Cost Reduction through correct investments

The Goodwind Company Research

I recently had a discussion with a client about how to get better control of an exploding maintenance cost in the IT organization. The fact was that given a fixed IT budget, the cost of maintenance was eating up more and more of the development budget. In fact, it is said that maintenance cost will increase by 15% of the development spend over its life cycle. So, if 100,00 € is spent on new functionality on an application, the maintenance cost of that application will increase by 15,000 € during its lifetime. The result is that IT has less and less funding to support business with new functionality and competitive advantage. The question was how to get maintenance cost under control. 

The situation is quite common and my first question was: “how much do you spend on cost reduction initiatives?” The fact is that all IT organizations need to continuously invest to, for example, reduce complexity in the architecture and remove out-of-date applications. Cost reduction initiatives are difficult as they do generally not have positive business cases but are necessary to reduce risk and increase efficiency of development and maintenance in the future. These activities are not something business is willing to pay for as it creates little value for them. The funding has to come from somewhere else. The response was not surprising. Little attention was paid to cost reduction initiatives as the entire development budget was assigned to drive new business functionality. 

To benchmark “Cost Reduction” percentage of the IT development budget is a new and popular metric to follow. Most benchmark studies tell us that companies spend 20-25% of their development budget to reduce complexity and maintenance cost levels. That is a large percentage of the development budget but probably the most important spend to secure ITs ability to provide business value creation in the long run. 

The way it is done is to categorize the different types of IT investments (development) into different buckets (for example: business value creation, cost reduction, innovation, system integration etc). Then set a defined proportion of the IT Development budget to each of the categories. In this way, the IT department is able to steer the development in the best way possible. Not tricky at all!

Recommendations:

Exploding maintenance cost in the IT organization is a quite common phenomenon. It is time to deal with the problem and actually assign money to keep maintenance cost at a healthy level. It requires a new dialogue with business and viewing the IT budget as one. Good luck with your discussion!