IT thrift

Most private equity firms have always run lean operations, but these days they have to find even more ways to cut back and make do with less. PEI Manager spoke with IT directors at three private equity firms, as well as three financial services technology consultants, to find the five most important areas where firms can cut technology costs without sacrificing the robustness of their systems.

1. Scrutinise your phone bill
“It's an area that's sort of ugly, complicated, and very expensive,” says Mark Weinstein, Vice President of IT at Waltham, Massachusetts-and Menlo Park-based Charles River Ventures. “I approve about $15,000 of telecommunications spending per month and the billing is often difficult to understand. But if you really take the time and you look at the different line items and you look at what you're paying for, you can ask yourself ‘Do I really need this?’, or ‘Am I paying for more of this than I need?’, or ‘Can I take my long distance and farm that out to a secondary provider who can be more competitive?’”

Weinstein just took on that daunting task recently, and found an area where he could save $700 a month. That may not look like a lot compared to the firm's overall budget, but by the end of the year that starts to approach the cost of a new server, he points out.

Tom Bonney, founder and managing director of technology consulting firm CMF Associates, also pointed to the phone bill as an area from which plenty of fat can be trimmed. Telecommunications services contracts – including the accompanying networking and service and maintenance contracts – tend to be negotiated once and then forgotten about, he says.

“What we find is that if every couple of years you run a process to put those things out to bid, you find that you can get generally a 20 to 25 percent decrease in the pricing,” Bonney says. “Especially in telecommunications, pricing moves around so much.”

Changing the telecommunications services that you use can also save you money, says Mark Coriaty, director of professional services at software and consulting company Eze Castle Integration.

“We've seen a big change in private equity firms in the last couple of years from traditional copper lines to voice over IP,” he says. “And voice over IP has pros and cons: the pros are obviously cost savings, one of the biggest things people are looking for as the majority of their communications are going to be over the phone or via email. We spend a lot of time with our clients to optimise our network, and ensure they have all the lines in place, as well as the technology that sits on the desk, and we try to make it as cost effective as possible. Videoconferencing has also been very big, especially since travel has been more and more constrained with a lot of firms.”

2. Merge your data centres
Over the past year, Weinstein installed a high capacity network between Charles River's two offices and consolidated the servers from Menlo Park into Waltham.

“We really reduced our operating costs and complexity by operating a lot fewer servers, allowing us to serve our West Coast users from our Waltham environment,” he says. “It also reduces our need for IT support staff. I think that's a trend you're probably going to hear more about.”

In consolidating servers, a firm runs the risk of some degradation in performance, he warns. One server is doing the work of two or more, and some users are geographically farther away from the server which impacts performance. But the savings outweigh the downside, he believes.

Relocating your data centres to cheaper real estate is also a smart move, says Jayesh Punater, president and CEO of Gravitas Technology.

“Private equity firms tend to have beautiful offices in mid-town Manhattan, and to put a high cost data center in the middle of that is really not being prudent with your investors' or your own money,” he points out.

3. Prioritise your projects and capital expenditures carefully
Of course, merging data centers costs money, and these days IT directors might not have the budget for such an expenditure, even if it saves money in the long run. IT directors need to think long and hard about just which projects are really essential this year, and which can be put off. It can be a painful triage to conduct, but a necessary one.

Weinstein gives the example of deciding when to replace your server. Typically, three years is considered to be the lifespan of a server. But not only are servers quite expensive, but the cost of migration, including the necessary professional services, can exceed the cost of the hardware. But three years isn't the maximum life of a server; it's more like the minimum. These days, IT directors are probably going to be trying to squeeze an extra year out of their servers before upgrading to a newer model.

Sergey Bushlyar, head of IT at Paul Capital, says he scrutinises potential projects much more carefully these days, not just from an IT strategy or performance perspective, but also from a business perspective.

“People in an IT department can get really excited about some applications, forgetting what the final goal is,” he says. “Maybe buying a beautiful dishwasher, which costs $3,000 to buy and an extra $100 per month to maintain, has no real sense if you can achieve the same dish quality with your own model. Just because it's a beautiful piece of technology doesn't mean you need it.”

4. Outsource as much as possible
Different private equity firms have very different feelings about which functions to outsource and which to keep in-house. Hoby Cook, vice president of IT at THL (fomerly Thomas H. Lee Partners), says he prefers to keep practically everything in-house, out of concern for the privacy and security of the firm's data.

But as Punater points out, when you outsource a function, you are turning it from a fixed cost to a variable cost, which gives you more flexibility in your budget. Traditionally, private equity firms outsourced things like tech support, portfolio management and risk applications, client tracking applications, and data providers, he says. In the post-financial crisis world, he's seeing firms outsource the entire risk reporting and management operation, research production and operations, and even servers and infrastructure or their entire data center.

In one instance, he worked with a firm that employed 15 people in the technology department, which cost the firm $4.5 million annually. The firm lifted out the entire team except for one person. The firm still needed the same skill sets, but needed them only 25 or 30 percent of the time. Ultimately, they were able to reduce the tech budget to $2.5 million, Punater says.

And if you already outsource some of your IT operations, there are ways to streamline your interaction with the service provider to save time and money, Bonney says. For example, in a 10-person private equity firm with an outsourced tech support desk, everyone in the company will typically call the help desk when computers freeze or email won't open. The service provider ends up providing redundant services to multiple people with the same problem, and it's difficult to keep track of requests in order to monitor spending. But if one person at the firm is designated as the IT liaison, both of those problems can be avoided, often saving quite a lot of money.

5. Review your service contracts
Remember that your service providers too are trying to weather the recession, and they very likely would be willing to give some ground on their rates in order to maintain market share. Whenever you have a contract that is up for renewal, therefore, bargain hard.

“Private equity firms tend to have beautiful offices in mid-town Manhattan, and to put a high cost data center in the middle of that is really not being prudent with your investors' or your own money”

“We spent a lot of money for online back-ups for one of our offices,” Weinstein recalls. “Well, the service providers are getting very hungry to keep share and keep business. I renegotiated a contract – the cost-per-gigabyte for backup dropped 50 percent.”

Bushlyar said the same. He added that now is a good time to review what application services you're using, and decide if you really need all of them.

“In a mid-sized company there are often a lot of applications running, but nobody even really uses them, because people multitask and they have no time to use them,” he says.

Even if you do decide that you need all of your applications, think about whether you need as many licenses as you currently have, adds Bonney.

“Sometimes groups will over-license their software,” he says. “They'll get access to a particular application for everyone in the office, and only three people of the 12 use it. The user license may cost $300 a year per person, and you're paying for 12, but you really only have three people using it. So a review of the software licenses that they have there would also be worthwhile.”