How federal agencies save money by running IT like a business

The Federal CIO’s 25-Point Implementation Plan to Reform Federal IT Management mandated that federal agencies complete progress reports and plans for data center consolidation. As a result, fiscal year 2011 brought the closure of more than 81 data centers, with more than 900 scheduled to shutter by FY2015, for a cost savings of nearly $5 billion. That’s exciting news. What’s more compelling is how federal agencies might finally be rewarded for improving IT performance, and allowed to apply the savings toward new initiatives. It could be the dawn of a new era in federal IT.

Who gets to keep the savings?

In the private sector, most successful companies can immediately leverage cost savings to fund new program efforts and IT transformation, hence, some IT initiatives can be self-funding based on the ROI. But within federal agencies, the reallocation or use of funds is highly restricted and requires a lengthy approval process, putting a wrench in many cost-reduction programs. In fact, there can even be a downside: Future cost savings are applauded but typically translate to reduced funding levels.

This trend however is starting to shift as agencies have created strategic plans and budget proposals that leverage cost savings for current year IT projects. Allowing agencies to leverage cost savings for future efforts will accelerate IT transformation and enable CIOs to truly run IT like their commercial brethren.

A case study in the making

In November the Senate approved budget plans submitted by the Department of Commerce that allow 50% of datacenter consolidation savings to be leveraged by the department for cyber security, baseline and reprogramming initiatives. If approved by the House of Representatives, the Department of Commerce will be able to leverage current year cost savings from their ongoing data center consolidation effort for new programming efforts.

In my humble opinion, this refreshing change could be a game changer for federal agencies that are struggling with how to accomplish unfunded mandates. If this trend continues, how IT is acquired, managed and reported may change drastically, for the better.

Looking into the future

Fast forward five years, agencies are ruthlessly monitoring and reporting cost savings for all IT efforts, thus enabling them to self-fund important initiatives that otherwise would be underfunded or poorly executed. Cost savings have become a dependable funding source. Low risk efforts that yield a high ROI, such as data archiving and information governance, are implemented with very little or no funding. Many agencies understand the value of performance management for IT and can quantify the total cost of an IT service to the lines of business. CIOs are true portfolio managers, making strategic application, service rationalization and optimization decisions that drive business outcomes and, of course, cost savings. Product and service vendors typically bid efforts with no cost outlays, and receive payment based on a percentage of the savings, thus assuming the risks of failure but having a greater return on investment if successful.

What can agencies do now?

How can federal IT get to this future state? Many agencies have achieved cost savings but failed to “ask” for a percentage for future IT efforts. As a start, here are some simple steps that each agency can do to take advantage of cost savings:

1. Quantify cost savings: Be prepared to quantify data center and application rationalization cost savings. This may be easier said than done: Savings must be real, not based on labor cost, instead including power, facilities, green IT, and so on.
2. Prepare or modify budget requests and ask for a percentage of future cost savings: Hopefully, OMB or Congress will allow agencies to document and request cost savings in process. Right now, only agencies like Commerce that submitted budgets based on savings may be able to keep funds.
3. Enable service-costing and IT financial management practices: Agencies should understand the total cost of a service or application, not just for a charge back to the business or potential movement to a shared service offering, but for documenting the potential cost savings. If you don’t know what it costs today, you can’t demonstrate savings after transition.
4. Enable performance management and IT governance processes: Savings can be quickly lost or spoiled by poor execution of IT. Weekly metrics and reporting on critical projects is essential to assure programs and projects are on-budget and earning value as planned.

Run IT like a business: Quantify business outcomes that IT can provide from moving to a shared service model to other modern IT strategies for network, storage or knowledge management. Eliminate, consolidate or kill low-value legacy services and applications in which a business outcome cannot be quantified.