Finding value: IT standardisation

No need to create a special 'flavour' of IT services for each portfolio company, argue Nigel Hughes and Sam Vail (pic) of ISG, a vanilla approach can be more cost effective and efficient.

In a traditional environment, IT services are delivered in a variety of ways to accommodate the requirements of disparate geographic regions and business units.  These unique requirements – based on legacy systems, established practices, or arbitrary business decisions – result in a high degree of custom service delivery, which drives inefficiency, unnecessary consumption of IT resources, and higher costs.    
Increasingly, global enterprises are finding a better way. Rather than requiring a special “flavour” of IT services for each business unit or geographical region, top-performing organisations are recognizing that, for up to 90 percent of their IT requirements, a “vanilla” service will do just fine.

This model of “standardised” IT service delivery is generating increasing attention with private equity operating partners seeking progressive ways to drive optimal performance within their portfolio companies.

The implications of this change in mindset are significant: Standardisation means that information technology service providers can leverage economies of scale across multiple clients. By introducing transparency into how IT is consumed, standardisation also makes utility-like based pricing of IT services via a highly efficient “pay by the drink” model more feasible. This, in turn, enables effective management of demand for IT resources by the business – a huge development, insofar as unconstrained and inefficient consumption of IT resources has been the primary driver of increased IT spend over the past decade. Finally, a standardised IT environment increases agility, flexibility, and scalability, allowing the business to respond nimbly to unanticipated new requirements – a critical benefit for operating partners when exiting the business.

Standardisation makes utility-like based pricing of IT services via a highly efficient 'pay by the drink'model more feasible

While these developments have primarily been driven by large global enterprises, operating partners at private equity firms are applying them within their portfolio companies. Indeed, opportunities to benefit from IT standardisation can arise at  any stage of an investment – during due diligence, as a part of a key corporate initiative within the 100 day plan, or as a strategic investigation during the early years of an investment hold period.

The opportunity

Traditional information technology improvement initiatives drive incremental efficiency gains within the existing operational environment, and “tighten the screws” on the way things have always been done.  Transitioning to a “standard” service platform, meanwhile, establishes a new and significantly better way of operating and managing business data and information. This transition also provides a clean slate that fully leverages the benefits of utility computing. 

The improvement reflects both increased delivery efficiency from the supply side, as well as improved commercial management from the demand side. Beyond the substantial cost savings, a standardised environment is ideally positioned for merger or acquisition integration, rapid growth expectations, implementation of new applications, and disaster recovery.

A standardised IT operating environment requires squeezing out the deeply ingrained operational “constraints” that characterise most existing enterprises.  These constraints typically result either from myopic IT managers that dictate a specific solution, design, or approach to governance, or from unclear boundaries of responsibility between IT and business units, or between the outsourced service provider and in-house IT team.  This confusion results in duplication of effort and high levels of inefficiency. 

By subjecting business requirements for IT services to cost and value-based assessments, it’s possible to determine which areas can be standardised (as well as which ones do require specialised support). In addition, establishing and enforcing “sticky” governance processes that clearly define ownership within and between delivery teams (either outsourced or in-house) and business users can address the duplication of effort problem.

How does standardised IT service delivery work?  To take one example, in a traditional environment, a portfolio company would pay an IT service provider a specified amount per server. The IT service provider seeks to install additional servers, as that generates additional revenue. In a standardised, usage-based IT environment, the business pays a specified amount for a CPU minute. This creates an incentive for the IT service provider to drive efficiency in the delivery of that CPU resource, as greater efficiency equals higher margin.  The portfolio company, meanwhile, has an incentive to utilise CPU resources more wisely, as every CPU minute consumed has a cost attached to it. 

Starting the journey

Despite the “transformational” nature of the transition to IT standard services, the change process can be surprisingly straightforward.  A “workshop” approach – conducted over the course of three to five days of discussion, with the outcome completed within three weeks – can define the desired future state of the IT environment and identify specific actions to get started. 

An effective workshop involves the entire IT leadership team working with the core business unit leaders to focus on discussing what “should” be, rather than what is “currently feasible” – this helps the organisation envision what an optimised, unconstrained environment can look like. Discussion topics can include potential target operating models for different IT services; how to introduce appropriate tensions to ensure the proper mix of cost, quality, and service continuity; and how to introduce flexibility through delivery choice but still control demand.

Outcomes of the workshop typically include a common lexicon to enable clarity of all deliverables and ensure ownership of key actions. In addition, a visual representation of the target operating model will show how current and future service needs will be delivered – this includes an understanding of what will be retained versus outsourced, and what will be delivered locally versus globally.  Additional considerations include how to introduce multiple suppliers or delivery teams to drive competitive tension, and how to define and manage unique business requirements through an agreement with very tight service level agreements.

The opportunity for operating partners

In today’s environment, operating partners can leave no stone unturned during due diligence. Optimising IT operational efficiency and reducing internal costs is considered a “table stakes” capability. Increasingly, operating partners are also focused on enhancing value through top-line growth to gain a distinct competitive advantage. In this context, standardised IT service delivery is relevant for its ability to support rapid deployment of new applications, the introduction of new client-facing technologies, and the ability to quickly respond to a new business requirement.  Bottom line:  whether the goal is to increase EBITDA via operating cost savings, or to generate top-line growth based on IT’s support of an expansion initiative, operating partners can use standardised IT service delivery to drive a new source of operating value improvement to all appropriate portfolio companies.

Sam Vail is a private equity-focused partner at Information Services Group (ISG), while Nigel Hughes directs assessment services at ISG.