The Cost Reduction Project

Cost Reduction

The business may set IT's cost reduction goals, but IT should also consider proactively identifying the need for budget cuts rather than waiting to be asked by the business. Whether it is business-driven or an IT-driven cost reduction, understand and clarify the urgency, depth, and magnitude of the necessary cuts. Obtain a common understanding of the measures of success. Clearly understanding the targets will help determine the best type of cuts to make. If required cuts are not specific, but rather a more general need to improve efficiencies and reduce overall costs, your actions are often general improvements in fiscal responsibility that take time rather than specific cuts that produce results by a given deadline.

Depending on the goals, the magnitudes of reductions that will be necessary are drastically different. Do not make assumptions on the goals. Needing a 5 percent cut is drastically different from needing a 20 percent cut. Deeper cuts signify the company may be in dire financial duress and it will require a serious need for quick action.

Timing of Reduction

The timing of the cost reduction goal is also important to understand. Achieving a 5 percent cost reduction within this quarter or month requires different actions than having to achieve a 5 percent reduction by the end of the year. Some actions will require time to implement and realize benefits. Identify the short-term (0 to 3 months), medium-term (4 to 10 months), and long-term goals (11 months or longer). For example, you may need a 5 percent reduction immediately and an additional 10 percent reduction by the end of the year. For the short-term goals, you will need to look for low-hanging fruit and stopgap measures. More structural changes will be required to meet long-term goals.

Short-term needs for cost reduction signify an urgent requirement for action. You will need to identify cost reduction actions quickly with limited planning to meet short-term needs. If cost reduction needs are short-term, minimize the information gathering and planning steps identified below and pick low-hanging fruit under short-term actions. After completing immediate cuts, you are able to return for more complete planning and information gathering phases for strategic and sustainable budget cuts.

Reduction Impact

Clarify what type of budget cuts are necessary, and identify particular areas targeted for the reduction. For example, identify if the budget cuts need to be operational expenses or capital items. Understand if the budget cuts must apply for company-wide IT support or IT services for a specific division or line of business. Identify if you will reduce costs in the area of staff as this is a major component of the IT budget. If desired cuts are broad and deep, you will probably need to affect the services provided and potentially reduce personnel.

Constraints

Make sure you clarify and understand any constraints in meeting the necessary budget cuts. For example, some company cultures do not support personnel layoffs unless it is a last resort. In addition, union rules may affect the ability to execute layoffs. Identify if any projects that need to proceed (even with budget cuts) are sacred cows or off limits to reductions.

Business Goals

Review the changes in the business goals, priorities, and projects as they have an impact on the IT projects and expenses. Look across all areas of IT and align the cost reduction strategy with the business strategy and priorities. Use the governance process and work with the IT steering committee to help in the cost reduction effort. Ensure that you align actions with the business strategies. The cost reduction goals in the business may also affect some IT projects and initiatives. For example, the business may defer a previous business goal to add a new product line in order to meet general cost reduction requirements. This is a great time to work with the IT steering committee and governance process to re-prioritize all IT efforts based on the new business priorities and budget constraints.

Communicate Goals

Clearly document the cost reduction goals as shown in Figure 1. Announce and communicate the goals and intent. Be honest and direct. Enlist the help of everyone in IT, your vendors, the governance structure, and the business to help achieve the IT budget cuts. You will be amazed how quickly you are able to identify cost reduction opportunities by asking everyone involved in IT for suggestions. If you get the buy-in from the entire IT group to meet the cost reduction goals, you are able to be significantly more effective than if you try to meet the goals by yourself. If the IT organization knows the goals, and understands that the last resort is personnel cuts, it is amazing how resourceful the group can be. It is even helpful to ask vendors and suppliers for their ideas in meeting cost reduction goals. They know the realities of today's economy, and the strong partners will start developing solutions to meet your needs.

Top Tip 1: Ask for input from everyone

"Don't underestimate the power of the people in the trenches. Ask them for ideas! Stand on a mountain and communicate what you are trying to do. Tell them to let you know if they see something dumb. We were flooded with suggestions. For example, one employee identified that we spent $70K/year in 411 calls."

—Brad Smuland
Merrill Corporation

 

Figure 1: Cost reduction goals sample

Mergers and Acquisitions

In the situation of a merger or acquisition, the focus often turns to that of cost reduction in eliminating duplication or overlap and achieving synergies between companies. Although cost reduction is important in these situations, the primary focus should be on integrating systems and processes while minimizing risk, operational disruption, and adverse impact to the customer or business. Oftentimes, in the planning phases of mergers or acquisitions, management can be zealous about the cost reduction opportunities but neglect to adequately plan for the costs of integration before being able to realize the reductions. Particularly in IT with large systems and infrastructure, the costs and time to integrate can be huge. Therefore, although the cost reduction process and tactics apply in the case of mergers and acquisitions, view it within the overall context and effort of merging companies and operations. Rather than an initial focus on cost reduction, it is far more important to minimize the risk of exposure, customer defection, employee defection, and operational errors. A cost reduction effort actually may be more appropriate as a follow-up wave of integration efforts. Once stabilized, standardization and consolidation can reap huge benefits in mergers and acquisitions.

Top Tip 2: Invite all team members

"Invite all team members to help you find cost reductions and be part of the solution. They know more about what can be cut than you do, as they are in it day-to-day. Bring them into the process and build trust."

—Peter Bellavance
Tastefully Simple