Though technology demands continue to rise, firms battling to cut costs are increasingly reducing their IT spending. A forecast from UBS predicted that spending from banks, financial services and insurance firms will have fallen 6% in 2012.
Carve-outs are companies that once belonged to a large corporation and have been spun-off or acquired by a private equity fund. They can face particular pressure to reduce IT spending.
With the economy in difficulties, carve-outs have become popular. Often, technology can be the make-or-break factor in a carve-out’s success or failure.
As new stand-alone companies, carve-outs do not have access to the budgets or infrastructure they had under the parent organisation. Such companies, particularly those in telecoms, media and infrastructure can be much leaner after a carve-out.
When Telecolumbus, the fourth-largest cable TV operator in Germany, was bought by a consortium of hedge funds, the company moved to rapidly reduce operational and capital IT expenditure.
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TDC, a large Danish mobile operator, went through a similar process when it was bought by a consortium of private equity firms.
Assess your IT cost baseline
After a carve-out firms initially need to look at their IT cost baseline, since IT costs can be widely distributed across geographies and functions, and therefore difficult to assess.
There are a number of ways to reduce IT costs. The first, and potentially most productive, is to optimise applications within the organisation.
Frequently firms operate redundant systems, fail to consolidate their applications, and fail to align and centralise the organisation to a simplified process with rationalised outputs.
Then you should look at infrastructure. Costs can be reduced in this area by outsourcing or setting up shared service centres.
Beyond infrastructure, businesses must look at their processes. This means improving end-to-end process effectiveness, standardising and enforcing IT policies and outsourcing selectively.
After businesses look at their internal organisation, its important to look outside too. In particular, businesses need to look at their main IT suppliers and assess the annual spend. Are there opportunities for economies of scale, or renegotiating some of these contracts?
Companies are also cutting costs by drastically reducing the size and number of technology and IT projects they initiate each year. Not only does this affect the up-front capital expenditure that year, but it also means that they can reduce the operational expenses in the following years. This ultimately improves the EBITDA (earnings before interest, taxes, depreciation and amortisation).
But the importance of the IT department must be emphasised. As IT systems have come to form a major part of all aspects of the business, the relationship between CIOs and other senior executives has changed. The tendency in the IT department is to continue with the status quo, rather than moving to a lean operating model.
Chief executives are realising they need to partner with a new breed of executive – specifically one well-versed in IT, who is able to combine the business strategy and requirements optimally with what IT can deliver in a cost effective manner.
Amit Laud is managing director at global professional services firm Alvarez & Marsal.
This was first published in January 2013