CIO Challenge: Maintenance Costs
The Challenge: On average, IT maintenance eats up more than $6 out of every $10 in the IT budget. In a bid to battle the maintenance misery and control costs, firms are eyeing everything from replacing old equipment and re-evaluating warranty coverage to outsourcing and architecting their systems differently.
When it comes to IT spending, there's good news and bad news, according to Robert Hegarty, vice president of the securities and investments practice at Needham, Mass.-based TowerGroup. The good news is that IT budgets are on the rise and the securities industry is emerging from a three-year spending slump. Hegarty says the industry will spend $71.5 billion globally on technology this year - with North America accounting for 42 percent of that spend - led by investments in asset-management technologies. But there's a dark side to increasing IT budgets, he says: much of the money still goes toward maintaining systems.
In the '90s, about 67 percent of IT budgets were dedicated to maintenance, while 11 percent went to replacement technology and 22 percent was dedicated to new IT spending, Hegarty says. Fortunately, he adds, "maintenance [spending] is on the decline." Today, 61 percent of IT spending is dedicated to maintenance, spending on replacement technology has crept up to 12 percent and new IT spending has increased to 27 percent. By 2010, Hegarty projects that maintenance spending will drop further, to 55 percent of overall IT spending; replacement technology will account for about 15 percent; and new technology will jump to 30 percent.
Out With the Old
Hegarty says the decline in maintenance costs "has got a lot to do with the declining costs of hardware and telecom." It's now cheaper to replace outmoded systems than to fix them.
Asiff Hirji, CIO at Ameritrade, agrees. "Rather than maintaining the old, we're much more focused on replacing it with new and more innovative functionality."
When it comes to maintenance, Ameritrade, which is based in Omaha, Neb., spends at a rate well below TowerGroup's published average. Only 30 percent of the IT budget at Ameritrade is dedicated to maintenance, Hirji notes. That's largely because "Ameritrade is an e-commerce company," he says. "Our systems are not legacy-based, 30-year-old COBOL programs."
Additionally, the rapid pace of change in technology means that the life cycle is short for the technology that Ameritrade deploys. "The functionality we provided four years ago is completely irrelevant to what we're delivering to the client today. The functionality is being refreshed within a year," Hirji continues. "We're like many other companies - we strive to deliver essentially disposable hardware. It is more effort to diagnose what is happening on one server and why it's gone wrong ... than it is to rip out the box and put a new one in."
Allan Woods, vice chairman and CIO of Pittsburgh-based Mellon Financial Corp., says that strategies for reining in IT maintenance costs depend on whether the maintenance involves applications development or infrastructure. At Mellon, the two areas have very different cost structures. Of the $600 million Mellon spends on technology each year, roughly 60 percent goes to application and systems development and 40 percent to infrastructure, such as computers, networks and disk drives.
Discretionary spending in applications runs about 70 percent of the budget, versus 30 percent for non-discretionary maintenance, which Woods characterizes as spending needed to "keep the lights on." For infrastructure initiatives, about 80 percent of the spend goes toward keeping the lights on and only 20 percent is discretionary.
Woods says that Mellon has even sold off some business lines to drive down maintenance costs. "Some of the businesses that we divested had fairly heavy maintenance requirements," he says. To further keep maintenance costs in check, Woods leverages as much of the technology across operations as he can. "To the extent that you can leverage systems in different parts of the organization, you're going to minimize your maintenance."
Al Ball, a technical platform systems administrator at Delaware Investments in Philadelphia, says his firm removed disk drives from maintenance coverage and implemented a disk drive hot-swap program to keep maintenance costs down. "We keep a variety of drives ... on the shelf to use as hot-swaps rather than paying for maintenance for them. We also have a few of the smaller servers on the shelf to serve as hot-swap rather than keep those common smaller servers on maintenance," he describes. For non-mission critical systems, Ball avoids buying a "warranty uplift," opting instead to go with the standard warranty. He also keeps a detailed, up-to-date list of hardware for which he re-evaluates the coverage every quarter.
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