IT budget reduction strategies for Riordan Manufacturing

¶ … Riordan Budget Reduction Analysis and Recommendations

In redefining the IT cost center consolidated operating budget for Riordan Manufacturing, a 4% increase in spending on selected hardware software, services including access charges yields a net gain in spending of $5,764.16. When taking into account the 4% increase in IT spending and the 2% reduction in the total budget, the annual IT budget is restated from $1,901,300 to $1,863,274. The 4% increase in IT spending has been applied to the baseline figures for hardware, software licenses, contract services, and leased lines, which are critical for managing Electronic Data Interchange (EDI) connections with other manufacturers, suppliers to and buyers from Riordan Manufacturing including its distribution channel partners, many of which rely on EDI to complete bath-oriented transactions. Costs of leased lines are arguably part of IT infrastructure, yet in the context of IT expenses as they relate to the Profit and Loss Statement of Riordan Manufacturing, these leased lines enable transactions with supply chain and distribution partners, thereby driving top-line revenue growth. The total increase in spending needs to be offset with revenue growth, hence the increase in leased lines rates to enable a higher velocity of transactions leading to a higher Return on Investment (ROI) in Information technologies.

Strategies for Offsetting Increased IT Spending

There is considerable flexibility in re-aligning the IT cost center budget to achieve a 2% reduction in the total budget. Presented below are the multiple strategies that the company can choose from to achieve this 2% reduction in their IT operating budget while increasing selected expenses by 4%. Keeping in mind these are recommendations from an annualized basis, the many options are immediately realizable with minimal impact to service and investment levels in current projects:

Reduction of Special Projects Expense from $150,000 to $106,210, a net reduction of $43,790, which is needed to accomplish a 2% reduction in total budget planned spend for FY2004.

Shifting away from a licensed software strategy to a Software-as-a-Service (SaaS) model could potentially save Riordan manufacturing $53,500 a year and would accomplish the objective of a net 2% reduction in the total IT operating budget. The use of SaaS as a strategy for reducing expenses and increasing the flexibility of applications to align with line-of-business objectives has been extensively researched by many IT advisory and consultancy firms including AMR Research, Forester Research, Gartner, Ovum, and others. The research into make SaaS a platform of choice however by Sweeney (2006) highlights how a lower Total Cost of Ownership (TCO) and lower operating expenses can be achieved.

This strategy would include eliminate $53,500 thereby accomplishing the 2% net reduction in IT cost center budget. This reduction would be achieved by completely getting rid of hardware ($8,500), maintenance which would not longer be necessary in a SaaS model ($3,000) and software licenses which average 20% of the purchase price of installed software and are invoiced yearly ($42,000). Clearly there is room for much improvement in the negotiation of better licensing fees with the software vendors that Riordan Manufacturing is purchasing and maintaining their software with. Riordan must begin to pilot a SaaS program to increase their negotiating leverage with license software vendors. As a first step Riordan must re-negotiate the licensing contracts for much lower fees, and moving to SaaS, even in a pilot stage, sends the right message to the software vendors who are clearly getting the licenses renewal fees with little push-back or debate.

Wages & Salaries, Benefits and Bonuses should be left alone as the demand for skilled workers in IT is high today and the hidden costs of replacing an experienced IT professional is at least 1.6X times their salary, in addition to the costs of lost productivity including revenue-generating programming projects.

SaaS-based applications also need to be considered in the context of replacing the leased lines expense of $50,400 which escalates to $52,416 with the 4% increase in IT expenses as defined by the assumptions of this project. Deploying applications on a SaaS-based model has the potential to minimize or even replace the costs of leased line connections with suppliers, buyers, distribution channel partners including training partners. According to Computer Business Review Online (2006) the integration aspects of SaaS-based platforms including IBM OnDemand, Oracle OnDemand, Salesforce.com and others is progressing to the point of being able to manage order transaction workflows previously relegated to EDI connections. In trimming Special Projects down from $150,000 to the suggested level of $106,210 this specific budget item could be used for a SaaS Integration Pilot that would yield significant cost savings in the future.

Summary

Riordan Manufacturing has a budget that is very unbalanced and in need of major re-negotiation of software licensing, maintenance, and must re-evaluate their assumptions regarding employee-related expenses. Riordan needs to investigate the cost reductions possible in licensing using SaaS as an alternative integration and application platform. Ironically the escalating software licenses could be used to drastically reduce the total IT budget through the use of SaaS-based applications, integrated across a common platform. For Riordan the future must include the ability to gain greater negotiating leverage with their software providers and regain control of the largest IT expense categories. As the IT staff will be asked to make major changes to the processes by which they use to do their jobs, Salaries and wages, benefits, and bonuses should not be touched as enough change is on the way for them without modifying these expenses.