This paper was developed to provide general background to assist clients in decisions related to Enterprise Asset Management (EAM) and outsourcing of technology infrastructure assets.
Today’s information technology (IT) environment is suffering from a syndrome of continuously fluid and emerging technology coupled with escalating costs. The general consensus throughout the industry is that the costs associated with owning, maintaining and managing PCs and the network infrastructure necessary to sustain a competitive edge is increasingly costly. Industry analyst studies and surveys of large organizations confirm the need for businesses to implement an asset management program to streamline their business practices and operate at optimum efficiency. Businesses are actively looking for ways to significantly reduce the cost of their information technology assets. The challenge faced by most organizations is to find an aggressive approach that will allow them to reduce the costs associated with actual equipment, inventory, contracted support and maintenance of their asset base. The Gartner Group estimates that businesses who successfully implement an effective IT asset management program can reduce the life cycle cost of IT asset management by 10-28%.1
The remainder of this paper is organized by the areas a company needs to understand in order to enable it to undertake an initiative to select and implement an effective asset management program, which are:
- State Of The IT Industry
- Managing The Dilemma
- Asset Management ROI
- Outsourcing As An approach
These factors will provide them with the information necessary to make an informed decision as to what approach provides the most effective cost saving benefits.
2. State Of The IT Industry
Over the past decades, there was a shift of budget and decision making from a centralized “glasshouse” model to a decentralized “empowerment” model. Simply stated, IT decisions were being made by business people rather than key technology personnel. Initially, this seemed to be logical. The assumption was that by empowering the business unit to choose and deploy technology, that this would further enable their business. The problem was the choices were numerous and the possible changes were infinite. A variety of technology “pockets” began to spring up in organizations. This development only served to intensify the problem. Today, technology remains in a constant state of transition and two trends continue to emerge that impact the price/performance equation. The rate of technology modifications and transformations frequently demands that organizations change at a faster and faster rate. However, the “human” factor does not always keep pace with evolving changes. The labor market often lacks a pool of available and skilled talent to meet the demands of advancing technology. Although end-users are armed with sophisticated and powerful desktop tools, they often experience an increasing amount of self-inflicted downtime due to a lack of talented IT management. In today’s fluctuating environment most companies are migrating away from centralized computing to more open end-user environments. These networks need to be managed effectively across a variety of widely distributed assets. This requires a business practice that will insure that the IT budget is efficiently spent.
Based on this evident need, the industry gave birth to Enterprise Asset Management. The true definition of asset management means that an IT organization understands and manages its entire asset base and works to actively reduce the total cost of IT ownership while maintaining powerful desktop functionality and support.
3. Managing The Dilemma
Today’s technology requires an organization to embrace procedures and disciplines, to automate labor-intensive tasks and to make technology decisions based on factual, historical and empirical data.
A thorough understanding of the impacts of new technology on the entire organization must be factored in before selecting and deploying the “latest and greatest” innovations. The focus must be on centralizing and standardizing. The key is to manage the investment in IT and human assets.
It is an important component of the decision making process to consider why organizations have acquired these IT assets and how this enables them to accomplish their business goals. We need at the very minimum to understand:
- The array of technologies in an organization
- The IT acquisition strategy
- The labor/management factor.
Enterprise Asset Management (EAM) is a reevaluation of the current IT model as we know it. The opportunity to deploy EAM within an organization can be as large as the IT industry itself. It can also be revolutionary and at the same time an evolutionary process for an organization. The challenge for organizations is to determine when and where to start and how to implement. Without a strategic asset management initiative, organizations will quickly lose ground simply because they will be unable to embrace and benefit from technological change. They will be incapable of deriving a competitive advantage from their IT investment and this will impair their ability to keep up with their competitors.
So what is the best approach to asset management? Organizations should look at the asset management process like the components of a large-scale project. Consider what is currently being done, what their goals are and how they can readily accomplish these goals. Next they need to determine if they handle this task in-house or investigate outsourcing options. One of the first and major considerations is to examine the ROI to the organization by deploying an asset management program.
4. Asset Management ROI
To begin building a case for an organization to undertake the decision to utilize an asset management solution, a baseline cost needs to be established. Once this baseline cost is established then the benefits of the solution need to be quantified in contrast to the baseline. The industry had adopted research done by the Gartner Group, Stamford, CT to illustrate this. Essentially, the Gartner Group Total Cost of Ownership (TCO) research attempts to quantify all of the costs (hard and soft dollars) associated with PC usage within an enterprise environment. The research outlines a model of capital costs (hardware, software and the cost of capital) and the labor costs (administration, technical support and end user operations) over a five year period. While each organization can argue the actual numbers, there is a general consensus that the cost allowances included in this model are representative of a realistic cost assessment…
Several conclusions can be reached based on this example. First, the capital costs account for roughly 15% of the TCO while labor costs account for 85%. This is consistent with the industry trends previously noted. The technology is a commodity driven by marketplace supply/demand functions. An individual organization cannot significantly impact the cost of the technology. In fact, only 1-2-percentage points can be achieved through volume buying, standardization and tier shopping. Tight labor markets, inadequate training and unsophisticated users, drive the labor component. Driving efficiency through the labor component is the real opportunity for Enterprise Asset Management.
Today, more than ever, IT executives are facing the challenge to effectively manage distributed assets while reducing the TCO from a conservative 5% to an aggressive 30%. But how can an asset management solution drive down the TCO? To illustrate the financial impact, we need to examine some assumptions. First, the Gartner Group TCO research will be used as a baseline. Second, only those items from the research, which can be measured, will be addressed. In other words, the illustration only focuses on hard dollars that can be quantified. There are, however, additional significant soft dollar opportunities but they will not be addressed at this time since they relate to user productivity and the overall impact on the organization. Third, this analysis will be based on a hypothetical organization with 2,500 PCs. Finally, the solution will be assumed to cost $100 per PC.
Using the Gartner Group TCO numbers, the 5-year costs for a 2,500 PC organization would be $151,875,000 or $30,375,000 annually. As mentioned earlier, assuming the asset management solution can be delivered for $100 per PC, the investment required would be $250,000. To justify the investment, the benefits need to be quantified and a return on investment (ROI) determined, as by the following steps:
- License reconciliation, elimination of duplicate software and redeployment. Assuming an average cost of $50 per licensed product. The average PC can eliminate/redeploy one licensed product for a savings of:
- Consolidation of software to servers for server based launching. Assuming that 25% of the user population can eliminate one software application from a local hard drive to a central server and that the average application requires 20-80meg, than the organization can save significantly by deferring costly hard drive upgrades estimated at $500 per PC:
- Software license compliance methodology. Organizations have not demonstrated a methodology to effectively manage software licenses. The fines associated with each non-compliant event can be $100,000 to $250,000. In most large organizations, the value of mitigating the risk is measured in terms of a premium paid. Would a $25,000 premium be worth it to offset the risk?
- Volume License Agreements. Organizations should assess their software usage and determine opportunities to renegotiate agreements and take advantage of VPA discounts. Assuming average software expenditure of $1,500 over five years, the leverage of VPAs can save:
- Maintenance Negotiating Power. An updated inventory is essential to renegotiating a maintenance contract. Service providers add risk to a quotation when there is a lack of inventory data. This risk equates to a 10-20% markup. The Gartner Group TOC study assumes $859 per PC over five years for maintenance:
- Surplus Discovery. The inventory aspect of implementing the asset management solution usually yields between 8 and 12% of surplus equipment. Assuming a surplus discovery rate of 2% and an average book value of $1,000, the organization will save:
- Warranty Reconciliation. Most organizations cannot effectively handle warranties for remote locations. Under an asset management solution, the warranties would be centralized. Assuming a T&M rate of $50 per service call (this is a conservative estimate) and that 25% of the PC portfolio is covered under a warranty, the organization can save:
- Theft/Loss Avoidance. Internal misplacement and borrowing account for the majority of IT losses within an organization. By implementing an asset management solution, employees will know that the technology is being counted and that they will be held accountable. Assuming laptops with an average book value of $3,000, the company can save:
- Technical Support Efficiency. According to the Gartner Group research, there is a 90:1 ratio of end-users to technical support. This equates to 28 full-time equivalents (FTEs) to support our sample organization of 2,500 desktops. A 15% improvement can be noticed in the technical support area by addressing some of the issues noted earlier. This can result in a savings of:
- Eliminate Annual Audits/Inventory. Every year, IT departments undertake some type of physical audit. The financial department usually drives this. An industry average of $35-50 per PC is spent on a one-time physical audit. These audits are generally limited to 4-8 pieces of data and are disposable since the value of the data is limited to a single application. By implementing a perpetual inventory and audit process though an asset management solution, an organization can save:
$50 x 2,500 PCs = $125,000
25% of users (625) x $500 per PC = $312,500
Value of risk mitigation $25,000
$75 per PC x 2,500 = $187,500
$850 per PC/5 years = $170 x 10% x 2,500 = $42,500
2,500 x 2% = 50 x $1,000 = $50,000
$50 per service call x desktop (2500 x .25) = $31,250
5 systems per year @ $3,000 = $15,000
28 FTEs x 15% yields 4.2 FTE @ $60,000 = $252,000
$35 per PC per year = $87, 5000
It is obvious that the information provided above paints a compelling case for implementing an asset management solution. There are ten immediate, first year opportunities for saving hard dollars. As stated earlier, the implementation costs can be assumed to be $100 per PC. The conclusions from this analysis are as follows:
Summary of Savings
- software redeployment $ 125,000
- server consolidation $ 312,500
- software license compliance $ 25,000
- VPA buying $ 187,500
- hardware maintenance $ 42,500
- surplus directory $ 50,000
- warranty $ 31,250
- loss/theft avoidance $ 15,000
- technical support $ 252,000
- audit administration $ 87,500
Total first year savings for 2,500 PCs:
$1,128,250.00 OR $451.00 per PC or $37.50 per seat per month
The analysis formulates the framework for a powerful justification for moving forward with an asset management solution. The ten immediate impacts illustrated only scratch the surface of the cost savings and efficient IT management process that can be achieved with effective IT asset management. It should be noted that the analysis was conservatively approached and actual results will undoubtedly yield more substantial savings.
Most organizations are now realizing the negative effects of years of purchasing PCs, laptops, software and a myriad of peripherals. IT departments are now examining asset management initiatives that will enable them to keep pace with a competitive edge.
Organizations need to manage the delicate balance of juggling IT asset management within the framework of their business decision support system. For some organizations, this will involve moving forward with a program within their IT organization to identify which asset management functions are essential and can be handled in-house and which, if any are best handled by suppliers.
Obviously, there are benefits to either an in-house solution or outsourcing as a possible answer. The decision is one of economic efficiency. Some believe that one way an organization can reduce their asset management costs is to start by mandating desktop standards. But asset management incorporates additional functions that must be managed, including inventories, finance/leases, purchasing, software licenses and agreements, help desk support, service and maintenance and security. With the right asset management tools, an organization can experience far-reaching benefits and a functional solution. In some instances, this can be the most efficient and cost effective solution. Yet, for some companies these tasks can be labor intensive and extremely costly and in this case, an organization may elect to investigate outsourcing as a viable alternative.
5. Outsourcing As An Approach
Many organizations are considering the services of external providers to resolve the problems of asset management. In essence, outsourcing asset management provides a solution for controlling the ten immediate impacts as outlined in the analysis. Organizations then rely on a single vendor or a combination of service providers to purchase, inventory, negotiate leases, provide integration and support and service their desktop environment. External vendors have the manpower to provide quick turnaround time for necessary projects, can research and provide the best-of-breed tools and if needed, can develop and implement customized solutions and applications on an as needed basis.
An immediate burden is removed from the in-house IT staff and they are free to concentrate on core activities. The vendor(s) can purchase your equipment and provide experts to configure, install and tailor your network to your organization’s needs. They can handle the registration of your software and hardware and can integrate and manage the maintenance, service and support of your complete system.
The real challenge facing an IT department once they have decided to outsource their asset management needs is to determine which vendor or combination of vendors can best meet their requirements. Regardless of the number of providers an organization works with, it is imperative that the working relationship is effectively managed to provide the maximum amount of service. An organization must still maintain control while relying on the vendor’s expertise. This can often put a new burden on IT organizations.
At this stage, companies often search for a strategic consulting firm that will research, provide and manage the services of many vendors and also partner with their organization and form an alliance to represent their best interests. Together, with this type of commitment, an organization can rely on the expertise of an information technology outsourcing company to help make asset management truly a cost savings practice and an IT and business success.