This paper was developed to provide general background to assist clients in decisions related to outsourcing IT. Please note that this paper presents professional opinions intended to apply generally and that clients must take appropriate care to evaluate them in light of their specific needs. Technology & Business Integrator s, Inc. makes no representations, warrantees or guarantees of any sort as to the applicability of the opinions presented in this paper.
Enterprises that are organized around diverse business units with indigenous
Information Technology (IT) departments have probably considered leveraging the investment in their IT infrastructure through consolidation. Whether or not this consideration is ever fleshed out beyond a brainstorming session depends on the enterprise’s “culture” and business strategy. There are two kinds of enterprises that may benefit by implementing an enterprise-wide IT infrastructure consolidation.
The first is an enterprise that provides one service or product but is managed through multiple vertical business and support units. A good example is a multi-layered global enterprise, i.e., an automobile manufacturer, comprised of research, design and development, engineering, test, production, and sales divisions. Each division, together with hundreds of suppliers and distributors is part of one value chain dependent on a process that results in creating one single product – automobiles.
The second is an enterprise such as a pharmaceutical or consumer goods manufacturer that provides diverse products through its own or affiliated research, design and development, production, marketing, sales and distribution divisions. Each division is a separate entity because it is independent, not part of an enterprise-wide process or value chain. This enterprise is less likely to consider IT infrastructure consolidation for several reasons:
- The enterprise most likely grew through acquisitions or mergers therefore unity and loyalty is primarily vertical rather than horizontal.
- IT environments may be uncommon.
- Basic support services like administration, human resources, and finance and accounting are stand-alone groups within each business unit.
The idea of shared services through consolidation of any of these activities rarely sees the light of day – who in his or her right mind would even consider such a monumental paradigm shift?
Nevertheless, there have been successful IT infrastructure consolidations in these two types of enterprises. The basic ingredients for success were:
- Strong executive level commitment and support;
- A compelling operational and financial business case;
- A dedicated program office with strong project management practices;
- A phased approach for implementation;
- A flexible implementation process during which lessons learned is an integral part of a continuous iterative process;
- A strong change management program that facilitates the transition of employees through two emotionally charged and often threatening obstacles—job security and career progression; and
- An end game that benefits the customer, not just the enterprise.
IT Consolidation And Shared Services
To best illustrate the relative importance of the IT infrastructure to any enterprise, but more so to a highly complex multi-layered, multi-division enterprise, consider the model of the railroad industry. This mode of transportation serves individual customers as well as commercial customers. The rail traveler (individual customer) has one-type of convenience, the passenger train with a variety of services and configurations; passenger cars, sleeping cars, dining cars, lounge cars, observation cars, etc. The commercial customer has the freight train with several types of configurations; a box car, a tanker car, a refrigerated car, a grain hopper car, a flat bed car to carry tractor trailers or containers, a semi-open car where goods can be stacked on pallets, etc. The common support components of a railway system are the tracks and switches, the power (electric or diesel), the signal equipment, the “rules of the way”, the terminal and yard crews, the train crews, the repair and maintenance organizations, and scheduling, to name a few. The railway’s infrastructure is comprised of people and equipment dedicated to insuring that passengers and freight get to where they need to go safely and quickly, regardless of purpose or destination.
Compare this model to the IT infrastructure. The common supporting systems regardless of internal or external customer business requirements are communications (all media), computers, operating systems software, peripherals, standards, connectivity, maintenance, help desks, vendor management, technology architecture, and engineering. What travels upon this infrastructure are business applications that perform the commercial or support functions of the enterprise and its customers. When discussing IT infrastructure consolidation, the questions that every enterprise should ask are:
- Can the IT infrastructure be managed by a shared services organization while discrete vertical units manage the business?
- Is there a compelling business case?
- Can services be improved or delivered more effectively and efficiently?
For those who propose and support consolidation, the tendency is to answer in the affirmative to all these questions. But when asked to qualify and quantify specific benefits, such as optimization of the network assets, leveraging the purchase of generic hardware, i.e., PCs, servers, routers, switches, etc., leveraging the maintenance contract services, or obtaining master software license agreements rather than individual or site agreements, there is relatively little empirical information at hand. The excuse, which in some cases may be valid, is that everything in the infrastructure has to be audited, consolidated, and then optimized prior to implementing an enterprise-wide reengineering effort to create a totally integrated IT infrastructure. Then, several years later, the “before” benchmark data can be measured against the “after” result. Unfortunately during the ensuing years, technology has marched on; half the infrastructure has been upgraded or replaced so that what is can no longer be fairly measured against what was. In the end, no one can really attest to an overall cost savings, not even attest to a reduction in the rate of spending because the technology product mix has changed.
If we are now in the ramp-up stages of a significant shift from transactional driven information processing services to real time-interactive information processing services via electronic commerce, and if, as a result the business drivers are changing while IT infrastructure consolidation is occurring, how can you adequately measure these two environments? The suggestion here is to minimize the tendency to use cost as a measure and focus on the desired end game even if it’s at a greater cost. Namely, what is the measurable value to the business units of IT infrastructure consolidation? More importantly, what is the impact on the customer? Don’t replay the “better service”, “more responsive” songs. Those benefits can be achieved without consolidation: Just employ better metrics and management of those support groups servicing the business unit IT infrastructure. It can’t be solely a question of what is best for the internal IT organization, or even what is best for the business units. The underlying reasons for IT infrastructure consolidation and the realignment of business processes are:
- To better serve customers
- To increase business
- To penetrate new markets
- To achieve better margins
- To bring new products to market faster
- To gain a competitive edge
- To become the best-in-class in the industry
Technology is an enabler of all of the above. But it is merely a pile of junk if not leveraged to achieve the end game. Is the measure of success in the railroad industry the reliability of the systems that keep the trains operating every day? Unfortunately, many IT managers believe that this is the sole purpose of their jobs – keeping the systems up. Keeping the trains moving is not the answer if you send the wrong cars to the wrong destinations, if you lose freight cars, if you are late, if the freight is damaged or destroyed, or if you can’t meet a customer’s specific or unique requirements. If the IT organization can’t leverage the infrastructure to deliver what the business unit’s customers require then there is no metric, rationale or business model that can justify IT infrastructure consolidation. This is probably why there is strong resistance to shared services.
If a business unit gives up control of its own tracks, signaling equipment, and communications, how can it be assured that the train will deliver what the customer wants on time? If a business unit wants to change its business model to meet a customer requirement, how long will it take to reconfigure the network, or change the architecture, or add bandwidth? As the manager of the consolidated IT infrastructure, how can you guarantee this level of service? When you develop standards for the consolidated IT infrastructure, how flexible will you be when an internal customer requests a deviation from the norm? Will the answer be that the standards group meets twice a year and the customer will just have to wait? Will the answer be that the request will have to wait for next year’s budget?
Will the answer be that there are no resources available for that implementation? If any or all of these responses are forthcoming, consolidation will fail. The business unit manager will eventually contract a third party to implement the solution. In the end, standards will erode, control of the infrastructure will shift back to the business unit and the three to five year experiment in shared services will have been a waste of corporate resources.
All of what has been written so far makes a good case for inaction and indecision. There is no doubt that an IT infrastructure consolidation effort is a high-risk proposition. But the key to pulling it off is to change the existing paradigm that is central to most corporate cultures.
There have been so many successful cases where legacy systems have been consolidated either through insourcing or outsourcing. Why has this been so successful? Paradoxically, because the operations staff in the data center really didn’t identify with its customers. In most cases they weren’t even located in the same facility or the same city. While application programmers were usually in close proximity to their business unit customers, perhaps assigned to the customer’s staff, the IT operations staff was not an integral part of the business unit. Now almost every major enterprise is running its business in a distributed environment where mid-range computers and servers are sitting in the same facility, and where computer operators, system programmers and network administrators are co-located with their customers. In many organizations the help desk staff may be right around the corner ready to solve day-to-day problems. Today there is symmetry between operations, applications development, business analysts and customer. It’s not unusual for people from the IT staff to transfer to the business staff and vice versa. In fact, this is a highly leverage able and acceptable way of keeping good people – providing challenges to learn and grow.
The people component in an enterprise’s IT infrastructure inventory is the critical component. A paradigm shift that impacts people is a significant emotional event, one that must be led by a persistent, focused and driven force embodied in a benevolent and persuasive leader. Here are several traditional and well-worn excuses why resistance to this particular change is so strong:
- The impacted employees usually believe that their opportunities for advancement and job security are at risk.
- The business unit may view these transitioned employees as no longer part of the business unit but rather adjunct or outsourced resources like security or custodial services.
- The gaining shared services organization may believe that one size fits all. It may become less flexible or inflexible when considering requests for enhanced or new delivery capabilities especially when they can’t be implemented or leveraged on an enterprise-wide basis.
- The shared services executive management team may believe that reducing IT costs, i.e., saying no to these requests, is the grand purpose of infrastructure consolidation and it becomes a benchmark topic for the CEO’s weekly staff meeting.
All of the above are some of the barriers that impede IT infrastructure consolidation efforts. Therefore, selling this to everyone involved must be a win-win situation for the enterprise, its employees, and its customers. The only way to accomplish this is to look from the outside in. Examine all the attributes of IT infrastructure consolidation and their impact on the external customers’ business and the internal business unit’s operations. If you can make a business case here, then examine all the attributes of consolidation and their impact on the other internal groups impacted by change. The business unit must agree with the external business case, and then help create the internal business case. Both may be based on different models, but both must have positive outcomes. The external business case may be based on benchmarking a major competitor while the internal business case may be based on benchmark data from a similar industry’s acknowledge best-in-class organization.
After the numbers are crunched and the end game is agreed to in principle and in fact, and all the nay sayers are placated, the last obstacle to buy-in is the affected IT staff that may believe their careers or job security may be in jeopardy. This may be a justifiable concern if faced with an outsourcing solution. But when considering an insourcing solution we are dealing with perception rather than substance. So what may tip the balance between an outsourcing and insourcing decision? The scale normally tips in favor of the employees who will continue to be an integral part of the consolidated IT organization and the IT organization’s management structure that remains in place. If a network administrator in a business unit reports to a manager of network services in a business unit the day before and the day after consolidation occurs, what changes? If the IT infrastructure manager reports to a central shared services organization but still maintains a close relationship with the business unit CIO and business unit leaders, what has changed?
These messages must be continuously conveyed to the IT staff because it is the perception that the relationships between the IT staff and its business unit customer will end that often causes resistance. This perception is simply not true. If the environment in the business unit was one where members of the IT staff worked on the business side as well as on the technical side, or if an IT employee had the option of transferring into the business unit for growth opportunities, or if a business unit employee could transfer to the IT support unit for the same reasons, why change that relationship? These accepted career-enhancing practices should not be interrupted because of consolidation. All of the human resources issues should be dealt with long before the first announcement is made that a consolidation is taking place. When this obstacle is overcome, then all the people related obstacles associated with IT infrastructure consolidation or insourcing will shake out. IT infrastructure consolidation and the subsequent transition to a shared services organization should be designed to:
- Improve business relationships with customers
- Improve enterprise-wide connectivity
- Leverage pockets of technical knowledge to create centers of expertise or excellence
- Manage the acquisition of hardware and software utilizing flexible standards of architecture
- Leverage technology innovation or solutions among all business units.
These are the primary objectives of insourcing. If they are met, then efficiencies in operations and costs will be achieved. The two variables that determine the success or failure of such a huge paradigm shift are project management and executive commitment. If one or the other fails the entire train will be derailed. The one constant that impacts the decision to leave the station is time. If you can’t make the delivery on time, don’t take the freight. The downside of failure is greater than walking away from an opportunity.