IT is currently undergoing a transformation reminiscent of manufacturing in the 1970s and 1980s. It’s called Lean IT, which applies the lean manufacturing principles developed by the Japanese, perfected by Toyota and leveraged by greats like General Electric and Motorola with the same end goal: cost reduction by elimination of waste.
Waste doesn’t necessarily mean reducing scrap metal. It can also mean eliminating the waste of your IT resources, such as purging low-value applications, consolidating multiple data centers, standardizing server platforms, increasing utilization from existing infrastructure and applying best practices to manual processes in order to make our human capital most efficient.
The lean concept requires strategic thinking and smart ideas, but some hurdles come with the territory. One of the biggest challenges in implementing a lean methodology into IT is offsetting skepticism. Fears that Lean IT will suppress creativity and its exaggerated rigidity are common criticisms among its skeptics. But the result is actually the exact opposite: Lean IT organizations are able to focus more of their resources on new projects that advance the business goals. These tend to be the leading-edge, innovative projects that attract the top IT talent.
Why Is the Idea of Lean IT So Important Today?
Several key industries like financial services, healthcare, travel and online retail are driven by IT. Its products and services are driving revenue, similar to how manufacturing did for the large automobile and technology companies of the 1970s. IT has become a significant part of the business budget, with enterprises having spent more than $3.1 trillion on IT alone in 2007. IT applications require massive investments in infrastructure, storage, software, labor, facilities and more. Combined with the economic downturn and subsequent heightened scrutiny on spending, the justification for value and a return on investment are at an apex for IT organizations. Such scrutiny is with good reason: manufacturing, supply and marketing have traditionally been under the microscope to prove their worth, and businesses should approach IT the same way.
The lean manufacturing methodology can be seen as a loosely connected set of potentially competing principles – all whose end goal is cost reduction and an increase in efficiency by elimination of waste. These same principles can be applied to IT in a considerable capacity, though there are six very clear steps that need to be taken to obtain Lean IT operations:
Step #1: Understand the Unit Cost Drivers of IT Products and Services
The first step is foundational: Gain a deep understanding of the allocated costs of the elements that comprise a service or product. I call these the unit cost drivers. The elements are all of the servers, network, storage, software, labor, facilities and anything else that contributes to the total cost of a service or delivered IT product. These costs are usually captured today in the general ledger for IT, Excel spreadsheets, virtual machine allocation reports and other management systems. They must be captured and modeled in a way that accurately allocates the shared costs to various services, such as desktop services, e-mail, trading applications, online portals, ERP and all IT services.
By understanding your unit costs in this way, you can begin to recognize the drivers to increasing IT costs, how your services compare to software as a service (SAAS) models or industry standards, and how your IT resources are being deployed with respect to how much value they are providing to the business.
For example, by understanding unit costs, you can determine the overhead of running an e-mail service per employee (as Google does) and thus, understand how much it costs IT to bring on new employees into the business unit. Additionally, infrastructure unit costs can be compared to determine best practices (that is, Windows blade server versus rack server, UNIX rack server versus virtualized servers), with all allocated support and facilities costs included. And, by knowing the fully-loaded cost of an IT service, IT product managers responsible for such services can run their business using such metrics–and have a baseline for managing to Lean.
Step #2: Determine Utilization and Performance Metrics of IT Products and Services
Looking at cost metrics is important, but utilization and performance of your IT services is just as essential. They provide the value side of the cost-value equation. For example, utilization measurements can assess how many users use a specific application, how “full” the data center is, what percent of CPU capacity is being used on a server and how much free space is in storage. This is no different than a manufacturing organization looking at utilization of their capacity and resources.
Step #3: Develop a Demand Management Process
The concept of demand management in Lean IT is akin to supply chain management in logistics companies or pull processing in Lean manufacturing. Lean manufacturers design their operations to respond to the ever-changing requirements of customers. IT organizations that are lean and flexible can adapt to changing business demands without incurring huge expense or time. This enables the business to be more nimble as well as IT-efficient.
Step #4: Eliminate Waste
This principle preaches the elimination of activities or services that do not add significant value to the company. Once there is a system or process in place to track service cost, utilization and performance metrics, as well as end-user demand, the next logical step is to apply resources to the highest-value, lowest-cost areas and eliminate those that are low-value, but high-cost. This enables an optimal allocation of resources and a lean organization.
For example, waste minimization in IT can mean analyzing and comparing a complex infrastructure element like servers and, by standardizing on fewer server types (low-cost and high-utilization), you can significantly drive down unit cost–including support, provisioning, patching and administration.
Another option is to consolidate storage and eliminate old data that is no longer worth the cost to store it. If one data center is cheaper than another, then the more expensive site is a target for elimination. These are all well-known cost reduction activities being deployed around the world, but commonly implemented without the rigor, data and process of knowing where to target these efforts.
By establishing a rigorous process, and looking at cost, revenue and utilization metrics, approximately 10-15 percent of costs can be driven out due to elimination of IT services, consolidation of infrastructure, better optimization of human resources and leveraging innovative vendor management approaches.
Step #5: Improve Flexibility
Flexibility means producing a mix or diversity of products quickly, without sacrificing quality or service levels–even at low volumes of productions. This requires foresight from management and a keen sense of the market trend. For IT, this suggests the ability to change services and output based on industry offerings and the needs of the business. You can often drive down costs by altering the service levels that the business expects. It’s a commonly discussed theory, but often unrealized in practice.
Step #6: Continually Improve
As the name suggests, this principle focuses on an ongoing analysis and innovation on ways to improve Lean IT and its contribution to the company. Finding the best way to execute a task, reduce cost, and improve product or work quality are examples of following this principle. Successful companies start small on a specific area, establish a consistent methodology and framework, and then iterate and expand this to other areas. An IT organization following this principle should cultivate a cultural process for implementing cost-saving and performance-enhancing measures through effective collaboration and communication.
Nearly all of these principles require a fundamental understanding of data. So, ask yourself these five key questions and be ready to have the answers:
1. What is our cost at every step of the production line?
2. How do we measure what we are improving?
3. How can we share this data with other constituents such as partners, customers and other contributors in the organization for the sake of better output?
4. How do we track this over time in an efficient manner?
5. How do we compare our data against industry benchmarks?
In the context of the IT industry today, businesses are aligning themselves as service organizations in the manner of outsourcing and SAAS models. This is not only a trend; it’s a reality that is driving IT organizations to a greater goal: Lean IT.
Lean IT is more than just a practice; it’s a revolution of getting IT organizations at the point of a higher utilization rate and at a cost basis that is lower than what it is today. By getting your IT organization to think creatively, collaboratively and consistently, and by implementing a lean methodology, your services will be smoother and face fewer hurdles. The benefits will be reaped by all involved in the business. Sometimes thinking within the big picture is all it takes to understand the principles. The rewards for doing so will be even bigger.
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 [email protected].