Monitoring and Managing IT Costs

Created as a result of a spin-off from Allergan in 2002, Advanced Medical Optics’ IT division found itself adopting existing chargeback methods. Under pressure to come up with new budgets fast, the chargeback methodology has been applied to a number of different areas, or ‘pools.’ At the same time, IT has implemented a number of initiatives to monitor and, where possible, cut costs.

Advanced Medical Optics (AMO) Inc. is a relatively new company. Based in Orange County, California, we have approximately 2,100 employees worldwide, with direct sales operations in 20 countries and sales through distributors in over 60 countries across six continents. With sales in the US$500m+ range, AMO is the world’s second-largest surgical company in the markets in which it competes, the second-largest contact lens care company, and currently the world’s fastest-growing company in the sale of foldable intraocular lenses for cataracts.

Background

Within the Corporate scenario, the IT budget is by far the largest expense within the General & Administrative (G&A) function. As such, we are always extremely conscious of managing our costs and fall under a lot of scrutiny. AMO spun off from Allergan, Inc. on June 30, 2002. To accomplish the spin-off in a short period of time (less than six months), many of Allergan’s "ways" were adopted, including chargeback methodologies. It was also decided that there would not be time to build up a data center, both physically and in terms of staffing, and that the majority of IT functions would, therefore, be outsourced to a third party with an established data center. Because the spin-off was done so quickly, creating initial budgets for all of the functional areas, IT in particular, was a best-guess scenario. High-level people developed budgets based on minimal knowledge and a lot of assumptions.

These first budgets were essentially six-month budgets, to get us through the balance of 2002. Unfortunately, only three months into the process, we were tasked with creating budgets for the following calendar year (2003). We still had little real information to go on: many software contracts had not been completely settled (splitting of licenses, extra license fees, etc.), and we were getting blind-sided every time we turned around, it seemed. However, we were lucky in that all of the functional areas were in the same boat, so we weren’t pushed too hard the first year.

However, the honeymoon is now over, and in preparing the 2004 budget we have been under a lot more scrutiny in a push to lower our G&A costs in total. A difficult task, in that most of our costs are fixed, as part of the outsourcing contract (PC & User Help Desk, SAP/Application Support, Server Support, Network & Support and other Local Infrastructure Support). And as most of you know, those fixed costs can go up, but rarely come down!

Chargeback Methodology 

We are set up to charge out, completely, to all functional/regional areas of the corporation. As a result, our global visibility is high, and many areas outside of Corporate are concerned with how we manage our costs, as it directly affects their bottom line. We have a relatively simple chargeback methodology – although if you were to ask someone in the company if they shared that opinion, you’d get a different answer! We charge back in the following areas (pools):

• Global Business Pool (SAP/Other Global Applications & Support)
• Local Infrastructure Pool (PC Deskside Support/Help Desk, Local Area Network, Local Application Support)
• Local Telephone Pool (Usage, PBX/Voice Mail equipment-related costs)
• Global Wide Area Network
• Discretionary Development Projects (in-house staff, supplemented with consultants for specific expertise when necessary).

The Global Business Pool is allocated out based on the number of SAP User IDs for approximately 1/8 of the pool, and the other 7/8 of the pool is charged out based on 12 months’ prior usage (averaged) as a percentage of total usage. It is charged back at budget, so the regions do not have to deal with any variances.

The Local Infrastructure Pool is charged out to our Corporate headquarter’s functional areas only, based on the number of PCs that are attached to the LAN. It is also charged back at budget, on a monthly basis. The Local Telephone Pool is charged out based on headcount to the functional areas at our Corporate headquarters. We do not have any software in place on our PBX to be able to track usage by phone/department, so this is the best we can do. It is charged back at budget, on a monthly basis.

The Global Wide Area Network is charged back to each site based on the actual cost from the provider for the size of the pipe or connection. There is no "mark up" or overhead assigned to these costs. If there are any changes made to the size of the connection during any given period, those costs are passed on to the site making the change as they occur. It is charged back on a monthly basis.

The Discretionary Development Projects Pool is charged out based on development projects submitted by our functional/regional customers. It is billed out at a fixed dollar amount/hour for in-house personnel and at actual cost for outside consultants involved in the project. These costs are charged back based on actual time spent per project to the functional/regional area(s) on a monthly basis. Because the majority of the pools are charged back at budget, anything over/under falls through to Corporate – which is obviously concerned about costs.

Monitoring Costs 

We specifically monitor our costs by:

• reviewing of all software maintenance contracts before renewal: do we still need this support (or the same level of support)? Have we added new users? Do we have fewer users?
• reviewing of any leases coming up for expiration: do we still need the equipment? Can we consolidate? Should we extend the lease, buy-out the lease, return & acquire current equipment?
• reviewing of the outsourcers invoices on a monthly basis: are we being billed properly based on change orders issued during the prior period? Are there any penalties that need to be assessed and credited to the invoice due to service levels not being met?
• Wide Area Network costs: do we need to increase bandwidth? Are there other solutions we might be able to put in place for our smaller sites that are more cost effective?
• Remote Dial Up Usage: are the customers being placed in the proper usage plan (fixed or usage) based on actual historical data?
• when discretionary projects are submitted by the user community, can we use existing resources (SAP or another application) rather than developing something completely new, or purchasing additional software?
• reviewing "legacy" applications brought over during the spinoff to determine (a) if they are being utilized, (b) if they can be updated/replaced with some other current application, or (c) if they can be discontinued completely, eliminating support and software maintenance costs?
• getting multiple quotes when acquiring new equipment
• reviewing lease rates on a quarterly basis to ensure we’re getting competitive rates
• reviewing software licensing to verify licenses are issued to employees who use the system(s) on a regular basis, and finding alternatives for the occasional user in order to avoid purchasing additional licenses during the annual audits
• ensuring standards for computer hardware and software in order to negotiate global pricing whenever possible
• renegotiating service contracts as appropriate to gain additional discounts and/or service levels
• routinely reviewing the outsourcing costs to see if we have any opportunity to make reductions in the services being provided (based on allowances in the contract)

Centralising Global Applications Development 

We also have our Global Applications Development Team centrally located at Corporate headquarters and all requests from the various regional/functional business units come in through this team. This enables us to insure that we don’t have different regions working on similar projects and creating duplicative programs. It also allows us to share projects requested by one region with other areas to see if there is any interest and be able to utilize the same development effort to solve and/or offer additional functionality at a lower cost.

Challenges

One of our biggest challenges in managing global costs is in the voice communications arena. There is no one company that can provide service to the 20 or so countries we have a physical presence in. Some of these locations are so remote, it is extremely difficult to deal with local carriers, let alone negotiate discounts on contracts. Regardless of what and how you manage your costs, it is imperative that you establish a "trust factor" with your upper management team so they are confident that you are indeed looking out for the best interests of the corporation, and are cost-effective. Without that trust, your job will be much harder, as you will continually be justifying every move you make.

We (IT) are making a concerted effort to be more involved as early in the development/planning process as possible in order to (a) insure that we are aware of what is being discussed in the regional/ functional areas; (b) steer planning towards looking at existing resources, rather than assuming new products have to be acquired to accomplish the task; and (c) be able to provide cost estimates to assist in decision making by the functional/regional management teams.

Summary

Obviously, cost containment is a never-ending process, and we have our hands full. As a start-up company, it is critical to have all of your costs in line with industry standards to keep the shareholders confident and committed. It is not a task we take lightly – right down to having it included in the entire IT staff’s Management Business Objectives.