Over a decade ago, after a couple of years as Deputy CIO, I was appointed Global CIO of Dresdner Kleinwort in May 2001. Times were hard, and my brief was harder still: to reduce technology capital expenditure and operating expenses by 50% within eighteen months, while providing “leadership, stability and continuity” to the organisation. At the time the IT department was nearly 2000 strong and spent around £700m pa in capex alone. I was surrounded by many very talented people, and, largely due to their ingenuity and actions, we delivered the goods. I’m privileged to have worked with them, and even more privileged to be in touch with so many of them a decade later.
Some of the things we did were standard, like shutting down remote offices when we were retracting our presence from those regions, renegotiating contracts with core suppliers, stopping activities that were yesterday’s necessities but today’s luxuries, that kind of thing. A few were more non-standard: shutting down our offshore operations in India and Eire, changing our hiring policy to stop hiring laterals and increasing graduate intake, establishing a formal commitment to opensource and to start-ups.
But it all began with our trying to understand our cost and allocations structures. Easier said than done. This was because it was not enough for us to save the money, we had to save it in the right places. We had to reduce it very heavily for advisory services, heavily for equities-related asset classes and services, and less so for debt- and treasury- related activities. Which meant that we had to understand how our costs flowed from IT to each business.
For most of my life, I’ve worked in very large organisations, often as an “official maverick” but nevertheless part of an extensive and complex fabric. And for most of my life, I’ve been astounded by the incredible difficulty I’ve had in getting two questions answered: What do I spend? How many people do I have? Over the years, as my career developed in its own serendipitous way, I found myself in charge of larger and larger departments with bigger and bigger budgets. And answering these two questions became harder and harder.
Perhaps I should have known better. When I was in my teens, my father used to say that the only “truth” on a balance sheet was the cash position; everything else was a “conventional” representation of information. If you didn’t understand the conventions being followed, you had no ability to understand the information presented.
So there we were, at Dresdner Kleinwort, trying to understand how much we spent, what we spent it on, what was discretionary, what was not, why. Trying to understand how many people we had, who was permanent, who was not. Trying to understand the people we had who “didn’t exist”, because they were part of a service contract; they took up space, had kit, had desks, had phones and badges, but weren’t part of our headcount. Trying to understand and appreciate the people who weren’t there but were on the payroll: on sabbatical, on maternity leave, long-term ill, in dispute. Some were even certified insane….
It turned out that we “controlled” a relatively small proportion of the money in the first place, particularly when it came to capex, but true even for opex. Far less than half. A big chunk of our budget related to “sins of the father’, the depreciation associated with capitalised investments from prior years. Some of the money related to long-term contracts where we had no swing room. A portion related to guaranteed bonuses of staff hired in prior years, and a similar portion to the “month 13” payments that were standard in one or more of the operating units. And then there were the things we were legally obliged to do, the projects that related to legal and regulatory requirements.
Then came our allocations and overheads: as the largest shared-service department, we received the lion’s share of the shared-service costs that had to be allocated out, like premises and heating and lighting and insurances.
That didn’t leave very much. Our so-called “discretionary” expenditure was less than 20% of the overall cake. Which made the very idea of a 50% cut interesting to say the least. But we did it, nevertheless.
In that process, I learnt a lot about allocations, augmenting what I’d already learnt in other companies by then. Here’s a sample:
- One firm allocated all its IT costs according to the floor space consumed by each department, something that was easy to calculate. As a result, the investment bankers, the lightest users of technology at the time, were charged the bulk of IT costs.
- It made no sense to me, but apparently it was common practice for one cost centre to charge another. So IT costs for example, not only went direct to the business units, but also via other shared service units. Depended on who did the “sponsoring”; this was probably a throwback to some shared-service manager who wanted his cost centre to look as big as possible, for his CV. But the convention stuck. As a result we had strange anomalies: while our IT costs remained the same, the charge that hit the business unit differed, based on the particular allocation routes and keys used. What this meant in practice was that we “saved” the equities business more money if we took 100 people out of their direct support costs, rather than if we took 120 people out of those who supported equities settlement, whose costs were routed through operations. The idea that two people earning the same money and seated next to each other represented different levels of saving took some getting used to.
- Some labour was capitalised and some was not; if you reduced the headcount in areas where projects were capitalised, the savings took time to flow through. Capitalisation rules were also different for different classes of resource: it was assumed that contractors worked on projects 100% of their chargeable time, but permanent staff spent only 70% of their time on projects, or some such ratio. So the way the costs flowed looked different.
- Shared-service allocations were an art in themselves. In at least one company I worked in, as a result of successive waves of layoffs, there were large swathes of unoccupied desks. Some of these unoccupied areas were islands in the middle of occupied areas, and soon became informal meeting areas. Lo and behold, the areas were chained off and declared verboten, on the basis that you couldn’t use it unless you were paying for it…. even though the company was paying for it anyway.
- In yet another place, we found out that it was more expensive for us not to book a meeting room than to book one…. the allocation key for unused meeting rooms hit us harder than the used version.
- One of the odder effects we noticed was that of project delay. If you delayed the point at which you actually delivered something that went into production, then you delayed the point at which backlogged work-in-progress would start rolling out in capitalised form. [When we froze all code changes during the lead-up to the euro and similarly to Y2K, the monthly charges from IT went down dramatically, even though actual expenditure actually increased…]
By now you should have a feel for the level of complexity involved in allocating costs related to headcount and project and space and shared services in general, by accident and by design. I hope your experiences have been better than mine.
But all this pales into insignificance when you look at how IT infrastructure costs are allocated. Because now you have systems people interacting with accountants and usually a smattering of consultants as well, and between the three a truly Byzantine structure gets formed. When I looked at what happens in the allocation of data centre costs, hardware, storage, bandwidth, market data, and so on; when I looked at how per-processor licence costs were spread out; when I looked at how firewall and security costs were distributed across the organisation; when I saw how operations, maintenance, support and upgrade/fix costs were charged….. I developed a bad case of spreadsheet vertigo.
These experiences have influenced me, affected me, perhaps even scarred me. In fact I think there’s only one form of “allocation” that scares me more than IT infrastructure allocation. And that will be the subject of a post at a later date.
If you have to develop a conventional representation of the costs of your cloud, it’s not cloud.
If you have to create complex allocation keys for your cloud, it’s not cloud.
Cloud is when what you see is what you get, in the context of billing and payment.
Which is why I find all this talk of “private cloud” odd. By electing to retain hardware capital expenditure, by choosing to continue with associated maintenance and upgrade costs, by voting to stay captive within the prison of the related processor-driven licensing models, people are in effect choosing to stay in the world of complex cost allocation models.
Such cost allocation models are part and parcel of why firms find it hard to be agile, to be responsive to change.
In current economic conditions, business agility is no longer a nice-to-have, it’s a must for survival.
Companies that are “born cloud” have this in their DNA; others will have to evolve this capacity, and evolve it quickly.
It’s a tough world out there.