KEY POINTS TO REMEMBER | Cost Reduction Strategies

Business applications:
  • Look at cost reduction holistically, considering the overall impact to the business.
  • Impact revenue and top-line growth; innovation is better than cutting costs.
  • Make sure the technology supports your strategy and has a valid business purpose.
  • Have an eye on the future and consider long-term structural and strategic changes that will result in lower overall total cost of ownership.
  • Divide large programs into smaller and more manageable projects.
Technical infrastructure:
  • Change the game by using new technologies to reduce costs.
  • Know the impact of business changes and understand the IT impact.
  • Delay costs if you can, providing you do not cause adverse strategic ramifications.
  • Increase risk levels to match the company risk profile.
  • Consider IT investments to improve the efficiency and effectiveness in IT itself.
  • Simplify and standardize to minimize the diversity of technologies supported.
  • Pay only for what you use.
  • Consider green initiatives for cost reduction.
IT processes:
  • Focus on what is important to the business through governance and prioritization.
  • Increase the minimum ROI requirements to ensure projects are worthwhile. Audit proposed savings to verify that you have achieved the projected benefits and cost savings.
  • Look at the total cost of ownership to consider up-front costs as well as on-going ones.
  • Cut the appropriate costs by focusing on nondiscretionary and hidden IT costs.
  • Identify what you are able to eliminate.
  • Leverage IT financing, procurement, and contractual aspects to maximize assets and negotiate better deals.
  • Ensure that definitions are clear and policies and procedures are supportive of the cost reduction efforts.
  • Plan ahead and have a contingency plan.
IT organization:
  • Manage and control IT to ensure cost effectiveness.
  • Reduce hidden costs so that you can manage, leverage, and reduce total IT costs.
  • Consider alternative delivery models and strategies.
  • Reduce service levels to match rather than exceed business needs.
  • Implement a culture of cost awareness that starts at the top.

IT ORGANIZATION | Cost Reduction Strategies

Manage and Control IT

As technology has gotten easier to use, and employees in every department have become more adept at using technology, IT solutions have seeped into all corners of the organization. Although this is often a good thing, it can also be more challenging to institute reductions if IT and technology investments and activities occur throughout the organization. In many companies, IT is compartmentalized into business units so that they are more responsive to business unit needs. During times of economic pressure, it is good to look at how IT is organized and managed. Verify that IT is organized in a cost effective manner for the business. Although centralizing IT functions often reduces costs, the key is to manage and control all areas of IT costs. This can be done by organizing centrally or organizing in a distributed fashion by business units (or a hybrid of the two), but manage the organization and costs instead of becoming complacent.

Reduce Hidden IT Costs

Many organizations have hidden IT costs, or IT functions conducted within a business area. The business generates and increases hidden IT costs over the years particularly if IT is not meeting the business needs. These costs are often for pet projects, nonstandard software, hardware, or tools for the business. Users often have an emotional attachment to the solution they have devised. The hidden IT costs are in the business units' budgets and are not visible in the IT budget. Although it is politically difficult, IT must identify, discuss, and reduce hidden IT costs without interfering with the business benefits they have generated. IT must work with the business to absorb these tools into the standard environment and the IT budget in order to manage, leverage, and reduce costs. If you are going to assume control of what the business has done for itself, make sure the result is a perceived improvement on the part of your users. Otherwise, you will only get to do this once. If it is perceived that your efforts are not successful, it will become politically impossible to do it again in the future.
Hidden IT costs can also be resources (or entire support organizations), which are located in the business units but actually perform IT-related tasks almost 100 percent of the time. Examples include business analysts that spend their time communicating with IT or individuals that write reports for the business unit. Due to their expertise, often other business units pull in these individuals. As a result, these analysts do not support their home group 100 percent. Review the situation to determine if you are able to reduce overall costs by leveraging these individuals across the organization by consolidating and absorbing the resources into the IT organization. If a valid business reason exists to have IT resources located in the business units, recognize and accurately count them as IT expenses and manage and control them cost effectively.

Consider Alternate Delivery Models

There continue to be new ways to deliver IT services, such as outsourcing, insourcing, off-shoring, cloud computing, SaaS, business process outsourcing (BPO), and platform-as-a-service (PaaS), which provides the entire computing platform. Subsequent chapters will discuss all these options in detail. The key is to have a strategy open to new ways of delivering services. As new options become available, continually review existing traditional delivery mechanisms. You need to consider other options; do not assume that the best way is always the way that you did it in the past. Many of these changes have emotional connotations that impact resource levels, but you need to review and analyze each of them objectively. Review the costs and impact to services against the business goals to decide if any of these options are right for you. For example, using CRM as a SaaS model would save the cost of servers, software, infrastructure, management labor, facilities, etc. However, review options cautiously as you may need some of these items for other applications and reducing one application may not result in any decrease at all. There also may be switching costs and other associated costs to consider with the SaaS model.
Selective outsourcing

"We did not do wholesale outsourcing, but did selective outsourcing. We went through a thorough analysis to determine what should be outsourced, similar to how the business analyzed outsourcing. We made decisions using a four-part matrix based on whether the work provided a competitive advantage or not, and whether we were good at it or not. Outsourcing gave us flexibility and leverage to ramp up or down."
—Gail Farnsley
Purdue University
(former Cummins CIO)

Small- and medium-sized businesses continue to look more closely at managed service providers and SaaS because the upfront costs are lower than building your own and the monthly fixed costs are easier to include in budgets. Similarly cloud computing is attractive because it is also subscription-based with relatively low upfront (development) costs. Off site backup and archiving services using the web are becoming popular uses of cloud computing as companies cut back on costly hardware upgrades, maintenance, and software updates while still addressing their backup needs. Even managed print services, or managed phone systems, are a form of outsourcing that companies use to reduce costs.
Leverage outsourcers

"Many organizations think they are special or unique. That stops you from leveraging the capabilities an outsourcer provides. Identify what you need to be good at internally and then leverage someone else's core competencies to complete the picture. You can use outsourcing to change the cost structure—when it comes down to it, we're not all unique."
—Malcolm McRoberts
Deluxe Corporation

Reduce Service Levels

Whether a company is outsourcing or insourcing, look at the possibility of reducing service levels to meet budget cuts. For example, if you are able to get 90 percent of the service for less cost, it is worth considering. Service providers, hosting partners, and maintenance providers typically have a variety of support designations such as titanium, gold, silver, bronze, etc. Understand exactly what services you get at each level and the business impact of changing to lower service levels. Consider grouping equipment or software into multiple levels for support. For example, customer-facing services and products need a very high level of maintenance and service, but you could support a noncritical back-office application at a significantly lower level.
Investigate the impact of reducing either agreed upon or implied service levels. Would there be cost savings, staff reductions, or reduction in underlying vendor support agreements if you would resolve help desk incidents in four hours rather than one hour? Focus on the business impact. Are you able to categorize specific noncritical problems in order to reduce responsiveness while maintaining a higher priority on critical business problems? Look at your disaster recovery times to see if you are able to reduce costs by compromising on the recovery time parameters. You often find that you have many areas of IT designed for service levels, reliability, and performance that are more than the business requires. This is because IT assumed the maximum service level that was required and did not offer alternatives or costs. Discuss service levels and present facts, costs, and usage statistics so the business can assist in making informed decisions. Providing a variety of options facilitates open dialog within the business, which is preferable to an atmosphere where the business feels they have no control over IT and no options.
You may have implemented past projects with excess capacity due to unknown usage. Analyze the implemented systems to see if you are able to make any capacity reductions leading to cost savings. Discuss and analyze alternative cost models with different service levels. For example, a company has a very expensive staffing model with support organization staff available on a 24/7 basis and with enough backup to respond immediately to provide a five-9 service level agreement (99.999 percent). The closer a company can get to 24/7 at 99.999 percent (or more) availability, the higher the investment will cost. Examples of costs for a high-availability environment include redundancy, end-of-life replacement, extensive disaster recovery and business continuity plans, network analysis tools, sophisticated security tools, backup technology, and stringent asset management. If the business requires only 11 hours, five days a week to cover the east and west coast working hours and is able to tolerate a one-hour response time, IT would be able to reduce staffing and some other costs.
Culture of cost reduction

"Our company culture is very accustomed to cost reduction. We look at licensing and ask the hard questions to determine what we need on an ongoing basis. Where we have stability, we assess options including consolidation and outsourcing."
—Daniel Heschke

Implement a Culture of Cost Awareness

Effective and sustainable cost management versus one-time cost-cutting efforts requires leadership from the top of the organization as well as a supportive culture. Entire books are written on how to instill a continuous-improvement and cost-conscious culture as consistency and focus are critical to achieve sustainable cost management. A continuous-improvement culture implies that room for improvement exists; you must continuously look for improvements and be mindful of complacency. Whether it is reducing costs on executives' trips or purchasing pens, you must have a continual cost focus. The executive management team must be personal role models for conservative cost management. Cost management is not just the job of the CFO or CIO; it is part of everyone's job.
If you want all members of the organization (not just the CFO or CIO) to strive for cost-cutting opportunities, you have to set and communicate goals with your team. They will find opportunities for savings in hundreds of little ways not listed here (e.g., stop ordering lunches for meetings). Once you create an enterprise-wide cost-cutting strategy, then live and breathe it. Communicate the budget and celebrate the savings.
Have clear accountability for cost reductions. When identifying a particular cost reduction, assign an individual to execute the reduction and ensure that you actually realize the savings. Make sure performance measurements support the cost reduction effort rather than conflict with it and have timely and visible feedback loops.