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Which Is More Effective For Cost Reduction: IT Offshoring vs. Implementing Lean Methodologies
 
Many companies operate with IT spend of between 3 and 10% of revenue so during the recession, many CFO's have challenged CIO's to deliver the same levels of service for 10% less. As IT directors are walking down the hall of cost cutting they have two avenues they can take. They can try and improve internal processes, reducing cost through improved efficiency and productivity. Alternatively, they can lower their cost base by offshoring IT development and support. But which option is the most effective?

Before a CIO decides on how and where to reduce costs, it is always recommended to quantify the cost of the cost cutting. So when you scale back on company network bandwidth, what will the impact be to your internal teams in lost productivity? When you reduce the telecoms capabilities of your business, how many calls will not be answered as clients try to get through? As you make redundancies, either due to efficiency gains or offshoring, do you have the required internal technology skill set to run the business and help it thrive? While the CFO and the business leaders often make the final decision about the IT budget, it is important that the CIO knows how to build a business case & educate the business on the impact of those cuts and to assign value to expenditures that will end up making or saving money.

Not just during an economic crisis would it be recommended for a CIO to improve internal processes, but it might be especially relevant as it can help the numbers. Lean is about reducing waste, not necessarily about cost cutting, but some argue that with less waste in a process you are effectively running it at less cost. General Electric is extremely effective at applying Lean Six Sigma to IT operations. It was estimated that from 2000-2005, GE saved over half a billion dollars through process improvements. Six Sigma can be easily applied to the standard IT towers like helpdesk & incident management, perhaps less so to application development as you are not dealing entirely with definable processes.

An IT director can either train internal teams or hire external consultants to help drive the Lean initiative, which option he/she take depends on time and money. Either way, they will both achieve the same objective of first mapping the IT processes as-is and then the to-be vision. When mapping out the internal processes, ensure to eliminate or lean inefficient processes. IT often creates internal processes that can, with very little effort, be improved or eliminated. As with any initiative, it is important to have leadership buy-in to help overcome road blocks from those entrenched in their old ways of doing business. Unfortunately, during the credit crunch, it is unlikely CIO's will invest in process improvement and training which I believe is a big mistake. The reason being is that it is difficult to measure productivity gains & show a direct link with cost reduction. They should move it to the top of the agenda and set up internal teams who can shoulder the responsibility of improving internal processes & reducing costs.

Another opportunity for reducing costs which is more direct and might be favoured over process improvement is to move IT support offshore. The labour arbitrage still show a 70% gap between offshore rates and local UK salaries. However, when you then include the extra retained PM skills needed in-house and the reduced productivity through communication gaps it will be more like a 30% saving. Still a significant saving for any Western organisation, but CIO's during a time of uncertainty are scared of making mistakes and losing their jobs, and offshoring still has the perception as a risky business. But it is during times of crisis that organisations need to make radical changes to survive so I think the offshore route provides the CIO with a viable well-established route to reduce costs. Many of the offshore vendors will be able to drive consolidation, standardisation and eliminate duplicate platforms as they have been doing this type of work for Fortune 500 business for a decade and the mid-market look set to gain from this expertise.

What is the moral of the story? Ensure that both the business and IT speak the same language. For example, when the business talks about reducing costs, does it mean getting more service with the same IT money or an actual budget reduction by 10%? CIO's and the business need to spell out the type of cost cutting they want to achieve. IT directors being asked to cut their budget should fully understand the consequences of these reductions. I used to work at a large re-insurance company where we spent millions on both process improvements and offshoring. The Six Sigma teams would ensure we had eliminated waste around the processes before offshoring them, so the support teams offshore were handed more efficient processes and thus creating a favourable economic benefit for both the client and supplier. An IT Director today should seek out an offshore partner that has plenty of credibility and experience in Six Sigma, use them at lower rates to help carry out platform consolidation and offshore the IT support work creating sustainable cost savings for the next decade.  
 

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