Sources of Productivity: Getting more bang from fewer IT bucks

sources-of-productivity-getting-more-bang-from-fewer-it-bucksU.S. productivity grew 8.1% in the third quarter, the Labor Department told us last week. In the short term, that's great news for company profitability, but bad news for workers. In the medium term, though, higher productivity is good for both companies and workers, because if demand starts to grow, companies will still need to hire more workers to meet that demand. But where does increased productivity come from? This is the first of a three-part series focusing on companies that show their clients how to be more efficient.

Information technology spending has dropped off significantly since the dot-com bust. And since the recent recession began in December 2007, companies have been looking for ways to cut IT spending further while maintaining or increasing performance.

To achieve that, IT consultants like International Business Machines' (IBM) Global Services unit and Accenture (ACN) offer a service called application portfolio management. APM helps companies to identify and streamline overlapping computer applications -- such as consolidating seven accounts-payable systems down to one -- and converts applications that companies do need to operate using more cost-efficient technologies.

IT services -- of which APM is one line -- is a huge market. ChannelInsider reports that worldwide revenues for IT services totaled $806 billion in 2008 -- up 8.2% from 2007. It further reports that IBM was the top firm in the industry with a 7.3% market share on $58.9 billion in revenue, while Accenture was third with $23.7 billion and a 2.9% market share.

IBM offers a combination of APM services and software from its Rational Software acquisition, which helps analysts to identify and implement application cost-savings opportunities. And IBM has been "eating its own cooking" when it comes to APM. I interviewed Carole A. Gibbins, in the Analyst Relations area of IBM Rational Software, who told me that IBM has used APM on its own systems and gotten impressive results, such as the following:

  • IBM reduced its applications portfolio from a high of 15,000 systems in 1998 to 6,800 in 2000.
  • The defect rates of IBM's applications have declined by 58%; maintenance costs for these applications have been reduced by 20%.
  • IBM currently sources 40% of its maintenance work to lower-cost regions and achieves cost savings in the range of 60% to 70%.
  • Overall, IBM has cut application maintenance spending. Today, 22% of IBM's IT budget goes to maintenance -- it was 40% in 1990.

How does IBM get such results for its clients? Gibbins told me that IBM completes two distinct but equally critical phases of activity:

  • Portfolio assessment: Collecting relevant application portfolio information, analyzing the information in the context of business and technical objectives, and identifying transformation opportunities.
  • Portfolio transformation management: Identifying key business drivers and monitoring their effect on the application portfolio, providing governance and sequencing over transformation projects and activities, and measuring the business value of transformation projects against identified objectives.

The details of each of these phases would take pages to describe, but I don't think it's an accident that IBM leads the IT services industry. IBM got there by creating tremendous value for its clients.

Peter Cohan is a management consultant, Babson professor and author of nine books, includingCapital Rising (due in June 2010). Follow him on Twitter. He has no financial interest in the securities mentioned.

Meet Peter Cohan at The World Money Show Orlando, February 3-6, 2010 at The Gaylord Palms Resort.

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