The Federal Government faces a situation similar to that of the private sector in the early 2000s. Many corporations experienced rapid growth in the late 1990s. Companies spent tens of millions of dollars on ERP, CRM, and other enterprise IT systems. As the below graphic illustrates, large enterprise systems grew corporate expense budgets at an unprecedented rate in the form of support, maintenance, enhancement, operations, and amortization. The late 1990’s technology and dot com busts, multiple downturns, and a recession caused industry to change their spending habits and drive cost out of their baseline. Some succeeded, many failed, and a few went bankrupt. The question is whether Federal COOs, CFOs, and CIOs will wait for OMB to levy cuts on them or whether Federal executives will act to address the systemic drivers of IT expense so they are ready to respond to the inevitable round of forthcoming budget cuts. In the words of George Bernard Shaw, “The possibilities are numerous once we decide to act and not react.” Acting now could protect agency missions and even redirect additional funds to critical needs. If CFOs and CIOs wait for the inevitable budget mandate, it will be too late to identify waste - and the only thing left to cut will be investment dollars. www.pwc.com/publicsector

1. www.pwc.com/publicsector
IT Optimization
Navigating Fiscal Austerity

2. Situation – Tight Budgets and
Tough Requirements
Federal budgets are tight and
requirements continue to grow. We are in
a period of budget reductions, especially
for agencies that have experienced
significant budget growth over the past
decade. The question is how big the
budget cuts will be and how long will
they last.
The Office of Management and Budget
(OMB) policy efforts (e.g., PortfolioStat,
TechStat) may be a “too little, too late”
strategy to get Federal agencies to look
deeper into IT expense management and
take waste out of the system. Whether
these and similar policies will achieve
meaningful cost savings or simply
result in more resources being spent on
compliance remains to be seen. Currently,
OMB projects that PortfolioStat will result
in a $2.5B savings over three years1
,
which is not a large figure considering the
Federal government predicts it will spend
over $70B on IT in fiscal year 2013.
The Federal Government faces a situation
similar to that of the private sector in
the early 2000s. Many corporations
experienced rapid growth in the late
1 PwC IT Optimization
> 1990s. Companies spent tens of millions
of dollars on ERP, CRM, and other
enterprise IT systems. As the below
graphic illustrates, large enterprise
systems grew corporate expense budgets
at an unprecedented rate in the form of
support, maintenance, enhancement,
operations, and amortization. The late
1990’s technology and dot com busts,
multiple downturns, and a recession
caused industry to change their spending
habits and drive cost out of their baseline.
Some succeeded, many failed, and a few
went bankrupt.
The question is whether Federal COOs,
CFOs, and CIOs will wait for OMB to
levy cuts on them or whether Federal
executives will act to address the systemic
drivers of IT expense so they are ready
to respond to the inevitable round of
forthcoming budget cuts. In the words of
George Bernard Shaw, “The possibilities
are numerous once we decide to act and
not react.” Acting now could protect
agency missions and even redirect
additional funds to critical needs. If CFOs
and CIOs wait for the inevitable budget
mandate, it will be too late to identify
waste - and the only thing left to cut will
be investment dollars.
1 http://www.whitehouse.gov/blog/2012/10/24/portfoliostat-saving-billions-it-spending, October 24, 2012
2 Strategic IT Portfolio Management—Governing Enterprise Transformation, Jeffrey D. Kaplan, 2005
Operating Expense Growth Drivers2

3. 2IT Optimization PwC 2
Complication – Obvious Answers
are not the Right Ones
Flattening and declining budgets threaten
mission and business effectiveness.
The easiest places to cut often offer
the greatest return on investment,
such as new investments in mission
capabilities, business optimization efforts,
consolidation, and “get well” projects.
This is because these investments are easy
to identify, reduce, and avoid; it is more
difficult to find, take out, and keep out
unnecessary spending.
Common practice is to trim down new
investments in response to budget
cuts, but this may marginalize the
organization’s return on investments by
elongating project cycle-time, deferring
time-to-results, and introducing
additional project risk. Eliminating
new investments altogether is worse
because new investments are often
designed to improve mission and business
performance. New initiatives are often
more strategic than older ones. Similarly,
systemic “get well” efforts are often
targeted because the concept of spending
to save may appear unpopular in the
face of short-term cost reduction targets.
However, these efforts affect long-term
spending and may pave the way for a
more efficient IT baseline.
Another common practice is to spread
budget reductions across programs. This
practice is popular because it is easy to
do. However, it does not address systemic
cost drivers and is often not sustainable in
the long run due to escalating operations
and maintenance costs (license fees,
inflation, volume metrics, etc.). IT
costs may appear to be flexible to the
layperson, but the vast majority of costs
for many organizations are relatively
fixed in the short term (e.g., contract
obligations, license fees, real estate,
salaried employees, deployed workforce).
Furthermore, the bulk of the IT budget
is spent on supporting, operating and
maintaining (O&M), and enhancing
the IT systems that have been deployed
over the past two or more decades. The
average O&M sustainment tail can exceed
three times a system’s installation cost.
When budgets are flat or declining, the
investment budget may decrease if O&M
increases. Hence, the value returned from
new investments may be reduced as new
capabilities are sacrificed or delayed to
accommodate increased operating cost.
If new investment is squeezed, the risks
to the mission and supporting functions
increase.
Unless management takes proactive
action to correct the trend, O&M cost
is relatively fixed in the short term. The
industrial supply base is rarely motivated
to decrease operating expense, and so
leadership must proactively take action
to reduce it. Furthermore, cutting O&M
cost often requires a change in human
behavior, which is rarely achieved
voluntarily and almost always requires
top-down guidance, leadership, and
management. Guidance sets strategy and
policy, leadership overcomes behavioral
resistance, and management persists to
make sure results are achieved.
Value Erosion3
3 Strategic IT Portfolio Management—Governing Enterprise Transformation, Jeffrey D. Kaplan, 2005
>

4. There is a direct and indirect cost
associated with each stand-alone
system, application, and technology.
Furthermore, many of these assets are
underutilized.
5. Gold Plating:
Most people do not buy the most
expensive home appliances because
mainstream ones meet their needs.
Requirements add sustainment cost
to a system. Deferring requirements
defers cost. Often, deploying a 60%
solution provides the majority of the
benefits much faster than waiting for a
100% solution.
6. Weak Standards:
Manufacturers of our personal
automobiles make suppliers develop to
their standards; doing otherwise would
be costly and impede interoperability.
Support costs inflate when
contractors offer their favorite tools,
operating systems, and development
environments. The most efficient
approach is to set standards and
require contractors to work on one
common platform.
7. Improper Analytics:
Anyone can perform analysis; few know
how to do it right.
Many organizations make poor
decisions because they lack sound
analysis; they do not know precisely
how much applications and technology
cost. Most IT professionals cannot
perform financial analysis, and most
financial analysts do not understand IT
cost drivers. Integrating the two skills
is critical to supporting investment
decisions.
8. Poor Long-Range Planning:
Have you ever seen your town tear up
the same stretch of road multiple times
because the utility companies do not
coordinate their improvements?
Uncoordinated and unplanned release
upgrades are often expensive and
inefficient. Establishing one integrated
multi-year upgrade release roadmap
can prevent wasted overhead and
expense.
The Culprits – Seeking out Cost
Drivers
While IT cost optimization can be
found in many areas, a small number of
cost drivers offer the greatest savings.
Investigating these cost drivers often
uncovers hidden costs that can be
eliminated or reduced:
1. Unaffordable Service Levels:
Most homeowners do not pay for instant
response when their air conditioner goes
out. Why do agencies pay for immediate
response when the average desktop
computer fails?
Ongoing operations and support
is costly. These costs are directly
driven by service-level requirements
(response time, hours of operation,
off-peak response, etc.). Open-ended
contract structures also add risk to the
government and typically benefit the
supplier (CP/LOE, T&M, etc.).
2. Enhancement Slush Funds:
Most homeowners would never give a
builder a large allocation and pay them
based on effort; yet, this is effectively
how most organizations manage IT
enhancements.
Enhancement budgets are often buried
in O&M and program budgets. Many
enhancements can be postponed
during periods of fiscal austerity.
Open-ended contract structures also
add risk to the buyer and typically
benefit the supplier (CP/LOE,
T&M, etc.).
3. Duplication:
Most people do not have two
dishwashers at home just because each
spouse likes a different model; why do
agencies allow similar duplication in the
IT portfolio?
There is a direct cost and indirect cost
associated with each application.
Similarly, there are costs associated
with having different contracts and
applications across multiple domains.
4. Proliferation:
We do not have a separate computer
for each application we install at home.
Why do we allow this at work?
3 PwC IT Optimization
>

5. 4IT Optimization PwC 4
Working Outside the Box
The key to achieving IT cost
optimization has little to do with
technology. In our experience, agencies
“get well” by carrying out a behavioral
change management campaign.
A get well campaign requires strong
leadership and management. Finding,
understanding, and responding to
cost drivers is not easy. A persistent,
strong leader who stays focused and
motivates the staff and a person who
pays attention to detail are integral to
this undertaking. In addition, moving
resources in an organization is difficult
to accomplish and requires authority
beyond most executives’ control. This
means that the most senior management
must be engaged in driving this from
the top. Budget reductions are rarely
achieved by consensus-based decisions.
Most get well campaigns require a
cross-functional team, including finance,
acquisitions, procurement, logistics,
human resources, as well as technical
domains such as networks, data center,
program management, engineering, and
integration. The team needs members
who both think outside the box and are
grounded in the realities of getting work
done. Those overly committed to the
current state will resist change rather
than enable it.
Few government executives have led
a team through a period of budget
reduction like the one we face because
many of them were promoted through
the ranks over the past decade when the
budget was growing. They were mostly
focused on spending and managing
an increasing budget. Many cut their
budgets by ten percent or more, but few
have experienced budget cuts of this
magnitude. Increasing attrition amongst
the most tenured government executive
only makes this situation worse.
> CIO/CFO Partnership—Good
Cop, Bad Cop
Many Chief Information Officers
(CIOs) are challenged when it comes
to cost alignment campaigns and most
CIOs have a fiduciary and a service
responsibility. On one hand, the CIO is
expected to be the caretaker of the IT
budget and installed base. On the other,
the CIO is expected to run a responsive
and agile business service, responding
to the needs of the mission and business.
This dual role places tremendous
strain on the IT function and is further
exacerbated when the business and
mission are allowed to make their own
IT investment decisions. While the CIO
can usually manage this duality, this role
conflict trickles down to other levels of
the IT function, often creating stress in
the lower ranks where individuals are
not adept at dealing with this dichotomy.
Furthermore, while some CIOs control
the IT budget, they do not handle the
demand for IT services. Rather, mission
and business units control demand for
IT systems and services, which is the
paramount driver of IT spending.
Enter the Chief Financial Officer (CFO).
An optimal working relationship ensues
when the CFO works with the Chief
Operating Officer (COO) to set fiscal
policy for IT investments. The CFO
helps to establish enterprise service
requirements aligned with budget
realities, facilitates the financial
due diligence of business cases and
acquisitions, and makes sure that a
process is in place to evaluate whether
the investment business case was
realized and the scope was maintained.
In essence, the CFO paves the way for the
IT function to solve technical problems,
provide and operate technical solutions,
and secure the enterprise.

6. • Get:
Taking cost out of the installed baseline
needs to be managed as a project. Most
organizations make several cost take-
out efforts simultaneously; initiatives
must be handled as a program with
interdependencies in schedules and
resources.
• Keep:
Managing costs is a never-ending
process. Many of today’s controls were
established during a time of increased
spending and lack sufficient insight
to manage costs during a period of
fiscal austerity. As cost drivers are
better understood, functions from the
full life cycle become more involved
in predicting costs and providing
support in investment decision making.
Sophisticated organizations not
only manage project cost, schedule,
and performance but also ongoing
sustainment costs and resources.
Planning for Success
Building and executing a get-well
campaign requires strong leadership,
savvy, and logistics. It took most
organizations over a decade to amass the
current level of annual IT expenditures,
and it is going to take a few years to
decrease it. A plan must be put into place
to scale down spending and keep it under
control for the long run.
A robust get well campaign operates along
three dimensions:
• Find:
Understanding IT cost drivers at a
level of detail to deal with them is
an ongoing process (which leads to
lessons learned and further analysis).
Uncovering costs, understanding cost
drivers, and targeting opportunities for
improvement is an ongoing process.
>
5 PwC IT Optimization
Get Well Campaign Elements

7. 6IT Optimization PwC 6
>How PwC Can Help
PwC helps senior executives define and establish campaigns to drive IT cost and
value optimization:
• Methodology:
PwC helps senior executives drive accelerated and sustained improvement by
applying proven methods. Our methods fuse technology and operational analytics
into business and management tradecraft that results in objective conclusions,
through planning, and robust execution.
• Competency:
PwC offers direct access to professionals with federal and commercial experience.
Our consultants deliver a blend of competencies necessary to solve difficult technical
and organizational problems. Competencies may include acquisition, architecture,
behavioral change management, contracting, finance, human capital, logistics,
policy, procurement and sourcing, strategy, as well as technology.
• Leadership:
PwC’s technology and business leadership is recognized by industry analysts
including IDC, Forrester, and Gartner. We offer access to tenured practitioners,
many with advanced degrees; including an integrated network of over 7,000
technology professionals embedded in PwC industry groups worldwide.
• Risk Mitigation:
PwC provides clients with an innovative, insightful, collaborative, and results
oriented engagement experience. PwC’s business model may offer clients lower
engagement risk in the form of self-managed teams, critical mass, a proven track
record, broad and deep past performance, and a learning culture.
For more information, please contact:
Jeff Kaplan
Principal
(202) 756-1711
jeff.kaplan@us.pwc.com
Simona Lovin
Director
(703) 918-1083
simona.m.lovin@us.pwc.com
Greg Dupier
Director
(703) 610-7467
gregory.m.dupier@us.pwc.com

8. © 2013 PwC. All rights reserved. “PwC” and “PwC US” refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each
member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
www.pwc.com/publicsector