software (acquired by IBM for approximately $2 billion), while playing a role on the team that helped scale that company from $300 million to $850 million in revenue. Sunny also co-founded Vigor Technology before its acquisition by Rational, and held product management and consulting roles at Easel Corporation and IBM. Sunny earned a bachelor’s degree in computer science from the University of South Carolina. He can be reached at sgupta@apptio.com.