As IT spending continues to grow, CIOs of global businesses must challenge conventional wisdom and focus on managing demand for IT resources in order to reduce costs and improve operations, reports Compass Management Consulting.

Traditionally, CIOs have focused on a supply-side approach to IT cost control. And in large part, they have successfully increased the efficiency of service delivery over time, as measured by steady and consistent declines in IT unit costs. These improvements, however, have been more than offset by burgeoning demand for resources and higher service levels, resulting in an overall cost increases. (The chart below, based on data from select global organizations in the Compass database, illustrates the divergent trends.)

Recognizing the limited potential for continued significant savings based solely on supply-side efficiency, CIOs must define strategies to work with business leaders to raise awareness of the cost implications of unbridled demand.

"It's no longer enough to simply meet the IT requirements of the business at the lowest possible price with the highest possible service levels," says Scott Feuless, a Compass principal consultant. "Businesses are asking, 'Can we add a virtual server instead of a physical one?' 'Can we alter the application to archive and purge old data rather than buying more storage?' Demand for new resources is huge, and without actively managing that demand, it will far outstrip cost reductions that IT can achieve through increased efficiency."

Approaches to better manage demand include the following:

• Storage strategies to categorize and prioritize data management. As Compass data shows, storage hardware has shown an especially dramatic gap between unit cost decline and utilization growth. Clearly, the increasing affordability of storage hardware has been no match for the flood of information organizations must store, protect, and retrieve. In many cases, businesses end up treating all data as critical in terms of security, accessibility, and longevity. Today, initiatives that define categories, tiers, priorities, and lifecycles for data are gaining increasing momentum.
• Chargeback programs that directly link IT usage to business requirements. New chargeback mechanisms are growing in popularity for their ability to introduce transparency into the linkage between cost and business requirements for IT resources.
• Server virtualization initiatives that quantify benefits. While the potential benefits of virtualization have been long recognized, businesses have struggled to understand precisely how a virtualization initiative delivers benefits. Part of the challenge has been to define effective measures, as traditional metrics that calculate the cost of physical servers are largely irrelevant to a virtualized environment. As the virtual world matures, companies are improving their grasp of how the technology can yield savings.
• Incentives for service providers to reduce utilization. In outsourced environments, charges – and vendor profits – are typically tied to business usage. As such, service providers have little incentive to find innovative ways to help clients reduce IT utilization. According to Feuless, “Traditional gain-sharing arrangements only go so far. There needs to be a dialogue between the client and service provider, whereby the client essentially says, ‘if you help us reduce utilization in this area, we’ll invest with you in additional areas.’”

While none of these approaches represent a dramatically new direction, Feuless says the marketplace is maturing. “Top-performing organizations are recognizing that an emphasis on demand management is essential, in terms of cost reduction as well as supporting the business. Plus, these companies have already, for the most part, put controls in place to continue optimizing their operations in terms of cost efficiency. Now, they’re taking it to the next level.”