The investment is substantial, but organizations can reap large rewards.
by Ajay Murali and Amitava Ghosh, January 2011
An IT systems consolidation becomes imperative for businesses focusing on growth as technology budgets come under increasing scrutiny, and the low-hanging fruits of automation have already been consumed. However, IT system consolidations often require reimplementing enterprise resource planning software, resulting in investments from tens of millions up to a billion U.S. dollars. An AMR Research study conducted in 2010 found costs of about one percent for companies with billion-dollar revenue, where IT savings alone — 25 percent— would not justify system consolidation. The benefits to other entities in the business must be taken into account to justify expenditures.
For any organization that undertakes a review of its technology infrastructure, it is important to identify different stake holders and understand that consolidation results in benefits with different pace, nature and order of magnitude. An organization embarking on technology consolidation can expect benefits at three levels:
Operational: Benefits are tangible at an operational level, and the likely internal champions are functional heads.
Tactical: Benefits come primarily from increased visibility into business functions and are likely to be pushed by CxOs, starved of real-time insight, looking to devise the roadmap for the short-term future.
Strategic: Benefits come from aligning information systems to long-term strategic goals.
In order to initiate an IT consolidation project, which can be a complex, time-consuming and often painful process, the key challenge is to find the right internal champions at appropriate organization levels at the opportune time. As these benefits span across functions, geographies and business cycles, a company should take the plunge only when the IT vision has been raised to the strategic level.
Operational benefits are the easiest to achieve, and simple to measure. A CTO or a CIO would quite readily agree to review all existing software licenses given a target to reduce the software license cost to a pre-determined fraction of annual revenue. A cost savings of 25 percent can be achieved, which can get the overall strategic project initiated smoothly. Committing to a unified information technology platform and eliminating geographic redundancy through partial centralization, except for disaster recovery, also contributes significant savings over time. The head of IT operations, in collaboration with the CEO’s office, can drive this initiative. The beauty of the IT consolidation lies in the fact that cost savings are achieved in other areas of operations, such as real estate and facilities. Longer-term closure of selected software development and maintenance centers can reduce rental expenses, power and cooling costs and other overheads by up to 20 percent. Moreover, based on projected requirements, country-level facility heads can plan expansion, utilization and allocation of fixed assets.
Tactical benefits are key because initiating a mammoth project and driving it down from the top management level would require justifications beyond cost savings in daily operations. Organizations can use the consolidation opportunity to gradually roll out a seamless global single instance, which makes the entire business operation more visible to the senior and middle management involved in tactical and strategic planning. Be it the sales pipeline, products under incubation, financial books, capacity planning for call-center and field support, or inventory and production systems, the improved visibility into the state of business can result in better decision making in the medium term and adds extra agility to the organization.
The most intangible and complex area of business improvements through IT consolidation involves the alignment of the IT and information system strategy with the long term strategic vision of the company. While difficult to measure, these are the most long-lasting benefits that a CEO can reap. The primary motivation for this project from the CEO’s perspective would include improving strategic performance metrics, such as minimizing long-term IT costs at the user or transaction level, optimizing the cost of integrating acquired entities, and preparing the platform and users for future strategic initiatives. The quest for sustainable competitive advantage can thus begin with what used to be perceived as the mundane streamlining of IT platform choices, and frees the whole project from the myopia of short-term targets.
How to approach an information systems consolidation
Most organizations consider IT as a tactical tool rather than a strategic differentiator. A project which spans across years and requires multi-million dollar investments is too critical to fail. Our experience shows that the following approaches can reduce the pain, complexity and duration of the exercise.
1. Align organization’s business strategy to information system design visions: IT consolidation becomes a core competency in helping a company grow, because new acquisitions can be integrated into the main business much more quickly. For an organization that is looking to significantly expand its product portfolio, a new information system should be able to absorb unstructured information and allow quick prototyping and concept testing. Supply chain-dominated organizations should zero in on a platform that enhances visibility across the upstream and downstream collaborators. In an industry in which customer involvement is critical to the quality of service and loyalty, ease of interaction across all electronic touch points becomes extremely important. These considerations would govern “develop or discard” decisions for the individual tools and systems currently in use.
2. Get all stakeholders and end users to commit to change: Investigate commonality of customers, suppliers, and business processes among the divisions to determine a possible plan. Internal champions will sponsor the project more wholeheartedly if they can visualize how IT consolidation would benefit them in the long run.
3. Get all implementation participants to agree on the scope and timeline for change: Companies seem to be using consultants and systems integrators less than in the early days of ERP implementations, with most limiting them to about 20 percent of the core team. While the overall scope and timelines can be lax, individual components can be driven with tight timelines and tangible milestones.
4. Prepare against oppositions of closure and reductions — both systems and human: This process must involve key participants from every organization, converting them to project supporters and negating any infighting. Be ready to take on tough decisions.
Ajay Murali is a senior associate on the Oracle Insight team. Amitava Ghosh is a principal business analyst at Oracle Insight.