Approaches to IT Cost Cutting
Realizing that there’s a need to cut IT spending can feel intimidating. How did we get here? What should we do? Where do we start? All are valid questions. The approaches to IT cost cutting should include both immediate tactical decisions and longer-term strategic decisions. You must look at how to do both:
Sustain the organization and eliminate the current cost threat.
Set the organization up for success over the long term.
Cost Cutting (Triage) vs Cost Optimization (Long-Term Care)
Cost cutting focuses on short-term spending reductions; cost optimization involves systematic improvements to reduce waste and increase efficiency.
Triage Phase
The first priority is to conduct a rapid analysis to identify areas where immediate actions can be taken. These actions must result in impactful, realized savings within weeks or a couple of months. The strategy is to get healthy enough to move the organization to the next phase of sustainable long-term care. Focus for the triage phase will be:
Target the Short Term by eliminating, reducing, or suspending items that will not deliver[NS1] an impact in weeks or months.
Go after Reduction by focusing on costs that can truly be reduced or eliminated. You don’t want simply to freeze costs for the current period only to have them reappear later.
Focus on Green Dollars by targeting items that will have a real cash impact rather than noncash items like depreciation or amortization.
Go Deep by using the mindset to do it once by going deep enough the first time, so that there won’t be a need to revisit costs and do it again.
Do Forensic Accounting by working with your finance partner to obtain a solid view of the expense-level detail, such as expense accounts, including expense accruals and prepayments.
Target the Unspent by understanding what payments (or commitments) can be recovered or prepayments returned, the most immediate impact will be on unspent or uncommitted payments. Evaluate contracts for renegotiation and termination clauses.
Address Discretionary and Nondiscretionary Cost by looking at not only new projects, capabilities or services but also address “run the business” expenses, such as IT infrastructure and operations, that can be cut by reducing usage or service levels.
Tackle both Variable and Fixed Costs by looking at fixed expenses that remain constant, regardless of activity or volume. The focus will be on elimination. For variable costs that change with activity or volume, The focus will be on both reduction and elimination.
Long-Term Care
The second phase is to conduct a comprehensive analysis to identify inefficiencies, then strategize, plan, and execute a single, meaningful cost-reduction initiative as part of the strategic planning process to avoid repeated, productivity-impacting cycles. Cost optimization activities should include:
1) Zero-Based Budgeting instead of basing budgets on previous years' spending, ZBB requires a justification for every line item, leading to more strategic allocation of resources.
2) Process Mapping and Lean Management to visualize and analyze workflows to identify bottlenecks and areas for improvement. Focus on maximizing value and minimizing waste within business processes.
3) ITIL Assessment utilizing the ITIL Maturity Model to evaluate the organization's IT service management (ITSM) capabilities. It provides a baseline for the organization's delivery service and identifies areas for improvement.
Cost optimization analysis and planning should focus on several key areas that include:
Hardware and Infrastructure: Modernize outdated systems, which can be more cost-effective in the long run due to better performance and efficiency. Virtualize infrastructure to reduce costs associated with physical hardware. Outdated Infrastructure is a significant drain on the IT budget. It impacts operational efficiency, typically has expensive maintenance, frequent patches, and specialized knowledge to operate.
Software and Licenses: Reduce spending on unused software and licenses by tracking application utilization and assigning them only to essential personnel. Consolidate redundant applications that perform similar functions. Review and reduce subscriptions that tend to accumulate lots of software subscriptions and services. Many are essential but some of your SaaS may be underutilized or redundant.
Vendor and Contract Management: Review and renegotiate your vendor contracts regularly — at least once a year. Take a close look at your agreements with suppliers and service providers to identify opportunities for better pricing and terms. When approaching these negotiations, consider leveraging your buying power to secure volume discounts or exploring extended payment terms to improve cash flow.
Outsourcing and Cloud Adoption: Outsource non-core IT functions to external providers to leverage specialized expertise, potentially reducing costs associated with hiring and training in-house staff. Transition to cloud-based solutions to reduce infrastructure costs, improve scalability, and enhance productivity and collaboration.
Automation: The ITIL assessment will identify areas where Implementing automation tools will help streamline repetitive tasks, reducing labor costs and the potential for human error.
Take Steps to Avoid “Wash, Rinse, Repeat” by Promoting a Cost Conscious Culture
Foster a culture that encourages team members adhering to cost optimization strategies. This involves:
Assigning budgets to department leaders, empowering them to make smart trade-offs and encouraging an ownership mindset throughout the organization.
Communicate the importance of cost optimization to all team members. Be transparent about financial goals and challenges by relaying the "why" behind cost-saving initiatives.
Using analogies and accessible language when discussing financial concepts, making them more relatable and understandable to all team members.
No need to re-invent the wheel - repurpose what you can, don't start from scratch if there are options to leverage from existing sources – “don’t fix what isn’t broken”.
By promoting a culture of financial discipline, you can harness the collective creativity and effort of your entire workforce in your cost optimization efforts.