By reducing IT complexity, companies can
generate significant savings, including lowering the overall cost of
finance and human resources functions, according to new
research from The Hackett Group, a business process advisory firm.
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.