Cut the Appropriate Costs | IT PROCESSES

A company's IT spending is comprised of:

  • Nondiscretionary spending. This is the operational cost of keeping the lights on. These costs result from past decisions on hardware and software that support business functions implemented over the past decade or more. They include maintenance costs for hardware or software, or the labor costs to keep existing systems functional.
  • Discretionary spending. Typically, this includes projects and improvements to the existing environment. These are projects requested by the business to add business value, to reduce business costs, or to support the business strategy. They are also efforts that improve efficiencies and reduce future operational costs.
  • Hidden costs. These are not typically in the IT budget but in the business unit's budget. If a business unit is not able to get its needs satisfied by IT, the problem may be solved by obtaining software and having individuals within the department support the software. A common example is an engineering department that is running ProE or some CAD/CAM application that requires higher-powered PCs and dedicated servers supported by the engineering department.
Unfortunately, even the cost of just maintaining often increases. As an infrastructure ages, keeping it running takes more resources and money. Compliance with new regulations and keeping up with increasing security demands also increases costs.
Over time, reduce nondiscretionary operational costs so you are able to spend more time on discretionary project spending that adds value to the business. Many organizations spend approximately 70 to 80 percent of their budget (including resources) on operational nondiscretionary costs while upper-tier organizations that have implemented best practices strive to have a lower-maintenance environment in which they can devote 40 to 50 percent on projects. It is important to identify and track all nondiscretionary spending. Conduct an evaluation of all these costs to determine where you are able to realize potential cost efficiencies. Tracking this over time will help determine if cost savings initiatives are effective.
IT has more pressure than ever to deliver business value while reducing costs. As shown in Figure 1, IT spending on nondiscretionary maintenance costs and discretionary new projects are both facing pressure, creating the IT cost squeeze. Discretionary spending on each new project must deliver increased business value. IT is faced with an increasing backlog of projects to reduce business costs, improve end-user productivity, provide a competitive advantage, enable new technology, and help the business meet competitive pressures. Maintenance, operational costs, and nondiscretionary spending face cost pressure as well since IT must meet increasing requirements relative to regulations, security, performance, availability, reliability, and an increasing speed of technology obsolescence.

Figure 1: IT cost squeeze
As nondiscretionary spending is not usually optional, many companies when faced with budget constraints cut discretionary spending as it is easier and quicker. However, the discretionary spending is moving the organization forward and creating value. In addition, companies need to make wise choices on discretionary spending because it becomes nondiscretionary spending in the future.
Hidden IT costs can be a significant amount of money and a substantial percent of spending, but these often go unnoticed, unmanaged, and even unmeasured. Oftentimes, as IT cuts discretionary spending, hidden costs increase as the users find solutions to their own problems. The company must strive to make decisions to reduce nondiscretionary spending and hidden IT costs over time as shown in Figure 2 and Figure 3.

Figure 2: Unmanaged IT costs

Figure 2: Managed IT costs

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