Small to Mid-sized businesses and non-profits face unique challenges when it comes to technology. Often viewed as an enabling low cost tool, IT can also be a driver to inefficiencies and higher costs. But how do you know where you stand? In Gartner’s 2017 IT Budget study, companies should range between 2.3 percent and 5.2 percent of IT spending as a percentage of revenue, depending on industry. Naturally companies which have a heavy technology focus (software, healthcare, etc.) will have a higher percentage.
Many small and mid-sized organizations assume they are spending well, because they are staying below the 2.3 percent benchmark. However, the key to measuring IT spend is not how much you spend or save but what you spend it on, and is it helping you achieve your organizational goals. The common mistake we see companies make is they often select pointed solutions related to hardware, software and applications and never relate it to how technology supports the process. What may seem like a low-cost cloud based application, can actually drive up operating costs in other areas of the organization in the form of labor costs, utilities, etc. Even exposing the organization to new risks.
The following are some key trends which are driving up costs for many organizations:
- Increased complexity and number of overlapping technologies and applications
- Supporting skill sets require a deeper and broader knowledge base
- Increased access and touch points are driving increased security and hacking risks
- Higher demand for IT talent increases labor costs, employee turnover and recruiting costs
This article profiles two small/mid-sized organizations: a $150M for-profit and a $30M non-profit, and how they transformed their approach to technology to create greater value for the organization.
$150M Products Company
This company has two manufacturing facilities and sales offices through-out North America and two international locations. The company’s revenue was growing at a rate of 27% per year but they were also seeing sharp increasing in their Sales and General Administrative costs. Which, despite the rapid growth, their profitability was declining. Management convinced themselves as the business grew that the costs would eventually level out and profitability would increase as well.
Over the course of two years, the opposite happened. Sales orders began to decline, product returns increased, profit margins plummeted, and the costs remained. Management rapidly moved into “cost cutting mode”, analyzing every supplier contract and cutting overhead costs where possible. It didn’t improve the financial performance of the business and their good employees began to leave for better opportunities or fear of company collapse.
SAGIN was asked to review their IT costs because any time Finance looked to make cuts the IT department and Sales group justified why their applications and infrastructure were necessary to support the business.
The actual cause of the company’s problem was the decentralized decision making that occurred two years ago. This resulted in multiple overlapping software application selections and a misaligned data strategy. The company’s Sales organization drove expansion and customization of their CRM system (Salesforce.com) to supporting order entry, customer service and warranty claims. While the manufacturing, distribution and accounting operated on its own ERP (SAP Business One). The decisions various departments made regarding technology investments not only drove increased spending in application subscription/licensing costs, but it also increased consulting support, internal labor and created inefficiencies in delivering products to their customers. The company had built a complex environment unaware of the consequences.
The company needed to take a step back, and design the Order to Cash process to accommodate how they wanted to service and support their customers. Also, by examining data interactions across cross-functional teams, including Sales, Operations, Customer Service, Accounting, Distribution and IT, they were able to create a data strategy that aimed to eliminate technology overlap. This drove down application costs and labor in the various departments. The company was back to their target profitability margins in less than a year.
This organization provides early childhood development where a significant portion of their funding comes from governmental agencies. Being a non-profit, there are several advantages in the form of access to special software pricing programs, grants, etc. However, since the “great recession” of 2008, this industry is continually challenged with the increased demand in society for their services, while the sources of funding continually decline. Many non-profits of this size either dissolve completely or are consolidated into other organizations.
This organization’s IT costs were increasing at a rate of 18% per year as the IT department not only supported the five childhood development centers, it also supported caseworkers in the field and visitors to their centers. Management of HIPAA data security compliance added increased complexity, and created the need to prevent identity theft and hacking of information. With the slow payment of State funding, the organization needed to look for solutions. A problem with their systems environment is that it was built 10 years ago and the people which supported it where no longer with the organization. The best analogy to this scenario is maintaining an old car because you can’t afford a new one, but the costs of the repairs are increasing and you can’t find any more parts or mechanics to work on it.
The organization had a difficult time hiring and retaining qualified IT staff. They decided to outsource the IT department’s functions to SAGIN, which were supported by four people including the CIO. Historically, outsourcing was synonymous with off-shoring and was something only multi-billion dollar corporations did to reduce costs. However, SAGIN’s model is designed for the small/mid-sized organizations whereby a client can be support by a dedicated team centrally in the same city and be on site as needed. This provides access to a deep experience across a wide variety of skill sets. . This also eliminates talent acquisition costs, taxes and benefits from supporting an internal team.
Shortly after the outsourcing transition, the SAGIN support team moved the organization to Microsoft 365 licensing, eliminating their email server, expensive go-to-meeting services and migrated the organization to a cloud based phone system. Overall, IT operating costs dropped by 22% and were held fixed for the next three years eliminating the annual increases of 18 percent.
Outsourcing is not always the right solution. What differentiates IT Managed Service Providers is how they deliver their services. It is important that a service provider supports the goals and aligns well with the culture of the organization being served.
In conclusion, there are some compelling best practices demonstrated in these examples that helped these organizations obtain the best value from their IT spending:
- When making application, hardware and technology investments, do it centrally and make sure it supports an efficient business process. Avoid application overlap and strive for consolidation and standardization.
- When operating with a flexible and remote workforce, leverage tools and applications which promote efficient collaboration. (E.g. centralized document storage, instant messaging, etc.)
- Leverage your applications and infrastructure. Cut the cord on your phone system by deploying cloud based applications, or leveraging the standard storage of applications like MS365 which provides each user with 1 terabyte of storage with each license.
- Avoid “App Overload”. If you keep implementing “Add-on” apps to the software you purchased, it may be time to ask why you purchased the software and how it fits into the overall business strategy.
- If you have a small IT team (1-10), and you are finding it hard to attract and retain talent, you should consider outsourcing. However, outsourcing is only successful if the provider has a seat at the management table and the delivery of services can be customized to fit in your culture and operating style (e.g. local, on-site, remote, or hybrid).
These are just some of the tools small and mid-sized businesses are using to better control technology costs but also creating increased capability and service to support their business.
SAGIN, LLC is a professional services firm with an IT Managed Services offering that provides full turn-key solutions to small and mid-sized business. If you would like to learn more about these solutions or to obtain a free assessment of your IT environment you can contact us at: +1.312.281.0290 or firstname.lastname@example.org. Also visit us at www.saginllc.com