The cost allocation and cost identification problem
The cost structures of automotive OEMs or manufacturing companies deviate heavily from other industries, such as banking or pharmaceuticals. Usually, a central IT department exists in the form of group IT, or centralized IT departments per product group or product line. In our experience, the central IT covers all applications, network services, etc. – down to the production line, excluding the production facilities and the production line itself.
Analyzing the cost distribution of these companies, most are production-related costs. Overhead costs, where general IT costs as well as the central IT department costs are generally included, are just a small proportion compared to production costs. Conducting a cost-efficiency program within the IT department therefore only covers the central IT costs occurring within the group IT, as there are no more ‘official’ IT costs with the company. But is this realistic?
Analyzing the existence of shadow-IT costs within the shop floor
We examine the question on the existence of a shadow IT using an automotive example:
New production lines within an automotive assembly plant consists of (but not exclusively) body shop, paint shop, assembly line, and finishing area. Each part of the factory is planned separately and constructed by suppliers specialized e.g. in paint shops, conveyor systems, or robotics. Each of the main production steps works autonomously and is connected with the rest of production through a central steering system to share production-related information. This steering system is standardized in terms of virtual and physical technology. For example, the paint shop works as an isolated application, running the paint shop equipment manufacturer’s software, same as the assembly line software solutions (screw guns, etc.). The data out of this island is then shared within the central steering system. The problem, or “supplier bias” is the emergence of massive amounts of shadow IT equipment, which is delivered, installed, and implemented with the production equipment in the isolated networks.
Taking the paint shop example, a paint shop runs:
- Its own network devices (switches etc.)
- Its own physical and virtual servers
- Its own workstation
- Its own backup-solutions
- Its own vendor-based software solutions for monitoring, control and steering
- Additional customized software solutions for reporting.
From outside, it’s a black box, as license costs, repair or maintenance fees, as well as any other IT-related costs not figuring within the official IT costs. We call this the “supplier bias,” as maintenance contracts often include services such as application programming, hardware replacement, backup services, etc., which are clearly IT-related costs but kept in the books as “paint shop maintenance.” From a controlling perspective, one gets a biased view on the cost occurring within these production areas.
Looking at the bigger picture, we can identify various isolated solution landscapes with more-or-less their own data centers, consisting of various amounts of physical and virtual servers and hundreds of autonomous applications.
To manage and run this environment in critical production facilities, each of the isolated solutions negotiated their own maintenance contracts with the OEM supplier. The contracts mainly include software license agreements, software development services, hardware maintenance, or hardware backup. We call this construct and the IT-related costs within the production “shadow IT” or “hidden IT.”
There are two ways of proofing the existence of shadow IT costs:
- The simple way: While conducting a walk-through, watch out for servers, network devices or large screens displaying the production status. In the next step, ask the responsible person who they will call in case of failure – IT or someone within the maintenance department. Then, check the cost allocation with the controlling.
- The hard way (not recommended): Analyze the maintenance contracts with the OEM suppliers and search for software and hardware solutions. Usually there exists a variety of contracts per production area, which makes this a time-consuming task.
Operational benefits through shadow IT optimization
After investigating and proofing the existence of shadow IT solutions, we recommend including shadow IT within central cost-cutting approaches. This process should be headed with support of change management, as production fears a lack of control and operational risks through cost measures. The cost responsibility should stay within the production, but the methodological support and guidance through the process must come out of the central efficiency program.
We can support our clients methodically in three ways:
- Cost exploration on shop-floor level with a structured approach
- Measure identification for savings and value optimization
- Operationalization of the program and implementation of measures.
We are doing this by implementing the Capgemini IT Cost Efficiency Framework on the shadow IT. Our Capgemini IT Cost Efficiency Framework enables our clients to get transparency on his shadow IT services. Further, we implement measures to increase the operational efficiency through fewer costs and higher operational output.
Figure 1: Capgemini Invent’s Cost Optimization Framework
Some examples of levers and measures which could be conducted within production facilities, to cut costs while achieving a consistent or improved performance of the IT support:
- Sourcing: Reduce the cost-per-part by common sourcing and increase the response time by common storage of all production IT hardware (i.e., switches).
- Partner: Centralize the sourcing for shop-floor software development and introduce standard developer rates per technology among all production areas.
- Staff: Build a capability tower for IT shop-floor maintenance, containing all software experts currently distributed among several maintenance departments.
- Infrastructure: Centralize all isolated server solutions within one production data center, implement a central backup solution.
It’s crucial for the automotive and manufacturing industry to include the shadow IT on shop-floor levels into the central efficiency program of the IT, to reach cost and operational benefit within their core business.
By bringing in our automotive and manufacturing expertise as well as our IT Cost Efficiency Framework, we help our clients:
- Uncover shadow IT costs and the cost drivers.
- Implement cost levers on shadow IT costs.
- Boost the central efficiency program through additional savings