BUSINESS APPLICATIONS | Cost Reduction Strategies

Look at Cost Reduction Holistically

Rather than a myopic approach to cost cutting by reactively reducing IT expenses, management must look at cost reduction systemically and contemplate how technology can enable the business to cut costs in an even larger sense. Although the focus of this book is on reducing IT costs, one should view this perspective in the context of the overall goals of the company. IT must work proactively with the business units to achieve cost reduction in the appropriate areas. Reducing overall organization costs may be a combination of increasing some IT costs while reducing costs in other parts of the organization.
One company wondered why their IT costs were so high, but after an objective assessment they realized it was the result of an overly complex business model that IT was supporting. As they acquired new companies, they did not change the policies and business processes of the newly acquired business unit but had IT modify the application software to support all the various ways of doing business in different divisions, locations, and geographies. Over time, the variety in the business increased IT support and maintenance costs. It can be difficult and time consuming to simplify the business processes and policies to have fewer ways of doing things, but it can be well worth the effort and can significantly reduce costs.
Instead of taking a reactive approach to reducing IT costs, management must take a strategic approach to cost reduction by reviewing the total costs and the overall impact to the business. Although IT is a significant part of a company's costs, it is also a key vehicle to enable cost reduction across an organization. IT is required to implement and maintain efficiencies throughout all areas of the business. As such, management must view IT cost reductions within the context of overall business costs. CIOs face the challenges of reducing IT costs while maintaining or increasing the value that IT provides the business.
When a company reviews its end-to-end business processes, IT is able to assist in trimming costs out of all areas of business operations. Investments in technology can lead to significant overall business savings. Although IT savings are an important goal, be sure you do not affect business cost-savings efforts during the process of reducing IT costs. The challenge is to know where the key opportunities exist.
For example, in a company focused on being a low-cost provider based on operational excellence, technology is fundamental to improve overall efficiencies and reduce costs. A chain of beauty salons cannot improve efficiencies when cutting and coloring hair, so efficiencies must come from back-office functions. However, cutting costs in IT may disable the ability for IT to help make the business leaner. Cutting the IT budget may mean that IT has to turn down requests that would improve business efficiencies because it requires IT resources

Innovation is Better than Cutting

When the economy is in a downturn, the first instinct of many organizations is to freeze projects. However, halting projects can be the riskiest option for a business, and it can have a significant negative impact on a company's long-term success.
As every CIO knows, technology projects can have an impact on bottom-line profitability but can also have a positive impact on the revenue and top-line growth of an organization. Technology enables the business to innovate with new solutions to help the business survive or even to thrive in a crisis. Simply cutting IT costs and projects can be counterproductive for an organization. For example, in a company focused on customer intimacy, technology is instrumental in top-line revenue growth and improving customer satisfaction and retention. The wrong cuts in IT can damage a company's total value proposition and competitive advantage. Every CIO knows this and, in the absence of a crisis, most business executives know it too. The challenge for a CIO is to ensure that business executives do not forget this in the face of short-term financial pressure.
Nicholas Carr claims that IT is just a commodity that cannot help a company create differentiation and compete in the market. He views IT simply as a cost center. What Mr. Carr fails to recognize is that in many cases the strategies and tactics used by operational and customer-facing departments would not be possible without technology or the analysis supported by technology. We have seen technology provide a competitive advantage for many companies to the point of helping a company become a market leader. Three obvious examples include eBay,, and Wal-Mart. It was, and continues to be, serious investments in IT that have allowed these companies to dominate industry segments in a highly competitive market.
Technology enables companies by:
  • Reducing expenses or the costs of doing business
  • Increasing margins by changing the business model and relationship between a dollar of revenue and associated costs
  • Opening new sales channels
  • Defining new customer segments, acquiring new customers, or retaining existing customers
  • Increasing cross-selling and up-selling
  • Creating new business models
  • Meeting customers' expectations and increasing customer satisfaction
  • Improving customer service
  • Delivering new products to market
  • Optimizing the supply chain
  • Increasing the speed of processes
  • Improving quality
  • Improving decision making
  • Supporting the business strategy
In the past, the main focus of IT projects was to reduce company expenses in the business. Now, most companies have automated business processes and realized much of the obvious expense reductions. IT in many companies has turned their focus to opportunities to improve customer satisfaction, service, quality, speed, revenue, and other areas identified in the previous list. The CIO can help the business to recognize the opportunities created by a financial downturn by understanding the business strategy, market conditions, and competitive forces. Many technologies help a company increase its revenue, reduce company costs, and secure a competitive advantage. IT is able to do more than weather the turbulent economic conditions; it can actually help the business to be more agile and competitive. If you are not using technology to improve overall business success, now is the time to step up that mission rather than to retreat.
The following are just a few examples of how companies have used technology for overall innovation and strengthening the business model:
  • IT-supported analysis helped automobile companies discover that the vast majority of U.S. residents interested in fishing, hunting, and boating also own a truck or SUV and typically choose a U.S. brand vehicle. As such, they are ideal for targeted marketing.
  • Direct delivery companies have found that handheld computers with route accounting software reduce the end-of-day closing process from hours to minutes. They also provide previous orders and truck inventory at the driver's fingertips which increase revenue per customer.
  • Many companies in the travel industry have used technology to increase customer satisfaction and affect their overall company performance. With technology improvements, we no longer take trips the same way we had in the past. Making reservations and getting the lowest fares with sites such as Orbitz or Travelocity are common, printing your airline boarding passes from home, checking in at kiosks and using the rental car mobile check-in when you return the car are all examples that have improved customer satisfaction and reduced total company costs.
  • A simple screen to verify accuracy in the fast food drive-through reduces errors, improves quality, and increases customer satisfaction.
  • Online Fed Ex package tracking provides improved customer satisfaction and fewer customer service calls.
  • Online assistance when ordering from retail sites such as Lands' End improves customer service and increases sales.
  • Modeling software is used by companies to predict product failures and improve product quality.
  • Frequent buyer programs and e-commerce sites with cross-selling and up-selling all impact customer buying and increase sales.
  • Web-based reservation systems, stock trading systems, or ordering of printed digital pictures are all examples of business models increased or created by technology advancements.
  • Companies use software to identify fraudulent use of credit cards and reduce costs of improper use.
  • Firms use software to take an order anywhere in the world and fulfill it anywhere in the world depending on inventory and cost of transportation.
  • Software is used to improve the speed of processes, such as orders, manufacturing, fulfillment, and the delivery process. Companies automate the transfer of information between the ordering company and suppliers.
  • Software is used to recognize revenue faster and to transact funds.
  • Software routes delivery trucks for decreased gas usage and quicker deliveries.
  • Process software communicates to the supplier the levels of available product and when additional deliveries are required.

Make Sure the Technology Supports Your Strategy

Technology is great. However, as everyone knows, improperly implemented technology can be costly and ineffective. Some people become enamored with the attraction of the latest technology without having a valid business purpose. It is the business equivalent of keeping up with the Joneses. Apple introduced the iPhone, and suddenly executives were requesting one without any real business justification. It is not questionable technology. Rather, the business function and costs are inappropriate for a specific business need.
Some companies jump to the conclusion that implementing technology solves everything. However, it might not always support the business strategy properly or cost effectively. Phone-response technology is a good example. Yes, at times phone response technology is a wonderful time-saver to get you directly to the right person who can help you. Have you ever been caught in a frustrating "press one for this, press two for that" cycle when you just wanted to talk to a human being? At times, it is impossible to get through the maze of response requests even though the company may have a customer intimacy strategy! Another personal frustration is when companies replace thinking, decision making, and logic with technology. An employee's response, "the computer will not let me do that," is frustrating for a customer. Be careful how and where you use technology. Make sure it supports the business strategy. Although CIOs are probably very well aware of this issue, they must continually remind executives who are making budget and priority decisions. Do not do stupid things with smart technology. Continually look for inappropriate uses of technology to eliminate and reduce costs. Better yet, make sure the company initially does not invest in inappropriate technology by having an effective governance process.
The organization must give employees tools that foster accountability, innovation, collaboration, and good decision making. Use technology that works for the company, not against the company. A company may have selected the wrong software, or the business needs have changed, and can spend a lot of money trying to make software work for the business when it may not be a good fit for the business from the beginning. At times it can be important to take a step back and objectively evaluate if it would be less expensive to implement new software rather than continuing to make the old software fit the new business model. For example, you would never convert your sports car to a van as your requirements changed and family grew, but rather you would purchase a new vehicle. One company initially selected software for the process manufacturing business. Over time its business model changed and it found itself in the discrete manufacturing business. They spent a considerable amount of money every year modifying the Enterprise Resource Planning (ERP) software for their needs. An objective assessment revealed that they had unsuitable software and could save a considerable amount of money and increase functionality by implementing software that was a better fit for their business model.

Have an Eye on the Long Haul

Although almost any software will work in the short run, in the long run you will see a difference in total costs, including business process inefficiencies, software changes, support, interfaces, data correction, training, and errors. IT must focus on both short-term cost reductions as well as long-term structural changes that will result in a lower total cost of ownership. Many technology improvements take significant time to implement, such as a new enterprise system that has a lower total cost of ownership. It takes time to achieve measurable and sustainable savings from some changes. One example is implementing e-commerce for customer self-service ordering in order to reduce or eliminate the clerical order-entry function. However, this will deliver savings only after customer adoption, which takes years. At times, focusing on reducing costs in the short term creates problems for the long term. Similarly, it requires an increase in costs in the short term to experience a reduction of costs in the long term. If your company is in a position in which it needs to make drastic cuts that will prove costly in the long term, ensure management understands this.
For example, one company knew they needed to invest in a new ERP system. However, due to the magnitude of the effort, the company continued to delay the investment and focused instead on short-term cost reductions. While trying to save money, the on-going maintenance and support costs continued to rise as the business grew. During this growth, the inefficient processes became even worse. Eventually, the company reached the point that the legacy applications and inefficient business processes stunted future growth. By the time the company finally invested in the new ERP system, the total costs were significantly higher than if the company had implemented it earlier. The opportunity costs from years of inefficient processes were enormous.

Implement Small, Select Projects

Divide programs and large projects into small manageable projects to realize more quickly portions of the results and cost savings. A program with a large return in five years is not helpful if you need to reduce costs this year to survive. Ensure a consistent strategic direction by designing the large-scope project but implementing it in small projects whenever possible. Place high-priority functionality into the first project to create larger cost savings earlier and to realize a quicker return on investment (ROI). Business and industry change too quickly to bet on risky, long-term returns.
Consider implementing only portions of a program rather than the entire one. Focus on projects within the program that garner the majority of the benefits by following the 80/20 rule, where 20 percent of the project realizes 80 percent of the benefits and ROI. When economic pressure is high, it is usually not a good time to launch expensive multi-year efforts. Some companies require that all projects have less than six- to nine-months' duration or that a project's ROI must be achieved in 12 months or less.

1 comment:

Anonymous said...

I know lots of smaller companies who have saved lots by allowing their IT to be managed by other companies involved with cloud computing and the like, but it seems harder for medium and larger companies to put all their trust in such technology.