CIOs Focus On Cost Control

In a bid to battle maintenance misery and control costs, firms are eyeing a number of cost control methods, including server consolidation and outsourcing.

June 22, 2004

7 Min Read
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On average, IT maintenance eats up more than $6 out of every $10 in the IT budget. In a bid to battle the maintenance misery and control costs, firms are eyeing everything from replacing old equipment and re-evaluating warranty coverage to outsourcing and architecting their systems differently.

When it comes to IT spending, there's good news and bad news, according to Robert Hegarty, vice president of the securities and investments practice at Needham, Mass.-based TowerGroup. The good news is that IT budgets are on the rise and the securities industry is emerging from a three-year spending slump. Hegarty says the industry will spend $71.5 billion globally on technology this year - with North America accounting for 42 percent of that spend - led by investments in asset-management technologies. But there's a dark side to increasing IT budgets, he says: much of the money still goes toward maintaining systems.

In the '90s, about 67 percent of IT budgets were dedicated to maintenance, while 11 percent went to replacement technology and 22 percent was dedicated to new IT spending, Hegarty says. Fortunately, he adds, "maintenance [spending] is on the decline." Today, 61 percent of IT spending is dedicated to maintenance, spending on replacement technology has crept up to 12 percent and new IT spending has increased to 27 percent. By 2010, Hegarty projects that maintenance spending will drop further, to 55 percent of overall IT spending; replacement technology will account for about 15 percent; and new technology will jump to 30 percent.

Out With The Old

Hegarty says the decline in maintenance costs "has got a lot to do with the declining costs of hardware and telecom." It's now cheaper to replace outmoded systems than to fix them.Asiff Hirji, CIO at Ameritrade, agrees. "Rather than maintaining the old, we're much more focused on replacing it with new and more innovative functionality."

When it comes to maintenance, Ameritrade, which is based in Omaha, Neb., spends at a rate well below TowerGroup's published average. Only 30 percent of the IT budget at Ameritrade is dedicated to maintenance, Hirji notes. That's largely because "Ameritrade is an e-commerce company," he says. "Our systems are not legacy-based, 30-year-old COBOL programs."

Additionally, the rapid pace of change in technology means that the life cycle is short for the technology that Ameritrade deploys. "The functionality we provided four years ago is completely irrelevant to what we're delivering to the client today. The functionality is being refreshed within a year," Hirji continues. "We're like many other companies - we strive to deliver essentially disposable hardware. It is more effort to diagnose what is happening on one server and why it's gone wrong ... than it is to rip out the box and put a new one in."

Allan Woods, vice chairman and CIO of Pittsburgh-based Mellon Financial Corp., says that strategies for reining in IT maintenance costs depend on whether the maintenance involves applications development or infrastructure. At Mellon, the two areas have very different cost structures. Of the $600 million Mellon spends on technology each year, roughly 60 percent goes to application and systems development and 40 percent to infrastructure, such as computers, networks and disk drives.

Discretionary spending in applications runs about 70 percent of the budget, versus 30 percent for non-discretionary maintenance, which Woods characterizes as spending needed to "keep the lights on." For infrastructure initiatives, about 80 percent of the spend goes toward keeping the lights on and only 20 percent is discretionary.Woods says that Mellon has even sold off some business lines to drive down maintenance costs. "Some of the businesses that we divested had fairly heavy maintenance requirements," he says. To further keep maintenance costs in check, Woods leverages as much of the technology across operations as he can. "To the extent that you can leverage systems in different parts of the organization, you're going to minimize your maintenance."

Al Ball, a technical platform systems administrator at Delaware Investments in Philadelphia, says his firm removed disk drives from maintenance coverage and implemented a disk drive hot-swap program to keep maintenance costs down. "We keep a variety of drives ... on the shelf to use as hot-swaps rather than paying for maintenance for them. We also have a few of the smaller servers on the shelf to serve as hot-swap rather than keep those common smaller servers on maintenance," he describes. For non-mission critical systems, Ball avoids buying a "warranty uplift," opting instead to go with the standard warranty. He also keeps a detailed, up-to-date list of hardware for which he re-evaluates the coverage every quarter.

Outsourcing is another way that firms are keeping maintenance costs in check. In fact, Richardson Partners Financial relies on the strategy. Stan Eng, senior vice president and chief technology officer, says that, in starting from scratch, the firm "made a conscious decision to buy versus build." That includes using an application service provider (ASP) for its portfolio-management system from Montreal-based Croesus Finansoft.

Scott Stennett, vice president of technology at Richardson, says that if Richardson had built the portfolio system itself, it would have had to swallow the costs of upgrades and maintaining the system. By using an ASP, it spreads the cost of maintenance across the ASP's customer base, making it cheaper for Richardson to maintain, he says.

When it comes to leasing software, "due diligence and negotiating a good contract are critical to controlling future software costs," Delaware's Ball notes. "Many, if not most, software vendors have gone more to a lease model for their software. Contract negotiation is key. Figuring out the necessary customization ... to the software before it is leased gives you a chance to negotiate when you have the most leverage."If You Build It ...

Mellon's Woods says that, for those who opt to build versus buy, maintenance is also a reflection of how well a firm develops its software at the initial stages. To guide it on that front, Mellon has adopted the Software Engineering Institute's Capability Maturity Model, a five-step framework for measuring and improving an organization's software development, for developing applications. Woods notes that when you have fewer bugs, there are fewer issues downstream. "The model really leads you through best practices for developing software. Among other things, it's a cleaner system that requires less maintenance," he says.

Ameritrade's Hirji adds that broken applications are one of the maintenance sticking points, especially with the number of security patches that some software developers issue. Each patch can cause a malfunction somewhere in the system. The challenge, he says, "is in managing and removing the complexity. The more complex an environment is, the higher the maintenance is going to be. We try to take out as much of the complexity as we can. We don't have monster monolithic applications."

Maintenance Mends

Experts say there are a few things that firms can do now to cut their maintenance costs.

  • Consolidate servers. "One of the most efficient cost reductions has been server consolidation," says Rob Hegarty, vice president of the securities and investments practice at TowerGroup. "You can go from multiple systems that perform the same thing down to one or two systems." That's particularly the case for investment firms that have recently gone through a merger-and-acquisitions spree. "There's a lot of waste and duplication."

  • Consider outsourcing. Outsourcing is high on the agenda for reducing maintenance costs. As applications get older, they become harder to maintain. By outsourcing new development, Asiff Hirji, CIO at Ameritrade, says, "The natural effect of that is a lower cost of maintenance.

  • Examine maintenance contracts. Consolidating or eliminating office equipment can result in significant cost savings. Stan Eng, senior vice president and chief technology officer at Richardson Financial Partners, says that "one of the things that's been a sore point for me is color printers." He says the cost of maintaining them can be almost as much as the printers themselves. "We've been getting rid of some of those devices" and electing not to go with maintenance contracts, he says.

  • The bottom line, says Hegarty, is that when firms are "looking at maintenance, the big goal is to reduce costs without reducing the service level - you have to be very careful not to throw the baby out with the bath water as you try to reduce costs." It doesn't help to reduce a budget by 4 percent if the system is down five times a week, he says.

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