Government Insights: Possible IT Budget Cuts

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1 Tactical Guidelines, J. Kost Research Note 6 January 2003 Government Insights: Possible IT Budget Cuts In tough economic times, government leaders pressure CIOs to reduce IT budgets. Although IT investments should help cut overall operating costs, CIOs can take actions to reduce the cost of the supporting infrastructure. Core Topic Government: Government Processes Key Issue How will government budgeting and funding processes affect technology? Tactical Guidelines When cutting IT budgets, financial analysts must understand that not all IT budget reductions are the same. Short-term savings can be achieved through deferral of replacement hardware and software. However, before deferring purchases, analysts must understand the financial and business implications of this type of action. Will the deferral generate financial penalties for failure to dispose of existing equipment or software that is almost obsolete? Will using old hardware or software impinge on the ability to provide services? Significant short-term savings from the elimination of computing capacity can only be achieved through complete elimination of the program or service provided to the citizen. Partial reductions in services or eligibility will have only an insignificant impact on IT infrastructure costs. Renegotiation of contract rates and prices may be possible under some circumstances. This will most likely be the case when government actually needs more of something and the vendor may be willing to provide a larger quantity at a lower price. If a contract is for a product or service that could possibly be eliminated, a vendor may be willing to negotiate a lower price if there is a risk of contract cancellation. The largest short-term savings available from IT are through more-efficient use of IT infrastructure. Government bodies that have already done significant consolidation or outsourcing will be able to offer few budget savings from IT. Those with significant numbers of data centers, distributed servers and networks will be able to offer the greatest savings. In difficult economic times for government, usually almost every organization is asked to reduce expenditures. Although it can be argued that increasing the investment in and use of technology can help to reduce the overall cost of government, government leaders often lack the time or investment capital to seriously consider the merits of this argument (see "Balancing Long-Term Objectives and Shrinking Budgets"). In the very-short term, the ability to reduce IT expenditures is largely limited to reducing personnel costs or discontinuing the planned purchases of new equipment. However, within a fiscal year, it is possible for the IS organization to initiate changes that can result in significant short- and long-term savings (see "Sluggish Economy: Government Operational Opportunities"). Here we will offer strategies that government IS organizations should consider when attempting to reduce budgets. Cutting IT budgets falls into one of the following categories (see Figure 1): Deferred Purchases: Not replacing hardware or software as planned by deferring the purchase to subsequent fiscal years. This saves expenses in the short term, but may result in higher expenses in the long term. Reduced Operational Requirements: If government reduces the amount of service offered to citizens, IT support requirements may be marginally lower. This will only result in significant short-term IT savings if the programs that are being cut enable the elimination of a significant amount of IT capacity (for example, data center closure). Reduced Cost/Unit: Difficult financial times for government are often indicative of similar challenges in the private sector. Belt-tightening may occasionally enable the renegotiation of rates or prices for services and products. Gartner Entire contents 2003 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Efficiency Improvement: Through the consolidation or outsourcing of existing resources, the same level of service can be provided with a more-efficient use of infrastructure and a reduction in the personnel required to support it. Figure 1 Short-Term Savings Potential Hardware Software Internal Personnel External Rates Deferred Purchases Moderate Moderate None None Reduced Operational Requirements Low Low Moderate None* Reduced Cost/Unit Low Low Low High Efficiency Improvement High High High Moderate * Potential savings from external rates could be moderate if there is significant outsourcing. Source: Gartner Research Government budget overseers should reduce the temptation to demand "across the board" budget cuts in technology. This is not to suggest that cuts are not possible. However, since most IT expenditures are not variable, in the short term, only labor costs are likely to be subject to reduction. Requiring all "across the board" cuts to come only from labor may make the goal unachievable without either eliminating an entire data center or depleting services to operating departments that may be depending even more on technology after they make their own reductions. The following list represents opportunities to generate savings through Efficiency Improvement. Computing Infrastructure To realize significant short- and long-term savings, many government organizations have moved to a utility model for computing and network services. Under a utility model, operating agencies of government no longer own or operate their infrastructure. Large-scale computing (mainframes and enterprise servers) is consolidated at the enterprise level (or outsourced) under the CIO or central data center. Owning and maintaining a distributed infrastructure is very expensive. Each separate data center must maintain hardware; software; floor space; heating, ventilation and air conditioning (HVAC), a minimum required head count and disaster recovery. Further, each data center is sized for the peak workload it encounters. Even a small data center with one workload spike each week is, by definition, inefficient because it has so much unused capacity during nonpeak times. Overall, the total consumption of resources is considerably greater than if infrastructure is consolidated. 6 January

3 Data center consolidation reduces the amount of hardware and software that must be supported, as well as floor space and HVAC requirements. It may also significantly reduce required head count. Within the consolidated data center, additional consolidation will enable even greater long-term savings. Consolidation of mainframes, if common operating systems are used, will provide more greater hardware and software savings. Mainframe consolidation will provide greater efficiency because it can be sized to accommodate the workload increases of all users, and will thus manage capacity use more efficiently (see "Mainframe Operating Systems: Perspective"). As with mainframes, savings can often be found in server consolidation. In most cases, the economics will justify consolidation into a common location to enable organizational streamlining or floor space reduction. Logical and rationalized consolidation will be justified under some circumstances (see "Server Consolidation: Benefits and Challenges" and "Understanding the Technology of Server Consolidation"). Network Infrastructure The same arguments can be made for networks. Few networks are used to peak efficiency. Through consolidation of physical networks or contracts with bandwidth suppliers, capacity is used more efficiently and fewer resources are required to support the network. Few state governments operate their own networks. Although some may have various internal capabilities, most maintain network capabilities through one or more contracts with various providers. The consolidation of networks or suppliers can also reduce the head count required to support them. Consolidating outsourcing contracts can lead to significant financial benefits (see "Network Outsourcing: Lessons from State Government"). Portals Supporting a single enterprise, rather than multiple ones, can produce small savings. These portal consolidation savings come from improved content management strategies. A strong content management strategy enables operating agencies to maintain agency-specific content on the enterprise portal without creating a large IT infrastructure for content development and maintenance. As a result, the infrastructure is consolidated (shared computing and network) and the agency-specific needs are met by the agency using common templates across the enterprise (see "Web Content Management and Portals: Who's 6 January

4 Doing What?" and "Document Workflow: A Fast Route to Enterprise Savings"). Desktop Computing In the short term, generating significant savings from the desktop is largely limited to postponing purchases. However, in the long term, the savings from desktop costs can be significant. All enterprises should empower their CIOs to set desktop standards that apply to hardware, software, training and the help desk. In setting these standards, the enterprise should commit to no more than two or three desktop platforms (one is ideal), one standard for laptops, and a standard office software suite. The financial advantages to this approach include: Economies of scale on procurement: Larger volumes enable great price discounts, thus saving significant money on the products themselves. Training: With fewer platforms in the enterprise, there are fewer products on which employees must be trained. More importantly, as employees transfer from one part of the enterprise to another, if desktops products are the same, staff will not lose productivity during the time required to learn new products. Help desk support: Fewer products to support will reduce the complexity of the help desk environment. It also enables an enterprise help desk consolidation that will provide consistent, universal service to all agencies in the enterprise (see "Help Desk and Consolidated Service Desk Systems and Software: Overview"). Enterprise Architecture In the long term, application development in an enterprise can become increasingly complex and expensive if the enterprise does not develop and enforce development standards. By creating standards, an enterprise can help reduce the complexity and expense of ensuring the interoperability of applications. Additionally, much of the guesswork for procuring new applications will be reduced if procurements are conducted around known standards (see "Architecture s Impact on Application Development Roles"). Enterprise Applications Although centralizing short-term applications will not save money in the short term, it can save significant resources in the long term. Common systems for , financial management and content management strategy for a portal can save a great deal 6 January

5 of money vs. fragmented approaches. In the short term, the greatest savings will be achieved by not allowing agencies to build their own systems unless it is decided that an agency's implementation will become the standard for the entire enterprise. The lack of an enterprise strategy for these types of applications often results in costs that spiral upward dramatically as each agency builds its own system. Infrastructure Outsourcing With the lack of large enterprise outsourcing partnerships in the public sector, some private-sector relationships can offer some ideas on how to achieve benefits. Despite the pros and cons of the technical and managerial merits of large-scale outsourcing, the financial engineering aspects of outsourcing offer significant opportunities. In an outsourcing arrangement that is heavily focused on the financial engineering aspects, the key driver is the change in cash flow for the party (the government) that is outsourcing its technology. In effect, one parties "sells" its IT infrastructure and operations to a private company. The private company may actually pay cash upfront for the assets in exchange for longterm cash flow from technology operations over several years (see "Financial Engineering: The Outsourcing Challenge"). In the long-term, government may benefit from the substantial outsourcing of technology. The economies of scale of outsourcing often enable external service providers to offer computing or network services at a lower overall cost. The outsourcing of computing and networking offers the benefit of more-efficient use of infrastructure by combining the needs of several organizations on one platform. In the very-short term, there are also opportunities in Reduced Cost/Unit. Master Contracts When budgets are tight, government agencies will seldom initiate new procurements. However, these same government agencies may have a long list of existing contracts for hardware and software with terms that are based on dated pricing. In the short term, governments may reap considerable savings by consolidating contracts for hardware, software and services. Fewer, larger contracts may generate better pricing and economies of scale. Current economic conditions make it an ideal time to renegotiate pricing for existing contracts. With the added incentive of potentially higher volume, many vendors could be encouraged to provide deeper discounts (see 6 January

6 "Improving Sourcing Deals: Look at More Than Service Costs" and "Sourcing in 2003: Another Year of 'Cost Is King'"). Even if government IS organizations are not planning to renegotiate existing contracts, they should create a series of master contracts for internal long-term use. The schedule of such contracts could be as lengthy as the schedule for the U.S. General Services Administration, or as simple as three to five pre-qualified contracts for specific types of services work. There are many advantages to creating a schedule of pre-qualified vendors able to provide services on demand. Schedules ensure that work can get done in a more time-sensitive manner without the need for time-consuming, costly procurement processes. Schedules reduce the risk to the government and the vendor by enabling the openness of a partnership in planning and implementing IT projects. Because the cost and risk of preparing bid responses is minimized, vendors can offer better pricing. Some governments will continue to make investments in technology with the hope that they will reduce the overall cost of government. Deciding what to invest in will be dictated by a number of economic, operational and policy considerations. Government decision makers should develop a scoring methodology to determine which projects are most worthy of investment during difficult fiscal times. (See "Prioritizing E- Government Projects"). Recommended Reading and Related Research "Why Governments Lag in Systems Adoption" "Creating a Public-Sector CIO Job Description" Bottom Line: IT assets should be viewed as the resources that are required to support delivery of services to the citizen. Assets must be effectively managed across the enterprise, without unnecessary duplication by various agencies. The "low-hanging fruit" for IT budget reductions is almost always in infrastructure consolidation. 6 January