IT Complexity Drives Costs
Hackett's new Book of Numbers analysis and research volume, Optimizing a Return on Business Complexity: Performance Metrics and Practices of World-Class Companies, focuses exclusively on the value of complexity reduction in back office and administrative functions.
Hackett found that to successfully reduce business complexity, IT leaders must convince business unit executives of its value, and combat the oft-held belief that unique IT configurations are critical for a business unit to effectively compete.
The challenge of defeating this "need-to-customize" can be significant, but the potential benefits are substantial. Companies that fail to reduce the complexity of IT spend 30% more on finance operations and 18% more on HR per employee than companies that succeed in this area.
In addition, reduction of IT complexity can also help to improve the efficiency and effectiveness of IT operations. World-class IT organizations spend 18% less than their peers and operate with 36% fewer staff, while bringing in projects on time and under budget over 25% more often.
In virtually every area, world-class companies show reduced complexity, with fewer customer and supplier databases, less software and hardware suppliers, more consistent use of data standards, and higher overall levels of standards enforcement.
"The bottom line is simple: our empirical research shows that companies which embrace IT complexity reduction as a mission spend less across virtually every area of the back office, said Hackett IT Practice Leader David Hebert.
"But this can be a tough sell. CIOs are constantly faced with business leaders who truly believe that their particular group or unit is 'different,' and has unique requirements. These leaders will resist standardization efforts, fearing they will lose their competitive edge. IT leaders need to hold the line, sell the value of standardization and simplification, and at the same time be aware of situations where a valid business cases exist to support customization."
Less Apps, Fewer Dollars
Hackett data reveals a clear correlation between the cost of the finance function and the number of primary applications in use.
Dividing companies in Hackett's benchmark database into two groups based on those with the more than 10 applications and those with the less than 10, the former report 30% higher finance costs as a percentage of revenue (1.3% of revenue versus one percent).
According to Hackett, the median HR cost per employee also rises substantially as the number of applications per 1,000 employees increases.
HR functions that report no common software applications report a median HR cost per employee that is 18% higher than companies that report a high level of commonality ($2,338/employee versus $1,976).
Overall, world-class HR functions are 87% more likely than typical companies to deploy common applications globally.
In finance, companies with less than 10 applications spend $3 million per billion in revenue less than companies with more than 10 applications. In HR, companies with no common software applications spend more than $3.6 million/year more for every 10,000 employees than companies with a high level of common software applications.
To make this complexity reduction approach work, top companies redefine their approach to the application-development process. Typical companies often start with the development of their "unique" requirements and then build or purchase and customize an application to meet their internal requirements.
In contrast, world-class companies find the application with the closest fit to the requirements, then map their business processes to the selected application. Customizations are done only when a solid business case can be made for doing so.
Complexity Impacts IT Cost
Hackett found that within IT, infrastructure complexity is highly correlated with cost. The median total IT cost per end-user rises with the number of database platforms in use per 1,000 end-users, and world-class IT organizations rely on 69% fewer customer databases per 1,000 end-users and 67% fewer supplier databases than typical companies. They also rely on 67% fewer software suppliers and 43 percent fewer hardware suppliers.
Complexity reduction at world-class companies clearly extends to application development activities as well.
World-class IT organizations use 80% fewer programming languages per 1,000 end-users than typical companies. They are also more likely to use data standards to a high degree across all systems and significantly more likely to have implemented a high level of standards enforcement across hardware, networking, and software applications.
The Real World
During a recent Hackett Web cast, one global automaker described how it executed a two-year effort to simplify its ERP environment as part of an upgrade. In its original implementation efforts driven by IT leadership, attempts to accomplish Y2K goals and be highly responsive to individual business units led to a 24% customization level.
This significantly impacted IT operating costs by increasing the level of IT staffing needed to maintain the system.
As part of the upgrade, the automaker created a three-tiered review process for all customization that was to be carried forward, requiring business units to justify and re-justify any requests to deviate from a standard implementation.
Business unit leaders and senior management played an active role in the review process, and developed an understanding of costs tied to customization and process reengineering that could be used to eliminate the need for it.
By the end of the project, the automaker had reduced customization to just 3%, well below the initial 10% target recommended by PeopleSoft. The de-customization effort enabled the automaker to immediately reduce IT support staff, and significantly cut total cost of ownership.
Current estimates are that the next ERP upgrade will cost the company 50% less to execute.