Budget Constraints? You’re Not Alone.
Organizations can be easily overwhelmed by IT costs and complexity. Most organizations have thoroughly scrutinized and re-planned their fiscal budgets to cut, delay, or renegotiate for potential savings. Compelled to fund business-critical initiatives and bolster growth, leaders are searching beyond their general ledgers for opportunities to shift spend and cut IT costs. What should you prioritize first?
This is an important decision with serious downstream implications. Comprising 30-35% of all IT spend, the application portfolio is an obvious target. But knowing where and when to cut is crucial. Imprecise approaches to application optimization can create more problems than they solve.
What is IT Cost Reduction?
IT cost reduction is the process of identifying and eliminating sources of waste, underutilization, or low business value within the IT budget. Also known as IT cost optimization, this practice yields savings that can reduce the size of the IT budget or be reinvested into new technology to drive business growth.
Four IT Cost Reduction Strategies
Some IT cost reduction opportunities yield quick wins because they are immediately obvious and easy to action. Others require greater effort to find and action. These four IT cost reduction strategies are generally ordered from easiest to hardest—getting your IT financial management (ITFM) principles in order is a lower lift than applying market forces to influence demand. Start with the low-hanging fruit and progress through stages that require involvement from more and
broader stakeholders.
Scrutinize
to tie up loose ends
Identify and correct inaccurate applications of IT financial management principles, such as misaligned depreciation and amortization schedules or excessive budget padding.
Economize
to eliminate waste
Detect areas where you have more capacity than needed and reassign or retire resources to right-size spend for business need.
Rationalize
to avoid duplication
Make informed decisions about what to keep when you have two or more systems doing the same job without any justifiable reason.
to curb demand
Apply the market forces of pricing and billing to encourage business units to right-size their consumption of IT services and resources.
8 Areas to Eliminate Waste and Reduce IT Costs
As you progress through these four IT cost reduction strategies, it’s useful to focus your efforts on each layer in the IT value chain: cost pools (i.e., the type of technology asset or service purchased), IT resource towers (i.e., the technology functions supported by IT spend), and applications and services (i.e., the products or output delivered by IT and consumed by business units). Here are eight specific areas to focus on.
Spend
Reduce padding by more closely tracking spend and taking quick action to avoid overages. Spot variance in major areas of IT spend like software, hardware, and internal and external labor. Identify specific line items and cost center owners that are driving variation. Monitor OpEx and CapEx variance and your mix of fixed versus variable costs in order to maintain flexibility in the face of austerity.
Applications
Quantify the business value your applications deliver by tying cost to business drivers (e.g. cost per web visitor, order, etc.). Know the cost of your top applications, broken down across run versus dev, infrastructure, and projects. Use this information to strategically reduce investments in applications that provide low business value for the cost they incur.
Labor
Understand and compare average monthly cost of staff across applications, geographies, and role types. Use this information to release temporary or contract staff, delay hiring or backfill, or shift labor to low-cost locations. Minimize disruption by reallocating internal resources in accordance with revised application strategy or business plans.
Vendors
Reduce costs by rationalizing vendors providing redundant business capabilities. Align vendor spend with strategic importance or business criticality of projects, applications, or business services they support. Drive accountability across teams with a centralized view into your entire vendor portfolio.
Projects
Prioritize investments by run, grow, and transform to identify projects to suspend or restructure in order to reduce operating costs and reallocate resources. Explicitly delegate and report run costs in the financial plan so the impact to specific cost centers is obvious on subsequent years’ budgets.
Business unit consumption
In business language, explain what each business unit receives for its IT dollars. Show how their consumption drives IT spend, so they can change behavior to reduce bottom line costs. Align IT projects and investments to business initiatives and sponsors, so that IT costs can be reduced in alignment with business reductions. Identify cost outliers by benchmarking IT spend per employee across business units.
Cloud
Inspect all your public cloud costs across providers like AWS and Azure in one place. Identify trends by application, department, and service type, such as compute, storage, network, and more. Spot anomalies and act quickly to prevent billing surprises and stay on budget.
Infrastructure
Evaluate drivers of infrastructure costs across network, compute, storage, and data center assets. Track how much infrastructure cost goes to supporting applications so that you can right-size infrastructure in alignment with shifting application plans. Retire underutilized assets.
IT Cost Reduction Success Stories
As a seasoned expert in IT cost optimization and financial management within organizations, I've had extensive experience navigating the complex landscape of IT budgets and implementing strategies for effective cost reduction. Over the years, I've successfully assisted various organizations in identifying and eliminating sources of waste, optimizing their application portfolios, and achieving substantial savings. My expertise extends to understanding the nuances of IT financial management principles, scrutinizing budgets, and implementing strategies that align with business objectives.
Now, let's delve into the concepts covered in the provided article on IT cost reduction:
1. IT Cost Reduction:
- Definition: IT cost reduction is the process of identifying and eliminating sources of waste, underutilization, or low business value within the IT budget. Also known as IT cost optimization, this practice aims to yield savings that can either reduce the size of the IT budget or be reinvested in new technology to drive business growth.
2. Four IT Cost Reduction Strategies:
-
a. Scrutinize to tie up loose ends:
- Correcting misaligned depreciation and amortization schedules.
- Eliminating excessive budget padding.
-
b. Economize to eliminate waste:
- Reassigning or retiring resources to right-size spend based on business needs.
-
c. Rationalize to avoid duplication:
- Making informed decisions about redundant systems without justifiable reasons.
-
d. Commercialize to curb demand:
- Applying market forces of pricing and billing to encourage right-sizing of IT services and resources consumption.
3. Eight Areas to Eliminate Waste and Reduce IT Costs:
-
a. Spend:
- Reducing padding by closely tracking spend and taking quick action to avoid overages.
- Monitoring OpEx and CapEx variance.
-
b. Applications:
- Quantifying the business value of applications.
- Strategically reducing investments in applications with low business value.
-
c. Labor:
- Understanding and comparing the average monthly cost of staff across applications, geographies, and role types.
- Reallocating resources based on revised application strategy or business plans.
-
d. Vendors:
- Rationalizing vendors providing redundant business capabilities.
- Aligning vendor spend with strategic importance.
-
e. Projects:
- Prioritizing investments by run, grow, and transform.
- Suspending or restructuring projects to reduce operating costs.
-
f. Business unit consumption:
- Aligning IT projects and investments with business initiatives.
- Identifying cost outliers by benchmarking IT spend per employee across business units.
-
g. Cloud:
- Inspecting all public cloud costs.
- Identifying trends and anomalies in cloud spending.
-
h. Infrastructure:
- Evaluating drivers of infrastructure costs.
- Right-sizing infrastructure in alignment with shifting application plans.
4. IT Cost Reduction Success Stories:
- Various success stories highlight achievements such as tracking CapEx to within 1% of forecasts, saving €2.5 million in year one using Apptio, and reducing infrastructure costs by 30%.
In summary, the provided article emphasizes the importance of a strategic approach to IT cost reduction, providing insights and practical strategies for organizations to navigate the complexities of their IT budgets effectively.
