Cost Containment - Pushing Information Technology Through the Eye of the Needle |-------------------------------------| | Paper presented at CAUSE92 | | December 1-4, 1992, Dallas, Texas | |-------------------------------------| COST CONTAINMENT-- PUSHING INFORMATION TECHNOLOGY THROUGH THE EYE OF THE NEEDLE Stanley Sokol James Anastasio Hunter College of the City University of New York ABSTRACT This presentation will describe the Administrative Services Cost Containment project that was initiated at Hunter College in March, 1991 and is on-going today. This project's primary purpose is to control the costs of the administrative infrastructure of the college. A serendipitous outcome of the project was that the exhaustive and exhausting discipline of cost containment proved to be an ideal tool for allocating Information Technology resources to the needs of the college. The project should be of interest to anyone that is trying to do strategic planning with shrinking resources. Executives, in the Information Technology and Administrative Services areas, should find this an interesting presentation. McKinsey & Company, the internationally renowned management consulting firm, provided us with a methodology and PC software to facilitate the earlier phases of the project which culminated in a plan for substantial savings in the cost of the administrative infrastructure. The implementation of the plan started in August, 1992. This paper will describe what was done right, what was done wrong, why this is an excellent way of doing strategic planning for Information Technology and how the entire Administrative Area of the college was pushed through the eye of the needle. This paper follows the charts that were used in the presentation. These charts are given, in reduced form, on pages 9 to 14 and are numbered from 1 to 26. This paper then proceeds, in 26 sections, to discuss each chart and thereby review the presentation. These reduced charts are difficult to read so if a full size copy is desired, the authors should be contacted. 1--Cost Containment--Pushing Information Technology Through the Eye of the Needle. This paper concerns the Administrative Services Cost Containment project that was started at Hunter College of CUNY in March, 1991 and continues today. Hunter is the largest senior college in CUNY with 20,000 students, 1200 full-time faculty and staff and about 600 part- time faculty and staff. The primary purpose of this project was to control the costs of all of the people reporting to the VP for Administration. A serendipitous outcome of the project was that the process produced an excellent method for assessing computer project priorities. McKinsey & Co., one of the premier management consultants in the world, provided us with a methodology, training and software. As the diagram indicates, this paper describes how moving from emphasis on computers to emphasis on dollars produced a move from being part of the problem to being part of the solution. Getting everyone, including the information technology people to adopt this discipline sometimes felt as if I was pushing them all through the eye of a needle. 2 -- Looking Back (1988-89) In 1988, we decided we needed a methodology for setting priorities for computer projects so we formed a committee called the Administrative Information Systems Planning Committee. We had AVPs, Asst Deans and Department heads on the committee and since strategic alignment was in vogue at that time we had one of our professors who was a recognized expert in strategic planning provide us with some first class methodology. The results were that the first choice--Chemical Inventory -is a great PC system that nobody uses. Facility Management is a solid mainframe system with limited use. The Student Advisement part of the third choice is taking forever to come into being and we're still trying to figure out what an EIS looks like. It will be instructive to compare the type of systems chosen here with those chosen with the new methodology. 3--Hunter College Budget There's no need to spend much time on this chart. The message is that Hunter, like the rest of higher education is in financial trouble. When inflation is taken into account, Hunter Administrative Services is seen to have taken a cut of about 40% over the last seven years. When this is combined with the additional responsibilities that the area has assumed, it's probably accurate to say that, over the period from fiscal 1985 through fiscal 1991, Administrative Services has produced a 75 to 100% increase in productivity. Yet more was being asked. Clearly a new approach was needed because simply doing more with less could lead to a sacrifice of quality and a real risk that any productivity improvement would not be sustainable for the long run. 4--The New Productivity Challenge A brilliant article by Peter Drucker appeared in the November- December, 1991 issue of the Harvard Business Review. The article is titled, "The New Productivity Challenge." It's an excellent overview of what is at the core of many of the new methodologies that are now being recommended to us. Drucker describes scientific productivity improvement as starting with Frederick Taylor in the 1880s doing time and motion studies to dissect each task and concentrate on improving the efficiency of each individual worker on an isolated basis. Fifty years after Taylor, Mayo began distinguishing between effectiveness and efficiency and began an approach that might be characterized as "doing the right things rather than just doing things right." Because of the shift to knowledge and service work, Drucker says that a new way has evolved which consists of defining the task, concentrating work on it, defining performance, making the employee a partner in productivity improvement and the first source of ideas for it, and building continuous learning and teaching into the job of every employee and work team. McKinsey has taught us an orderly method for doing what Drucker describes and has given us PC software to facilitate the process. Chart 4 summarizes the key phases of that methodology in the column headed McKinsey. In fact, all of the new methodologies have much in common -which is basically rethinking what's happening. Let's take the next chart as an example. 5--When you are up to your ears in alligators The saying here reminds us that we are always caught in the false dichotomy of fighting alligators or draining swamps. The new methodologies and the new productivity challenge is to train the alligators to clean up the swamps. A question I'd like return to at the end of the presentation is-- who are the alligators? 6- How the Process Works The process consists of six phases laid out along the time line on this chart. Phase 0 is the organizational and initial training. Phases 1 to 3 are to decide how the cost containment will be done. Phase 4 is where sustainability is built by planning the capture of the projected savings. Phase 5 is the implementation of the action plans. Hunter is now in Phase 5. Some points worth making about this process: - McKinsey encouraged us to get to Phase 5 in no more than 4 months; we took 17 months. - A full day's training was given for each of the first three phases. This tied up about 35 people for each day. - The Steering Committee (President, Provost and VP for Admin) spent many hours on this project during Phase 3. Perhaps as much as 30 hours each within a one month period. - Enormous burden upon VP for Admin and Project Leader to negotiate ideas and follow up on implementation. ]7--Key Principles This chart gives the key principles of the methodology. The 40% cost savings target tends to lead to a lot of anxiety as well as good idea production. The next chart looks at the 40% a little more closely. 8--40% Stretch Target The 40% cost reduction stretch target is used to stimulate creativity and generate ideas for fundamental redesign rather than just incremental belt tightening. However anxiety is created by this target. In our case, our President's willingness to enunciate a no-layoff policy and to explain that we would take a multi-year approach to capturing savings did much to alleviate the anxiety. 9--Project Roles This chart shows the project organization. The Task Force focused on overall management and "top-down" restructuring by trying to take a cross-functional approach. We divided Administrative Services into 15 units mainly along organizational lines. Unit Leaders were generally first (lowest) level managers. The Next Higher Managers were Directors of departments and for the most part were also the Task Force members. This was not a good idea since it's probably the reason for the Task Force having difficulties in cross functional analysis. 11--Phase 1 Missions, Activities and Outputs Each unit develops a complete description of their unit in terms of its missions, activities and outputs. Typically, a unit will have several missions, each mission will have half a dozen activities and each activity will have several outputs. A unit can easily have a hundred outputs. The costs associated with each output are gotten by allocating the unit's budget to each output. PC software, supplied by McKinsey was used to do the allocation and to then roll up the outputs to assign a cost to each activity and each mission. Even with the software, this is a labor-intensive task. An example of a mission, an activity and an output is given at the bottom of the chart. 12--Missions, Activities and Outputs (MAOs) -Illustration This is an example of a portion of a MAO listing. We can see that the unit's cost for each mission, activity and output is given. For us, at Hunter, this was very valuable information since it provided a cost accounting viewpoint rather than a fund accounting one. An analysis, using fund accounting, must deal with a unit's costs being spread over several funds using cost categories that have little relationship to what is going on in the unit. Using MAOs, we can actually state the cost of individual activities. This now puts us in a position to assess the costs and benefits of the ideas that will be generated in Phase 2. One very important result of Phase 1, which many people at Hunter still don't believe, is that the VP for Administration actually controls only about 25% of the budget. Prior to doing this analysis most people thought that the figure was between 40 and 50%. This was due primarily to the confusion caused by fund accounting. 13--Phase 2--Summary By the time Phase 2 got started, the project was 8 months old for some of us and 4 months old for all of the participants. So people were a little cranky when they found that they were to learn new software and take more training. Nevertheless they were asked to generate ideas that would save 40% of their unit's costs. The doughnut in the chart shows the cycle that each unit went through several times. After several cycles and much negotiation with the Project Leader and the VP for Administration, each unit produced many ideas and classified them as go, no-go, controversy and further study. Hundreds of ideas were produced and these were discussed with the Steering Committee. 14--Expense Reduction Idea Generation Tree McKinsey recommended this tree as a source of ideas for reaching the 40% goal. It is interesting to note that the iterations tended to start with improving efficiency--the lower part of the tree and moved in later cycles to the upper part of the tree which is the more modern approach. 16--Form 2B Idea Evaluation This is the form--one for each idea--that was reviewed with the Steering Committee. Although you can't read the details of the form, the general content is what is important. This form which is produced by the Phase 2 software contains a description of the idea, the benefits, adverse consequences, implementation considerations, comments by all of the players and, at the bottom, the expected unit savings as well as other unit savings. There's also some bookkeeping columns to prevent double counting of savings. On the right middle of the form are the start-up costs and the payback period in one block. And in another block, on the right, each of the players gives a risk assessment and the status of the idea (go, no- go, controversy, further study). I think that one would have to agree that this is a very complete and concise presentation of an idea. 17--The Twenty-one Most Costly Activities What are some of the results of doing Phases 1 and 2? First, the cost accounting approach of Phase 1. This chart shows the 21 most costly activities and gives the FTEs used and the total cost. These 21 activities account for about 50% of the Administrative Services budget. We have similar lists of the most costly activities for each unit. This kind of information is an excellent management tool and an excellent start for an idea generation session. For example, do we really need five people to maintain temperature control? Are there really 11 people in Custodial Services working on improving the quality and effectiveness of the unit? 18--Examples of Ideas Not Involving Information Technology What about the ideas generated in Phase 2? This chart gives some example of ideas that don't involve Information Technology and are broader in scope and controversial. The asterisks indicate which ones have been adopted. Those that were not adopted are either very controversial or have political overtones that go beyond Hunter. 19--Examples of Ideas Involving Information Technology On this chart almost all of the ideas have asterisks. Clearly, this type of idea was more readily accepted. The key operational principle here was that the units were willing to negotiate a contract. They were willing to save dollars if they actually got something in return that made their life easier. Usually the easiest things to give them was technology or permission to change the service. Notice how often the word "eliminate" appears. It's worth mentioning that when these ideas were presented to focus groups consisting mainly of Deans and Chairs, their response ranged from "these ideas are obvious" to disinterest and even anger. To those who felt the ideas were obvious, our President directed the question of why no one had suggested them before. The disinterest and anger, I attribute to first, our not involving more Deans and Chairs in the Task Force and second, to a general lack of interest on the part of the Faculty in Administration's problems. And that's not completely unreasonable! Why should be they be interested in those kind of problems? 20--Phase 3 This is the decision making phase where all members of the project team present the ideas to the Steering Committee. The major point here is that each Idea Evaluation (chart 16) is presented to the Steering Committee and they decide on its disposition--go, no-go, controversy or further study. Presentations of technology are to be avoided. Since each unit had many ideas to present, the best approach was to give the Steering Committee an overview of the more obvious go and no-go decisions and let them concentrate on big ticket items and on those ideas classified as controversy or requiring further study. This process highlighted the need for more staff training in planning and presentation skills. 21--Phase 4 By the time we got to Phase 4, everyone was about a year into this project and very tired of it. Remotivation was needed at this point and it had to be done at the highest level. An action plan was made for each idea. This was a one page simple document that said what was going to be done, what were the prerequisites to getting it done, who was responsible and how much would be saved. In essence a negotiated contract. A trap that the Information Technology people have to be wary of is that they may be so happy about having a meaningful conversation with users that they go ahead without the contract. The stage we're at today is the beginning of Phase 5 -implementation of these action plans. Let's look at some of the expected results. 22a--Schedule of Captured Savings This chart shows the savings that we expect to capture for all of Administrative Services. The vertical scale is millions of dollars. The annual savings for the five years from fiscal '92 to fiscal '96 are shown as the right- most five bars. In fiscal '92, there were $95,000 saved, in the current fiscal year, $1,600,000 is being saved and in fiscal '96, there is to be $2,500,000 saved. The cumulative savings captured over the five years are expected to be $8,000,000 which is 47% of the fiscal '91 administrative services budget (left bar on the chart). The start-up costs are the three bars centered on the number 5 in the chart and they are $400,000 in fiscal '92, $250,000 in fiscal '93 and $40,000 in fiscal '94. The bars marked 2 and 3 indicate that the maximum annual potential savings are about $2,900,000. The bar marked 4 indicates that there is a potential savings of about $1,000,000 from units outside of administrative services. This last amount has been extremely difficult to capture. 23--Comparison of Potential Annual Savings to Captured Annual Savings and to Start-up Costs This chart shows a quadruple set of bars for each unit. The vertical scale is thousands of dollars. The first bar is potential annual savings, the next two are start-up costs for fiscal years '92 and '93, and the fourth bar is the annual captured savings. Thirteen of the fifteen units are projecting that they will capture almost all of the potential savings. Only four out of the fifteen have start-up costs that are significant with respect to the captured savings. However, if we consider the total for all units, the cumulative start-up costs are only 8% of the cumulative savings. Even if the start-up costs are 50% higher and the savings are 30% lower, the numbers still look very good. 24--Potential and Captured Savings This chart shows the potential and captured savings, as a percent of total expenses, for each unit and for the total of all units. While the total potential savings was a little more than 15% and the captured was 13.4%, there were several units that did much better. One unit actually achieved the 40% stretch target and four units reached targets above 20%. Unit G, which was very resistant to the whole project, nevertheless reached a target of 17.5%. Maybe the 40% stretch is not so crazy. 25--Summing-Up This chart sums up where Hunter is at now. Cost containment can work and it's a big help in setting priorities for Information Technology but it takes a great deal of effort and dedication. Whether we will reap all of the projected benefits remains to be seen and maybe we can examine that at next year's CAUSE convention. Last, who are the alligators that we have to train to drain the swamp? 26- The Computer Alligator The alligators, of course, are everyone in Administrative Services. "We have met the enemy and they are us." The faculty and the students are not the alligators who are nipping at our ears. What they want is low costs, high quality, great service, no problems and continuous improvement. This means that they behave like customers. Our problem is to train ourselves to give them what they want and to make use of technology to accomplish that end.