– IT Consolidation and the Bottom Line

Last updated on: October 25, 2005 at 3:00 pm by Desh Kapoor

– IT Consolidation and the Bottom Line 2005-10-25T15:00:08-05:00 Desh Kapoor

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“There are few more ready means of improving earnings per share than the consolidation and rationalization of IT systems, hardware, networks and other infrastructure. In fact, this isn’t about technology at all: It’s a business decision with profound balance-sheet implications.” say Richard M. Melnicoff, Marc E. Snyder and Rockwell Bonecutter in their article <bIT Consolidation and the Bottom Line

Here is an excerpt:

Once upon a time, there was a company committed to running its business better by giving managers the IT systems they needed. Given the economics and the technologies prevailing at the time, executives knew that rolling out new systems built on a distributed, server-based computing model would be the most cost-effective way to do this. They were even more pleased that managers in the company’s five divisions could incrementally add new servers to meet growing processing demands or when new offices were established.

Fast-forward 15 years: Today, the company has accumulated more than 1,000 servers (some of which were swept up during the acquisition of a number of new businesses), consisting of a veritable rainbow of technical platforms and proprietary variations. These servers are spread over more than 50 locations. About half are housed in data centers, many of which (though not all) have an assortment of backup power sources and security and operations staff. The rest reside in closets or sit beside workers in various offices.

How much does it cost the company to run, back up, maintain, upgrade and network all these servers? Unfortunately no one really knows. Top management has limited insight into the total amount spent on its IT systems. Decisions about replacements and most other technology investments were made lower in the organization (a common enough practice at the time), and now all this IT infrastructure is scattered over the books and budgets of different divisions.

The good news is that over the past 15 years, product designs and configurations and systems management technologies have changed to such a degree that it is now possible to reap significant savings through infrastructure consolidation and rationalization. In fact, there are few more ready and material means of improving earnings per share than infrastructure consolidation and rationalization of operating systems, hardware and software, processing and storage, networks and facilities.

Infrastructure consolidation requires no additional customer channels, no new products, no new revenue streams or increases in gross margin, and no reformulations of core value propositions. It is based entirely on internal policy changes and program execution. In fact, it isn’t really a technology decision at all; it is a fundamental business decision with profound bottom-line implications.

Infrastructure consolidation represents a right-under-the-nose opportunity to boost both income statements and balance sheets. Annualized earnings-per-share returns for IT rationalization commonly range from a half-cent to one cent. We have seen such initiatives reduce annual IT infrastructure costs by anywhere from 15 percent to 40 percent, and capital spending during the next refresh cycle by 15 percent to 30 percent—no small change given the fact that IT spending today can account for more than 50 percent of the capital outlay of many large companies worldwide.

So if the business case is so clear, why hasn’t there been a stampede of infrastructure consolidation initiatives? You can chalk it up to—in varying degrees—fear, uncertainty and doubt.

It is well enough understood that the shift to the distributed, server-based computing model has been accompanied by a parallel decentralization of IT decision making. It is less commonly understood that the shift has also frequently brought about a decentralization of perspective, particularly financial perspective.

The financial information has always existed—in dozens of separate departmental IT budgets. Before you know it, this adds up to real money. But the business case for adding it up—for assessing the aggregate business impact, or acting upon it—has simply seldom been made clear.

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