Hackett: IT Complexity Directly Linked to Increased SG&A Costs; Selective Standardization Drives Significant SavingsAccording to
August 03 2005 - 9:30AM
Business Wire
Book of Numbers Research Shows That Companies with More
Applications Spend 30 Percent More on Finance, 18 Percent More on
HR By reducing IT complexity, companies can generate significant
savings, including lowering the overall cost of finance and human
resources functions, according to Book of Numbers(C) research from
The Hackett Group, a business process advisory firm (NASDAQ:ANSR).
Hackett's new Book of Numbers analysis and research volume,
"Optimizing a Return on Business Complexity: Performance Metrics
and Practices of World-Class Companies," focuses exclusively on the
value of complexity reduction in back office and administrative
functions. Hackett finds that to successfully reduce business
complexity, IT leaders must convince business unit executives of
its value, and combat the oft-held belief that unique IT
configurations are critical for a business unit to effectively
compete. The challenge of defeating this "need to customize" can be
significant, but the potential benefits are substantial. According
to Hackett's research, companies that fail to reduce the complexity
of IT spend 30 percent more on finance operations and 18 percent
more on HR per employee than companies that succeed in this area.
In addition, IT complexity reduction can also help to improve the
efficiency and effectiveness of their IT operations. According to
Hackett, world-class IT organizations spend 18 percent less than
their peers and operate with 36 percent fewer staff, while bringing
in projects on time and under budget over 25 percent more often. In
virtually every area, world-class companies show reduced
complexity, with fewer customer and supplier databases, less
software and hardware suppliers, more consistent use of data
standards, and higher overall levels of standards enforcement. The
Hackett Group is a world leader in best practice research,
benchmarking, and advisory services that empower executives to
achieve world-class enterprise performance. Hackett offers analysis
and insight backed by metrics derived from 3,300 benchmark studies
over 13 years at nearly 2,000 of the world's leading companies,
including 93 percent of the Dow Jones Industrials. "The bottom line
is simple: our empirical research shows that companies which
embrace IT complexity reduction as a mission spend less across
virtually every area of the back office," said Hackett IT Practice
Leader David Hebert. "But this can be a tough sell. CIOs are
constantly faced with business leaders who truly believe that their
particular group or unit is 'different,' and has unique
requirements. These leaders will resist standardization efforts,
fearing they will lose their competitive edge. IT leaders need to
hold the line, sell the value of standardization and
simplification, and at the same time be aware of situations where a
valid business case exists to support customization." Hackett
Quantifies Value of IT Complexity Reduction to Finance, HR Hackett
data reveals a clear correlation between the cost of the finance
function and the number of primary applications in use. Dividing
companies in Hackett's benchmark database into two groups based on
those with the more than 10 applications and those with the less
than 10, the former report 30% higher finance costs as a percent of
revenue (1.3 percent of revenue versus 1 percent). According to
Hackett, the median HR cost per employee also rises substantially
as the number of applications per 1,000 employees increases. HR
functions that report no common software applications see a median
HR cost per employee that is 18 percent higher than companies that
have a high level of commonality ($2,338/employee versus $1,976).
Overall, world-class HR functions are 87 percent more likely than
typical companies to deploy common applications globally. The cost
implications of moving to a common infrastructure and applications
are marked. In finance, companies with less than 10 applications
spend $3 million per billion in revenue less than companies with
more than 10 applications. In HR, companies with no common software
applications spend more than $3.6 million/year more for every
10,000 employees than companies with a high level of common
software applications. NOTE TO JOURNALISTS: A chart illustrating
select findings described above is available on request, and will
be distributed via BusinessWire. To make this complexity reduction
approach work, top companies typically redefine their approach to
the application-development process. Typical companies often start
with the development of their "unique" requirements and then build
or purchase and customize an application to meet their internal
requirements. In contrast, world-class companies find the
application with the closest fit to the requirements, then map
their business processes to the selected application.
Customizations are done only when a solid business case can be made
for doing so. Complexity Also Impacts IT Cost Hackett found that
within IT, infrastructure complexity is highly correlated with
cost. The median total IT cost per end-user rises with the number
of database platforms in use per 1,000 end-users, and world-class
IT organizations rely on 69 percent fewer customer databases per
1,000 end-users and 67 percent fewer supplier databases than
typical companies. They also rely on 67 percent fewer software
suppliers and 43 percent fewer hardware suppliers. Complexity
reduction at world-class companies clearly extends to application
development activities as well. According to Hackett, world-class
IT organizations use 80% fewer programming languages per 1,000
end-users than typical companies. They are also more likely to use
data standards to a high degree across all systems and
significantly more likely to have implemented a high level of
standards enforcement across hardware, networking, and software
applications. Two Companies Describe Real Benefits of Complexity
Reduction During a recent Hackett Webcast, one global automaker
described how it executed a two-year effort to simplify its ERP
environment as part of an upgrade. In its original implementation
efforts, driven by IT leadership, attempts to accomplish Y2K goals
and be highly responsive to individual business units led to a 24
percent customization level. This significantly impacted IT
operating costs by increasing the level of IT staffing needed to
maintain the system. As part of the upgrade, the automaker created
a three-tiered review process for all customization that was to be
carried forward, requiring business units to justify and re-justify
any requests to deviate from a standard implementation. Business
unit leaders and senior management played an active role in the
review process, and developed an understanding of costs tied to
customization and process reengineering that could be used to
eliminate the need for it. By the end of the project, the automaker
had reduced customization to just 3 percent, well below the initial
10 percent target recommended by PeopleSoft. The decustomization
effort enabled the automaker to immediately reduce IT support
staff, and significantly cut total cost of ownership. Current
estimates are that the next ERP upgrade will cost the company 50
percent less to execute. A telecommunications giant also shared
with Hackett advisory members how it dramatically reduced the cost
of its finance operations through an application consolidation and
standardization effort. After a Hackett finance benchmark
identified significant room for improvement across a wide range of
metrics, the company implemented a broad application
standardization and simplification effort that was driven by
business transformation objectives. A dedicated team was assigned
to focus on improving business value from applications, and
procedures were put in place to do follow-up audits to ensure that
business case and cost savings objectives were met for ERP
upgrades. As a result of its efforts, when the company
re-benchmarked with Hackett as part of its ongoing improvement
effort, the company achieved first-quartile performance. The
company also estimated that the changes were generating over $50
million/year in annual savings. The Hackett Group's research into
world-class performance is compiled in its Book of Numbers series,
which provides senior executives fact-based performance metrics and
insights based on Hackett's extensive database of best practices
and process metrics in IT, finance, HR, procurement, and other
areas. Hackett Book of Numbers volumes are available exclusively to
members of Hackett's Executive Advisory Programs -- premium-value,
membership-based programs providing confidential advisor inquiry,
best practices research, and peer learning opportunities. More
information on The Hackett Group is available: by phone at (770)
225-7300; by e-mail at info@thehackettgroup.com; or on the Web at
http://www.thehackettgroup.com. About The Hackett Group The Hackett
Group (http://www.thehackettgroup.com), a business process advisory
firm and an Answerthink company, is a world leader in best practice
research, benchmarking and advisory services that empower
executives to achieve world-class enterprise performance. Only The
Hackett Group empirically defines world-class performance in sales,
general and administrative (SG&A) and supply chain activities
with analysis gained through 3,300 benchmark studies over 13 years
at nearly 2,000 of the world's leading companies. The foundation of
Hackett's benchmarks, transformation services, and membership-based
advisory programs is our proprietary database of
Hackett-Certified(SM) Practices, approaches which are proven to
correlate with superior performance metrics. This unparalleled
knowledge repository enables Hackett business advisors to provide
data, advice, and strategic insight with a level of integrity and
authority available nowhere else. As of this writing, Hackett
clients comprise 93 percent of the Dow Jones Industrials, 76
percent of the Fortune 100 and 90 percent of the Dow Jones Global
Titans Index. Hackett-Certified and Hackett World-Class Passport
are service marks of The Hackett Group. Certain statements in this
press release are "forward looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 and involve
known and unknown risks, uncertainties and other factors that may
cause the Company's actual results, performance or achievements to
be materially different from the results, performance or
achievements expressed or implied by the forward looking
statements. Factors that impact such forward looking statements
include the ability of the Company to attract additional business,
changes in expectations regarding the information technology
industry, the ability of the Company to attract skilled employees,
possible changes in collections of accounts receivable, risks of
competition, price and margin trends, changes in general economic
conditions and interest rates as well as other risks detailed in
the Company's reports filed with the Securities and Exchange
Commission.
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