This year, Microsoft has spent millions trying to convince you to upgrade to Windows Vista and Office 2007. The makers of PCs, servers, and other hardware are following in the software giant's footsteps, hawking their own new equipment in the knowledge that when a company buys new software, it often ends up buying new machines as well.
Back in 1995, Harvard Business School professor James McKenney called computer costs an "insatiable economic sump" for businesses. He was right. From the time the first mainframes were installed in offices in the 1950s, companies have been pouring cash into information technology, much of it going to upgrade existing equipment and programmes. Today, more than 40 per cent of the average company's capital investment goes on IT, and routine expenses in this area swallow up the largest slice of the annual budget.
Sometimes, investments in IT pay off in higher profits but, most often, it is little more than a necessary evil. Companies boost IT expenditure to keep pace with competitors in the automation race, but they rarely get a competitive edge or an earnings boost from the outlay. IT is just another cost of doing business—and an onerous one at that.
The good news is that in the wake of the Y2K scare and the bursting of the dotcom bubble, companies have grown more skeptical about IT and more conservative in their spending. Microsoft faces a much tougher sell this year than it did in 2001 when it rolled out Windows XP. Since then exciting new technologies have also emerged that have allowed businesses to use their existing IT equipment more effectively and avoid buying
new gear.
Suddenly, companies are finding they can cut their IT budgets and still have the computing capabilities they need. Smart IT management is all about getting more for less. Here are 10 ways your business can achieve that goal.
1 Consolidate
More powerful microprocessors mean that a big gap has opened up between the computing capacity companies have in place and the capacity they need for their applications. Studies show that about 75 per cent of the power of the average corporate server is wasted. Data storage systems aren't much better, with capacity rarely more than 50 per cent utilised.
That opens up big opportunities to consolidate servers, databases, and even entire data centres. Large companies are leading the way. Hewlett-Packard's IT department, for example, is consolidating its 85 data centres down to just six and expects to save hundreds of millions of pounds as a result. But you don't have to be a giant corporation to make net gains. Adams Kids, the UK children's clothing retailer, went from running three servers to just one. In doing so, it reduced its maintenance and support costs, for both hardware and software, while also reducing the size of its data centre.
2 Virtualise
Closely related to consolidation is virtualisation. Simply put, it means replacing hardware with software. Since all modern computing gear, from microprocessors to databases to firewalls, operates through digital instructions, they can often be "emulated" with software code. You can, for instance, use a single server to run many "virtual machines", thus reducing hardware expenditure. Virtualisation is allowing insurance group Prudential UK to do with just two computers what once required 60 servers.
It's also possible to virtualise a company's PC desktops, running employees' applications centrally, on a shared server, rather than from individual hard drives. Dundee City Council has switched from installing applications on individual PCs to distributing them to users' computers over a network from a central server. By doing so, it estimates it will save £85,000 annually in support costs and £70,000 in software licence fees.
3 Go open source
Free open source software has proved its value in running the inner workings of computer systems. The Linux operating system and Apache Web server, for instance, play key roles in keeping internet traffic flowing smoothly. Many companies have found that open source operating systems are a cheaper alternative to proprietary ones sold by big vendors. Virgin Money switched to Linux to run its consumer-facing website. As a result, it not only avoided high software licensing costs but also found its site's performance improved substantially.
Open source is moving into the application world as well. Although open source applications won't be right for every company, they can be more simple and less expensive to run than proprietary programmes.
Recruitment firm Reed chose an open source application, from Alfresco to manage documents throughout all its branch offices. It found the Alfresco application had the functions it required but was much easier to install and use than more complex content-management systems sold by traditional software firms.
4 Buy software as a service
You may not need to buy or install software applications at all as the idea of "utility computing" finally moves from dream to reality. Broadband internet provides the powerful transmission grid required to supply software as a for-fee service rather than as a pricey packaged product.
Hundreds of software-as-a-service, or SaaS, start-ups have been launched, and even computing giants like Oracle, Microsoft, and SAP are rolling out SaaS offerings. Buying software as a service not only allows you to avoid hefty up-front payments for licences, it also means you can avoid all the hardware and labour costs that go along with running it.
Foreign-exchange company Travelex went the SaaS route for the software it needs to manage its customer accounts. Its regional offices had been using a mix of customer relationship management (CRM) software, from simple Excel spreadsheets to complex Siebel enterprise applications. By standardising on Salesforce.com's CRM service, which only requires a Web browser to use, Travelex now has a single, central database of customer information, maintained on Salesforce's computers, and has also cut its maintenance and equipment expenses.
Smaller companies may soon be able to fulfill all their software needs over the internet. Google already offers corporate email, calendars, website hosting, blog hosting, and even spreadsheet and word-processing software as utility services. The days when small businesses had to run their own servers for email and other basic applications are rapidly coming to an end.
5 Buy hardware as a service
Utility-computing isn't limited to software; you can also buy data storage and raw computing power as services supplied over the Web. Hardware as a service can be a boon where computing demands fluctuate substantially. In the past, a business would have to buy enough computing and storage capacity to meet its peak demand, which meant it was expensive.
One of the leading providers is online retailer Amazon.com, which has opened up its computing systems to outside companies. For a low, usage-based fee, these firms can store their data and run programs on Amazon's machines. SmugMug, a US photo-sharing website, uses Amazon's service to handle the big image files its customers upload. It gains the flexibility it needs to expand rapidly without having to invest capital in new machines and the property to house them. The company estimates it will save $500,000 in the first year of using the Amazon service.
6 Think thin
The ability to supply IT services over a speedy corporate network means that personal computers can be replaced with cheaper "thin clients". These are stripped down network terminals that lack the big hard drives and powerful chips of standard PCs. They draw their software applications and data from central servers. Thin clients are cheaper than PCs, but the real cost savings come from lower maintenance and upgrade costs.
Glynwood Metal Services, a UK metals distributor, has replaced 600 PCs with thin clients in its 30 offices nationwide. All the software required is run centrally on servers at the company's Southampton headquarters. When an upgrade is necessary, Glynwood only has to install the new software on the central server.
7 Conserve power
One of the biggest expenses in IT is electricity. As computer chips become more powerful, they suck in extra power and throw out more heat. One study estimates the total annual cost of the power used to run the world's server computers, plus related equipment such as data-centre air conditioners, is more than £3.5bn.
Microchip and computer makers are beginning to prioritise energy efficiency. Companies like AMD, Sun Microsystems, and HP are pioneering new cooling and power-management technologies that reduce kilowatt consumption. In planning your next data-centre upgrade, make energy efficiency a key criterion. Power savings can quickly offset the higher purchase price of energy-efficient equipment.
There are also easier ways to reduce power use. Employees leave their PCs on overnight, often running screensavers on their monitors; this wastes a lot of electricity. Just shutting off these machines when not in use can produce big savings—and helps the environment.
8 Offshore work
Among the biggest IT costs of all is salaries and benefits. Shifting jobs to countries with lower wages continues to offer cost cutting opportunities. Transco, the natural gas supplier has, since 2000, been using workers in India to update and support some of its software applications. The scheme has cut Transco's annual application support costs by 15 to 20 per cent, and reduced the incidence of errors and other problems.
9 Avoid customisation
It's natural for people to want to be innovative, but these days the instinct to be creative can backfire when it comes to computing. Many corporate IT departments try to customise their systems by writing their own code or configuring off-the-shelf applications to accommodate "unique" requirements. This undermines the cost savings that come from buying generic hardware and software. Customisation also increases complexity, which can push up maintenance costs and make collaboration with business partners more difficult.
10 Procrastinate
It's not always necessary to make outright cuts to save money. One way to reduce costs without foregoing new systems is to spend more slowly. The rapid fall in IT prices means that even small delays in purchases can slash costs. And delaying investments can bring other benefits. Companies that steer clear of brand new software reduce their chances of being saddled with buggy technology. They can also learn from the successes and mistakes of early adopters, enabling them to avoid unnecessary costs and often build better systems as well.
Nicholas Carr is the author of Does IT Matter? His next book, The Big Switch, will be published in January 2008.
