NAVIGATING DIFFICULT TIMES

Viewpoint Paper

Government Chief Information Officers (CIOs) will have to take a strategic view to navigate the economic downturn because the impact on government finances will be long term in most countries. They will have to reduce the costs of IT to run the business to free up funds for IT investment in business improvement projects. In addition, they will have to overhaul governance mechanisms to increase return on project spend. Finally, the scale of the challenge is such that they will have to explore “disruptive solutions” with potential to make breakthroughs in performance, whether disruptive technologies, sourcing solutions or business models.

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Introduction“B.C. and A.D. - Before Crash and After Depression”

The economic crisis has brought storm conditions for most government Chief Information Officers (CIOs). New policy objectives must be implemented with unparalleled speed. Workloads are increasing often without commensurate funding. Budgets have been reduced, frozen or increased less than historically. Despite these changed conditions, CIOs still have to keep the ship afloat, ensuring uninterrupted delivery of live services.

In this storm you will inevitably be absorbed in problem-solving. In terms of the well-known time-management matrix, most of your time is probably spent in the “important” and “urgent” quadrant. Even so, it is vital that you look ahead and carve out time for activities in the “important” but “not urgent” quadrant that can prevent problems and seize opportunities. This is for two reasons.

First, though no one can predict the severity of the economic crisis, economists are already forecasting a significant long-term deterioration in the public finances of most developed countries. For example,

in the UK, the Institute for Fiscal Studies estimates that it will take 20 years for government finances to return to where debt is 40 percent of GDP.1 This is because the need to fund interest payments and pay back debt will coincide with the aging of the population. CIOs, therefore, cannot plan just to hunker down for a year or so, to survive one or two cold winters. You need a longer-term strategy to cope with the climate change in government finances.

Second, the instability caused by the economic crisis will reduce barriers to change, thereby bringing within reach transformation opportunities that you may previously have regarded as “too difficult” or “too risky.” The combination of cost pressures and reduced barriers to change could create a tipping point for the transformation of public services. For example, the Great Depression in the United States triggered reform that went beyond the scope of the New Deal. The Glass-Steagall Act, the repeal of Prohibition, the introduction of Social Security and the recognition of trade union rights all date from this period. It was this enduring change that led historian Felix Frankfurter to redefine B.C. and A.D. as meaning “Before Crash” and “After Depression.”

Executive Summary

However long the economic downturn lasts, in most countries a long-term deterioration in government finances is already projected. HP believes that government CIOs have to take a longer-term view at the same time as responding to today’s immediate problems.

First, CIOs will have to restructure IT operating costs to fund investment in IT that enables business initiatives. CIOs should work back from a target cost that reflects where the business needs to be, not where it is today. Action is required quickly so that a virtuous, self-reinforcing cycle is established where IT costs are reduced ahead of savings targets so that funds are available for the next cycle of cost reduction. HP has identified the main cost levers and cost reduction strategies that will enable CIOs to reach the cost reduction targets that will typically lie in the 15 percent to 45 percent range over three years.

Having created more room for project spend, the second task is overhauling governance mechanisms to increase the business impact of IT project spend. This can be achieved by flexing delivery and procurement models, prioritizing projects based on Government Return on IT (GRoIT) and adopting portfolio management approaches that address the entire IT value life cycle.

Finally, the economic crisis is a highly disruptive event, in the face of which incremental change alone will rarely be sufficient. CIOs will have to explore “disruptive” solutions – some will be new technologies, some alternative procurement solutions and others different business models.

Figure 1. Government IT Expenditure in Relation to Total Operating Expenditure and Allocation to “Run,” “Grow” and “Transform”

HP advice to Government CIOsHP has three points of advice to help navigate these difficult times:

•Restructure IT operating costs to fund investment in IT that enables business initiatives

•Overhaul governance mechanisms in order to increase the business impact of IT project spend

•Explore disruptive solutions that can create breakthroughs in performance

Each of these points is described in more detail below.

Restructure IT operating costs to fund investment in IT that enables business initiatives Information technology on average makes up 6.8 percent of government operating expenditure, according to Gartner. See Figure 1.3 It is evident, therefore, that Chief Financial Officers (CFOs) will be looking to their CIO colleagues to make a “fair” contribution to meeting budget freezes or reductions. At the same time, even if a narrow financial view is taken there is much more potential to impact the non-IT costs of the organization (93.2 percent) by increasing

the value that IT creates rather than by reducing the cost of IT. Since capital is in short supply, however, the main source of funding for IT to improve business performance (“Grow” and “Transform” in Gartner’s terminology) will be reductions in IT operating costs, for which Gartner uses the term “Run” and the industry commonly calls “Business as Usual.”

CIOs need to act quickly to reduce their cost base In a situation where budgets are steadily declining, two scenarios are possible. In the first instance, a CIO resolves to reduce the cost of IT to run the business substantially and quickly — to meet cost reduction targets, fund investment in business improvement projects and free up capital for further reductions in IT operating costs. In this case, a self-reinforcing or “virtuous circle” can be set in motion. Alternatively, if a CIO does not quickly get on top of operating costs, a “vicious circle” sets in where declining budgets and the cost of running IT operations combine to squeeze out investment in improving the business or in reducing IT operating costs, making change progressively harder.

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Average Total Operating Expenditure

Average Breakdown of IT Expenditure

Transform 12% (0.8%)

Grow 13% (0.9%)

Run 75% (5.1%)

TransformRun Grow

This is an indicator of how much of the IT resource is consumed and focused on the continuing operation of the business. It includes all non-discretionary expense as part of the Run the Business Cost.

This is an indicator of how much of the IT resource is consumed and focused on developing and enhancing IT systems in support of busi-ness growth (typically organic growth). Discretionary invest-ments are included in the Grow the Business Cost.

This is an indicator of how much of the IT resource is consumed and focused on implementing technololgy systems that enable the enterprise to enact new business models. This is very much a “venture” category and would be represented by activities such as the e-investments in the late 1990s.

Non-IT Operating Expenses93.2%

IT 6.8%

Cost reduction does not have to be at the expense of quality The natural assumption is that reducing costs has to be at the expense of quality. However, an analysis of 37 European banks by McKinsey & Company found that, “A small number of European banks get more business value from information technology — including faster, more flexible support of business objectives — than do their peers, and at a far lower cost.”4 They called this group “effective business enablers.” Conversely, another group of banks, the “high IT spenders,” reported both high IT costs and high operating costs. McKinsey’s detailed examination showed that in comparison to the “high IT spenders,” the “effective business enablers” on average had half the number of data centers, 380 vs. 500 applications, more standardized desktops that cost 40 percent less, and a lower percentage of applications that were “hard to change” (<40 percent vs. 40–60 percent).

In other words, reducing IT costs to run the business need not impact business performance – quite the opposite. There is a second “virtuous circle” where modernized systems provide high returns from investment in IT and yet are cheaper to run. See Figure 2.

CIOs should work back from a target for spending on IT to Run the business and on IT to Grow and Transform the businessWhen an automotive company sets about developing a new product, it is common practice to set a target cost. The design teams work back from that figure knowing that they have to meet the target cost if the product is to succeed in the market. Working back from a target cost greatly increases the probability of a product’s success in the market. Moreover, starting with a target stretches a team to achieve more than if they set expectations to improve based on today’s performance.

HP believes that government CIOs are in a similar position. You need to achieve a target cost for IT to run the business if the organization is to meet its financial targets. There is also a target level of investment in IT to improve the business that is needed for the organization to meet its wider objectives. So how can you determine the right targets?

According to Gartner, public sector organizations on average use 75 percent of their IT budget to Run the business. Bringing performance into line with the private sector at an average of 66 percent would

Figure 2. Self-reinforcing or “Virtuous Circles” Related to IT Operating Costs (Run)

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Lower IT Operating Costs

(Run)

Investment in Reducing IT

Operating Costs (Run)

Rationalized Infrastructure and

Applications

Rationalized Infrastructure and

Applications

Lower Business Operating Costs

4 Kanika Bahadur, Driek Desmet, Edwin van Bommel (McKinsey & Company), “Smart IT Spending: Insights from European Banks” McKinsey Quarterly (January 2006).

Figure 3. Illustrative Target to Reduce IT Operating Costs (Run)

entail reducing IT operation costs by 12 percent.5 Likewise, the Gershon Review of Technology Spending in Australia set a target for large departments to change the mix of business as usual (BAU) to project work from 77:23 in 2007-2008 to 70:30 in 2011–2012.6

Extra factors should be taken into account in setting the target cost for IT to run the business in addition to the investment required to improve the business.

•Rising IT volumes and demand for IT — As organizations mature in their use of technology and technology itself matures, demand for IT increases. For instance, although the cost of storage is declining at 35 percent per year, demand for storage is increasing between 50 percent and 150 percent per year. Furthermore, many organizations are experiencing increasing volumes of workload – up to 30 percent in some human services agencies.

•Allowance for investment to reduce Run costs — Since organizations may have to self-fund, the target cost for IT should include allowance for capital to invest in reducing costs to run the business.

•Reduction in overall department/agency budget — You will probably have to reduce your overall budget, not just change the mix of spend.

Since government finances will be under pressure for several years, a medium-term target should be set, say for three years. This is far enough out to reap the benefits of investment in major change, but close enough in to make plans practical.

The individual economic circumstances of government agencies will vary, but HP believes that CIOs will typically have to reduce the cost of IT to run the business by 15 percent to 45 percent within this timeframe. See Figure 3.

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* Investment required to achieve target BAU reduction assuming ~5 times payback and ~25% cost reduction target

1. Changing the mix between Run and Grow/Transform (75%:25% to 65%:35%)

2. Increasing IT volumes and demand for IT (0% - 5% p.a.)

3. Allowance for investment to reduce Run costs (~5%*)

4. Reduction in overall department/agency budget (0% - 5% p.a.)

~15% Lower end of required Run cost reduction

~45%Higher end of required Run cost reduction

0%

25%

50%

75%

AS-IS 100%

125%

5 Kurt Potter and Michael Smith (Gartner, Inc.), “IT spending and Staffing Report 2009” (January 2009); Table 2. Run-, Grow- and Transform- the Business IT Spending by Industry, 2008. To determine the Run savings required, we solved for X in the equation 75%-(75%*X) = 66%, or X=1-(66%/75%). 6 Sir Peter Gershon, “Review of the Australian Government’s Use of Information and Communication Technology” (August 2008), 48.

Since these are demanding targets and you need to make cost reductions quickly to prevent a vicious circle from developing, there is particular value in considering alternative sourcing options that may reduce capital requirements or even provide a capital injection (see the Disruptive Solutions section on page 10). Additionally, there may be newly established funding options available from central government initiatives to increase sustainability or develop infrastructure.

The target level of investment in IT to improve the business should in theory be set by working in concert with the business units to determine which projects will be required to meet the objectives of the organization. In practice, the realities of tight budgets are most likely to require you to work within your existing (now reduced) budgets.Furthermore, your ability to negotiate additional funds will to a large degree depend on being

able to demonstrate a track record of cost reductions and return on investment.

The savings that are achievable will depend on an individual client’s circumstances, but the table below provides indicative savings derived from HP experience. These savings figures are based on tried and tested solutions and do not assume some of the more radical, but still practicable, modernization strategies that entail disruptive technology and sourcing solutions (see the Disruptive Solutions section on page 10). In order to give a sense of potential impact on the overall IT budget, these indicative figures are mapped against Gartner data on the average percentage of the IT budget that is spent in each IT domain in government.

You can see that by absolute value (Table 1, column C) the areas with most potential to reduce costs are applications development, applications support,

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Finance / Administration

5% 3%

IT Management 10% 6%

Applications Development

14% 18%

Applications Support

11% 15%

Help Desk 7% 4%

Voice Network 5% 10%

Data Network 13% 13%

Desktop and Peripherals

15% 12%

Data Center 20% 19%

Total 100% 100%

1.2%

1.8%

6.8%

3.5%

1.1%

1.9%

2.3%

3.6%

5.4%

Table 1. Average Government Spending and Potential Savings by IT Domain

DomainFederal/ National

(A)

State/ Local (B)

7 Jamie K. Guevara, Eric Stegman and Linda Tracy (Gartner, Inc.); Figure 21. State/Local Government: Distribution: Spend by Technology Domain, and Figure 22. Federal/National Government: Distribution: Spend by Technology Domain.

Gartner Data On Breakdown Of Government IT Budget By Domain7 HP

Experience of Typical Savings

(C)

Average Impact on Total IT Budget (Average of A+B* Midpoint

of C)

27.6%

20% - 40%

15% - 30%

35% - 50%

15% - 40%

10% - 30%

20% - 30%

5% - 30%

20% - 35%

15% - 40%

desktop and data center. The main modernization strategies for each of these major cost reduction areas are:

•Applications development – component re-use; tooling; and adherence to quality standards, such as the Capability Maturity Model Integration (CMMI)

•Applications support – portfolio rationalization; remote management; and Design for Run™, HP’ proprietary approach to applications development that focuses on minimizing total lifetime cost of ownership

•Desktop and peripherals – consistent office environment, minimal number of standard configurations; and standard tools and processes

•Data center – virtualization and remote systems management; physical centralization; standardized tools and processes; and server and storage consolidation

Achieving these reductions in IT operating costs entails a journey. The major stages can be categorized as custom-managed (typical un-modernized environment), leveraged facility (partial centralization, consolidation

and standardization) and a fully agile environment (full centralization, consolidation, virtualization and standardization). Figure 4 illustrates for each infrastructure domain the potential savings at each stage.

Cost reduction initiatives need to be underpinned by understanding of costs, risk and potential impact on other change activitiesAn essential step in addressing any of these cost reduction opportunities is to understand the existing cost base, including cost behavior. Costs can vary with time due to licensing agreements, business volumes, IT transaction volumes, changes in the location where services are provided or as a consequence of contracts with suppliers. Assessment of the behavior of costs assists with modelling costs and identifying the optimum targets for cost reduction initiatives.

A next step is to ensure that the risks of potential change are understood. IT to support the business in its current state is inextricably linked to existing organizational processes, structures and control mechanisms, so the potential impact of cost reduction activities on the business should be analyzed in detail.

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Figure 4. Potential Savings at Each Stage of IT Maturity across Infrastructure Domains

Mainframe

Midrange

Network

Desktop

Help Desk

Total

Custom Managed

Leveraged Facility

Agile Environment

Forward Costing Curve Future

Leveraged Savings

Agile Savings

15% 25% 35%

30% 35% 40%

5% 15% 30%

10% 25% 30%

25% 30% 35%

15% 20% 35%

Finally, projects to reduce costs have to be planned alongside investments to improve the business so as to ensure that plans are synchronized.

Overhaul governance mechanisms in order to increase the business impact of IT project spendGovernment is often criticized for being slow to change. In reality, however, government departments have well-oiled mechanisms for introducing substantial policy change. What is different about the current economic crisis is the speed of change and that so many changes have not been anticipated. The processes that government departments have in place, such as for make/buy decisions and subsequent procurement or in-house development, are not designed to operate within such short cycles nor can many cope with the range and complexity of current change. In this situation, IT is bound to be a constraint unless CIOs are able to overhaul governance mechanisms so that they become fit for purpose.

Governance and sourcing processes should be reviewed in the light of project demand In manufacturing, a standard way to design operations is to analyze demand in three different categories: “runners” are daily or weekly production items; “repeaters” for which demand will be occasional but when it comes it will be of a similar nature; and “strangers” or one-offs that fit no discernible pattern. The point is that very different production systems are required for each type of demand. “Strangers,” for example, typically require ways of working that are more akin to a traditional workshop than a factory. Mixing “strangers” with “runners” or “repeaters” is a sure way to foul up an efficient production line.

This concept can be transferred to public sector IT where “runners” are routine application enhancements; “repeaters” are policy changes, often substantial, but still usually following relatively similar patterns; and many of the changes being introduced as a result of the economic crisis can be categorized as “strangers,” since they are different in nature and/or require much more rapid implementation. Attempting to handle these “strangers” through governance mechanisms and sourcing approaches that have been designed to manage “runners” and “repeaters” will most likely fail to deliver the required change and foul up the IT production line as well.

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Case Study 1

EDS, an HP company, modernized a U.S. Federal Agency infrastructure to enable the agency to reduce comparable IT spend by 20 percent

Determined to enhance its standing on the President’s Management Agenda and improve service to citizens, this federal agency relies on a large number of applications and systems to successfully support community development on a national scale. Yet over time, these systems had grown complex and outdated.

The agency looked to EDS to overhaul its data center, optimize security, provide business continuity and enable an industry-best enterprise architecture for all of its business lines.

The first step toward building the centralized IT infrastructure required consolidating the agency’s various home-grown help desk operations into a single, enterprise-wide help desk.

Next, EDS transitioned the agency’s aging mainframe environment to EDS and enhanced it to industry-best standards. At the same time, EDS migrated nearly 200 business applications running on 400 servers to an EDS data center through back-to-back weekend moves in just six weeks – all with no interruption to the agency’s daily business. EDS then successfully executed rapid modernization projects, such as virtualization, which further improved the agency’s productivity.

As a result of the massive modernization and enhancements, the federal civilian agency’s various business lines are now unified by a standardized platform which helps enforce the new enterprise architecture. The agency has succeeded in attaining the coveted Green rating on the President’sManagement Agenda in record time. More importantly, enhanced systems availability and processing performance have dramatically improved the agency’s ability to serve citizens.

Since “strangers” inevitably require workshop, rather than factory, ways of working, the governance and sourcing mechanisms that are appropriate will vary according to the project. The key for CIOs is to understand the nature of each project and determine whether it can go through the existing governance and sourcing processes or whether something different is required. In some instances, sourcing services from third parties, such as another department operating a similar function, may well be the quickest route to delivery.

If there is a need for different governance and sourcing processes then it is essential that the decision-making process is documented (“Why was a different approach adopted?”). Furthermore, if an alternative approach is employed, there is all the more need to ensure that appropriate steps are taken to meet standards of public accountability and audit.

CIOs can prioritize projects and assess results using Government Return on IT (GRoIT)In the private sector, Return on IT (ROIT) investment is usually calculated in financial terms. Many have recognized that even in the commercial world this can be simplistic. In the words of Eric Clemons, a professor at Wharton, “The greatest danger is the ‘concrete’ and ‘measurable’ driving the significant out of the

analysis.” A special problem identified by another MIT professor, Ravi Aron, is the “revenue gap,” i.e., the distance between the technology and impact on revenue. He gives the example of how a customer-ordering system would have a much smaller revenue gap than an intranet for sales people to share sales leads.8

The issue of how to measure ROIT is more complex in the public sector since policy outcomes are rarely purely financial, outcomes are harder to measure and there is often an even bigger gap between IT investment and outcomes, the “outcome gap.” So how can you measure ROIT in order to prioritize IT investment and demonstrate returns?

HP has developed a Framework for Public Value that is based on the work of Mark Moore.9 In contrast to market contexts, where value is linked to the return to shareholders, public value in societies is ultimately defined by the public themselves. As a general rule, the key things valued by the public fall into four very distinct categories: they value quality services, delivered with efficiency, by trusted institutions, and to achieve desired socio-economic outcomes.10 We believe that Government Return on IT (GRoIT), is directly linked to the public value created or enabled by IT. See Figure 5.

Figure 5. GRoIT: Government Return on IT

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8 “Measuring Return on IT Investment: Some Tools and Techniques,” knowledge@Wharton, 18 July 2001, available from http://knowledge.wharton. upenn.edu/article.cfm?articleid=398; Internet.

9 Mark H. Moore, Creating Public Value: Strategic Management in Government (Cambridge, Massachusetts: Harvard University Press, 1997).

10 Suparno Banerjee and Ian Kearns, “Public Value and e-Government,” HP Government Journal (2007).

• Transaction costs

• Productivity

• Time to market

• Volume, Speed and Flexibility

• Asset utilization

• Convenience and availability

• Access and channels

• Accuracy and timeliness

• Choice and personalization

• Security of personal information

• Price and affordability

• Equity - service delivery to all segments

• Collaboration & participation

• Compliance & risk

• Service delivery metrics

• Long-term qualitative and quantitative measures

• Sustained change

How IT is “produced”

How IT is delivered

How IT is “consumed”

How IT is sourced

How IT is managed

How Risk is mitigated

GRoIT =

Cost Factors Quality Factors Trust Factors Outcome Factors

Portfolio management disciplines can increase business impact, reduce risk and ensure auditability of decisions After evaluating candidate initiatives, it is essential that CIOs assess how they come together as a portfolio for three reasons.

Firstly, projects may combine to impact business objectives in ways that are more complex than a matter of straight dependencies.

Secondly, just as in the case of a portfolio of financial investments, the balance of a portfolio has to be assessed on a number of dimensions:

•Impact on business objectives - The overall impact on departmental objectives has to be considered to ensure that investment is not skewed unduly towards specific objectives

•Project size and time to impact - A mix of small, medium and large projects and projects with short- and long-term impact is necessary to diversify risk

•Impact on IT objectives - There should be a blend of projects that impact Run, Grow and Transform

•Application areas – Investment should be spread across application areas such as service delivery applications, business intelligence and utility applications (for example Human Resources and Finance).

Finally, the portfolio has to be analyzed in relation to

constraints to ensure that it is deliverable. In particular, the

demands that the portfolio places on the resources of your IT

organization have to be profiled, alongside capital and other

funding requirements.

Departments can employ an end-to-end IT value life cycle to maximize GRoITIn our experience, though public sector organizations have a formal IT project life cycle, few have the same level of rigor in the IT value life cycle that goes from business case development to benefits measurement. See Figure 6.

Figure 6. IT Value Life Cycle to Maximize GRoIT

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Value Factor

Quality

Trust

Outcomes

Cost

Other Criteria

Architecture

Risk

Capital

Value Factor

Quality

Trust

Outcomes

Cost

Impact

Impact

Impact

Public Value

Constraints

Public ValueYes

No

Go

No-Go

GRoIT =

Investment

Portfolio Balance

Lessons learned

Initiative

Initiative

Initiative

Initiative

Initiative

Run, Grow Transform

IT area, e.g. utility & service delivery

Project size and time to impact

Funding profile

Resource needs

Constraints

1 2 3 4 5 6

Create Business

Cases

Score Business

Cases

Provisional Portfolio

Portfolio Assessment

Go/ No-Go

decision

Measurement of costs and ben-

efits

Many of the individual components will be in place but the

process is not formalized or viewed as a single end-to-end

process. As a result, public sector bodies often find it dif-

ficult to demonstrate value for money by citing consistent

figures for financial and non-financial return on IT spend.

In addition, audit trails showing how decisions were made

may not be sufficient to meet raised expectations for trans-

parency of public spending.

Having a framework for the full IT value life cycle allows

CIOs not just to maximize GRoIT, but to demonstrate

ability to achieve GRoIT — a competence that will be of

importance in competing for scarce capital. A standard-

ized approach to GRoIT also enables your organization to

learn from experience

and thereby ensure that there is no weak link in the IT

value life cycle.

Explore disruptive solutions that can create breakthroughs in performance

A “disruptive” technology is a technological innova-

tion that marks a radical change in the market, often by

maximizing a particular product attribute, such as cost or

convenience. Examples of disruptive technologies include

the digital

camera, the tape recorder and the personal computer.

In many instances, disruptive technologies actually

perform worse on certain product attributes than exist-

ing alternatives. But they manage to gain market share

because customers place a higher value on a single

attribute. For example, the early digital cameras took

lower quality pictures than traditional film cameras but

many customers valued convenience over quality. For

this reason some disruptive technologies are not actually

new. They take off because people’s priorities change. The

downturn will alter people’s priorities, giving greater value

to low cost and flexibility but less value to customization

and control.

The concept of disruptive technologies can be extended

to disruptive sourcing models and business solutions. The

economic downturn is a highly disruptive event that, in

HP’s view, calls for disruptive solutions. Adopting evolu-

tionary approaches will be a critical element in your change

strategies but it seems unlikely evolution alone will be

sufficient for the scale of the task.

Case Study 2

Portfolio management and measurement of ROIT investment were key to HP halving IT spend and flipping the ratio of operating costs to new projects from 70:30 to 30:70

In 2005, Hewlett Packard CEO Mark Hurd

established straightforward goals for CIO Randy

Mott: provide better information, lower the risks

related to technology failures, and lower costs

overall. As one of five key initiatives in the

overall transformation program to achieve these

goals, Portfolio Management and Prioritization

processes now require all proposed IT projects to

develop a business case that demonstrates real

impact.

The impact, or Return on IT, is documented

using the sum of all benefits, both hard dollar

and intangibles, that a project delivers in

the 12 months following full implementation.

Furthermore, forced ranking and selection

enables our IT organization to focus on

executing fewer, high priority projects at once

and completing them in shorter timeframes. The

ROIT numbers have credibility because they are

based on a cost benefit analysis agreed to by

business partners — they are finance numbers,

not estimations from the IT department.

While more benefit may be derived from longer

term projects, a six-month duration hits the

right balance of benefit and risk most often and

therefore makes up the majority of the portfolio

of projects at any given time.

As a result of this focus, we have been able to

drive down overall IT cost from 4% of Revenue

to just under 2%, and shift the ratio of Business

as Usual to New Development cost from 70:30 to

30:70. Along the

way, we significantly reduced our reliance on contract

employees. The transformation program itself

implemented modernization initiatives that

tripled bandwidth at half the cost; rationalized

6,000 applications down to about 1,500; 700

data marts to fewer than 55; and 85 data centers

consolidated down to 6.

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Disruptive technology solutions can reduce costs, increase flexibility and enable more open governmentHP believes that several disruptive technologies have matured to the point where they merit serious consideration by governments. Examples include:

•Alternative workplace solutions — Government agencies are considering alternative options for the workplace, such as role-based computing and thin client. Pressure on cost makes these options more advantageous as well as more innovative options, like netbooks.11

•Open source software — Utility applications (applications that are essential, but not differentiating, such as payroll and HR systems) on average account for 20 percent of expenditure in banks12 so, if a similar level of spend in government is assumed, exploring open source software has substantial potential to impact costs. The desktop is the most obvious area. Other generic applications, such as Customer Relationship Management (CRM), database and application servers will also be candidates.

•Open / collaborative approaches — Government can free up development resources by adopting open development approaches and more collaborative models such as Web 2.0. and mash-ups.13 These have potential to transform the relationship between citizens and government, as well as reduce costs.

•Cloud computing — Cloud computing offers powerful opportunities for delivering a service-centric strategy, creating a scalable infrastructure by sharing technology services and resources, thus driving down the cost of infrastructures. For example, HP supplies the U.S. Department of Defense (DoD) with scalable technology to enable its Defense Information Systems Agency (DISA) to deploy a cloud computing infrastructure. The shared, flexible infrastructure allows DISA to remotely provision its test and development systems through a single, secure interface.

CIOs can employ disruptive sourcing solutions to increase efficiency, reduce capital outlay and move to a more variable cost baseAlternative procurement solutions can convert costs from fixed to variable and reduce capital requirements. Moreover, innovative sourcing solutions can often deliver change within the shortest timeframes by re-using existing capabilities. Examples include:

•Outsourcing — The economic crisis impacted the Financial Services (FS) industry first and there has already been a sharp increase in outsourcing by FS institutions. This is because they have seen outsourcing as the single way that they can achieve the biggest reduction in IT operating costs within the shortest timeframe. We have also seen FS institutions reviewing existing contracts, and where they do not perceive sufficient value for money, either going back out to market or breaking single contracts into multi-sourced arrangements. As governments come under greater cost pressures you may need to take similar steps to reduce costs and to avoid risk by “baking in” cost outcomes.

•Alternative financing options — Even where government departments have outsourced IT service management, the assets often remain owned by the government. Transfer of assets and leasing can free up scarce capital for you to invest in other areas. Similarly, public-private partnerships have potential to provide access to additional capital and revenue streams.

•Software as a Service — Software as a Service (SaaS) is a way of deploying software where an application is hosted by a service provider and accessed by customers via the Internet, potentially using cloud computing. SaaS reduces your need for capital outlay and enables faster implementation.

•Pay-as-you-go — Another flexible sourcing approach is “pay-as-you-go” or “pay-per-use.” Think of this as outsourced capacity on demand or infrastructure as a service. HP Adaptive Infrastructure as a Service and other pay-per-use solutions offer real-time access to pre-built application infrastructure without having to

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11 Note: A netbook is an ultra light-weight laptop designed predominantly for work over the Internet or accessing applications through a cloud.

12 Peter Redshaw (Gartner Inc.), “IT Spending for Banks, 2007” (February 2008); Table 17. Allocation of IT Operating Budget by Category.

13 Note: “In web development a mash-up is a web application that combines data from one or more sources into a single integrated tool. The term mash-up implies easy, fast integration, frequently done by access to open APIs and data sources. An example of a mash-up is the use of cartographic data from Google Maps to add location information to real estate data.” From: http://en.wikipedia.org/wiki/Mashup_(web_application_hybrid), accessed 20 March 2009.

Table 2. Impact of Alternative Sourcing Solutions

pay for all the capacity when not in use. Pay-per-use measures how much capacity you use and bills you accordingly.

•Shared service and joint-procurement models — The change in the economic environment strengthens the case for shared services and joint-procurement models that can decrease capital needs by reusing assets and reduce costs and time spent managing procurements. An instance of such a shared service in government is the Data Warehouse on Demand service that HP operates for a number of U.S. states to analyze and profile Medicaid and Medicare claims.

The potential of alternative sourcing models to impact capital requirements, fixed vs. variable cost structure, total costs and time to market is shown in Table 2.

Disruptive business solutions have the greatest potential to drive breakthroughs in performanceThe traditional model for delivering government services entails a vertically integrated “silo” that is responsible for a single policy area, such as tax or justice, and is funded through taxation. There have been moves away from this silo model towards joining up front-line services for citizens and achieving economies of scale at the back-end through shared corporate services. In general, progress has lagged behind the expectations of those at the centre of government.

HP believes that the economic crisis will, in many instances, create a tipping point that will accelerate these pre-existing trends in government. The first reason for this belief is that increased pressure on

finances creates a stronger drive for change and innovation. The second reason is that the economic crisis has altered the boundaries of government and caused general instability, thereby bringing greater degrees of freedom.

Technology will be a critical enabler of many of these disruptive business solutions, in some cases creating opportunities that would hitherto not existed. For instance, the integration of edge technologies has enabled new models for funding transportation infrastructure and managing congestion by introducing highway toll collections that are based on usage and the time of day. Likewise, identity management and Service Oriented Architecture enables joined-up citizen-centric services. The main innovation in business models that we envisage are:

•Integrated models for customer-facing functions — The concept of shared services applies to customer-facing functions as well as to corporate services. Government departments can share capabilities at multiple levels: process, data, applications and infrastructure. The result can be both lower costs and a more seamless customer experience.

•Shared service models for corporate services — The standardization that is required to make shared services work will increasingly become an acceptable price to pay in order to reduce costs and fund modernization of Human Resources and Finance.

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Outsourcing Alternate Software Pay-as-you- Shared Service/ Financing as a go joint- service procurement

Reduced 3 3 3 3 3 capital

More 3 3 variable cost base

Reduced 3 3 costs

Faster 3 3 3 time to market

•Different payment models — Payment by customers according to use of a service or payment of suppliers for delivery of policy outcomes, such as placement in employment, can provide new funding and alter customer and supplier behavior.

•Outsourcing of service delivery to the private or voluntary sector — The downturn will encourage service suppliers to consider new opportunities as suppliers of services directly to citizens; while the voluntary sector will often be an attractive option for shaping services that are built on first-hand understanding of customer needs.

•More participative community models — New technologies such as Web 2.0 will allow citizens to take more direct control over the design and delivery of services, changing their role from consumer to producer.

Seizing disruptive solutions requires an open innovative mind-setThis final point of advice is more a matter of adopting a new mind-set than of taking a specific action. To seize such opportunities, CIOs will have to be imaginative and willing to take steps into unfamiliar territory. In nearly all instances, deep collaboration with your business colleagues or external parties will be vital. Exploring disruptive business solutions may seem like an unaffordable luxury in a world of frozen or declining IT budgets, but the reality is that for many this will be a necessity — “more of the same for slightly less” will not work.

Case Study 3

The City of Anaheim developed an entirely new way to manage local emergencies through a virtual emergency operations center

For the City of Anaheim in Southern California, public safety is a crucial concern. The City has to be prepared for emergencies such as wildfires and earthquakes or incidents in the Anaheim Resort area, the City’s thriving convention and entertainment district.

Organizations in the public sector for many years have had brick-and-mortar emergency operations centers (EOCs). The problem with traditional EOCs is that it takes time to physically report to an EOC and communications with field personnel are limited to radio and telephone. Working with EDS,an HP company, the City’s long-term technology partner, the Mayor of Anaheim had a vision for emergency management that broke the mould in three ways: it was virtual, it demolished organizational silos through information-sharing and it put information in the hands of front-line responders as well as incident managers.

The Enterprise Virtual Operations Centre (EVOC) allows officials and emergency responders to view topographical maps, global positioning system (GPS) data, weather conditions, blueprints, utility plans, video camera feeds, radio transmissions, live news feeds and more – all from a single application that is available through a wireless public safety network. Information-sharing across departmental and jurisdictional boundaries is achieved through open formats and technologies such as XML and web services. In addition, map layer standards, like KML, make it possible to obtain and overlay map layers from services such as Microsoft Virtual Earth, Google Earth and ESRI ArcWeb Services.

Whilst being highly innovative, EVOC is a practical solution that re-uses existing assets, applications and data repositories through middleware without having to reengineer them.

An example of EVOC’s practical value is provided by the 2007 wildfires in the nearby City of Malibu. The Anaheim Fire Chief happened to be out of town but he was able to locate each of his units assisting Malibu, track all communication and, using the aerial view of the map that was obtained via Microsoft Virtual Earth, could assess the terrain that his teams were facing.

As is with many innovative or ‘disruptive’ solutions, EVOC has been employed in ways that were not originally envisaged. For example, traffic footage that was previously only available in the Traffic Management Center is now used for day-to-day operational management by other departments. Likewise, an exercise using real operational data is underway to assess the potential impacts to respond to emergencies. In addition, as a result of the proliferation of cell / mobile phones, when EVOC issues a major event advisory, an email is sent to all members of the Emergency Notification Group. Embedded in the email are links to EVOC lite — a version of EVOC that is designed to run on PDAs or any comparable device.

About the AuthorDavid RimmerDavid Rimmer is the leader of HP Enterprise Services, Global

Government Industry in Europe, Middle East and Africa and also

the global lead for Revenue and Tax.

Contributors

Suparno Banerjee

Vice President and Leader of HP Enterprise Services, Global

Government Industry

Kimberly Caldwell Katsuyama

HP Enterprise Services, Global Government Industry

Charity Dunlop

HP Enterprise Services, Global Government Industry

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Technology for better business outcomes

To learn more, visit www.hp.com© Copyright 2009 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice. The only warranties for HP products and services are set forth in the express warranty statements accompanying such products and services. Nothing herein should be construed as constituting an additional warranty. HP shall not be liable for technical or editorial errors or omissions contained herein.

4AA0-1231ENW, Sept 2009