Suffering from the Cost Cutting Blues? - Page 1

Jul 21, 2008

Michael Fillios

If you are like most IT executives in the global 2000 today (or any CxO for that matter), chances are that you have been “diving for dollars” in search of hard, soft or any flavor of savings to contribute towards the overall cause. In fact, you have probably also been handed your second or third cost cutting challenge in the past 12 months. As one IT executive commented, “we are beyond the bone and attacking the marrow at this point.”


As the economy reels from the alleged recession, IT organizations around the world have been looking for innovative ways to reduce their cost by reducing fixed and variable labor, material, and overhead-related expenses. But the strategy and tactics used vary across the board. Based on our experience, we've seen companies pursue cost reduction haphazardly, with short-term payoffs quickly offset by loss of business functionality or higher costs downstream.


Another observation is these tactics are often not sustainable, resulting in trimming muscle rather than fat, creating a quandary for executives to not only meet these tough challenges, but also simultaneously attack the root cause of the problem. Unfortunately, the latter typically takes a back seat or never gets addressed at all. If you are facing this situation, perhaps you should consider an unusual suspect: customer demand. Look to the basic laws of economics, or more specifically, a technique called, Demand Shaping.


Demand Shaping


The supply and demand model posits that a market leans toward equilibrium price and quantity of a commodity at the intersection of consumer demand and producer supply. At this point, quantity supplied equals quantity demanded. Given the economy these days, spirited discussions on the supply and demand model are plentiful. But for certain industries such as airlines, hospitality, or consumer products, managing the supply and demand model is just another day at the office. Lets take a closer look to examine this further.


By definition, demand shaping is the influencing of demand to match planned supply. There are two categories of demand: planned and unplanned. Planned demand arises as part of the annual planning process and the corresponding budget for the next financial year. Unplanned demand corresponds to the huge amount of unpredictable work that IT does, which is not contained in well-defined structures.


These include things like change requests, feature requests and bug fixes, which arise from changing business and regulatory environments, changes in strategy, company reorganizations, mergers and acquisitions, insufficiently tested systems, an so on. The challenge, however, is that both planned and unplanned demand surface every day and unless the IT organization is prepared to capture, prioritize and decide alongside its customer, it often reverts back to its supply side comfort zone.


Consequently, the traditional IT business model of managing supply, particularly in a hyper-cost reduction environment, may seem to be an attractive target for cost reduction initiatives. But as organizations exhaust the leaning of their processes, consolidation of physical and virtual environments, and various reductions in workforce, additional sources may not be as palpable.


Improving your organization’s ability to shape demand begins with focusing on three specific management capabilities that at their core establish the much-needed foundation for fact versus emotional decision-making. The basic premise is that the role of IT in demand shaping is to aid customers by providing fact based investment alternatives that deliver the highest business value from its often limited financial and human resources.


Secret Sauce


The three key ingredients needed for continuous demand shaping represent a subset of the foundational capabilities we have identified. Theses capabilities are Strategic & Tactical Governance (decision rights and structures), Portfolio and Program Management (visibility, investment mix and targets) and Approval and Prioritization (decision-making criteria and process). When managed in an integrated fashion, these capabilities can unearth untapped sources of sustainable savings while helping to address the root cause of the problem to boot!


The Strategic and Tactical Governance capability establishes what decisions must be made, the people responsible for making them, and the process used to decide. This capability touches on a broad range of decisions beginning with the most strategic, such as business direction and new product introductions, carrying through to the tactical direction of execution.

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