ANALYZE | Cost Reduction Project

Slice and Dice the Costs

Although it is important to have transparency and visibility into IT costs on a regular basis on the budgeting process, it is even more important to have that visibility when beginning budget cuts. Analyze and look at the IT costs in a number of ways, such as:
  • Costs by business area. Make sure you obtain costs by application and costs by business area or business process to identify areas that are not in alignment with business value. Look at your costs by service or capability provided. See if you are able to eliminate or target for reduction within a particular service or capability offering. Look at business processes that are costly and could benefit from business process re-engineering.
  • Keeping the lights on versus adding value. Many organizations spend 70 to 80 percent of their budget maintaining systems or keeping the lights on. Typically, companies spend only 20 to 30 percent on projects that add value to the business. Companies that have implemented best practices drive to spend 40 to 50 percent on projects. Review your costs to see how much money you spend on maintaining systems, and target that area for potential cuts and efficiencies.
  • Fixed versus variable costs. Look at the amount of fixed costs you have versus variable costs. Particularly in turbulent business times, it is helpful to have more costs that are variable and scalable with the business. Shift costs from fixed to variable in a number of different ways, such as using some consultants rather than all employees, using software-as-a-service (SaaS) for some applications rather than having everything in-house, or using hosting services you pay for based on volume.
    Top Tip :Prioritize based on criticality
    "Start by understanding the application portfolio and prioritize based on the criticality of the application and functionality provided to the business. Based on this, ensure you are spending the time and money on the critical applications."
    —Trent Buness
    3 Wire
  • Project cost. Review the estimated total costs by project. Align each project with the business priorities. Ensure that the estimated total project cost has not exceeded estimates.

Cost Drivers

Understand the detailed costs and the key cost drivers. Analyze the budget by areas of the business or business services. For example, as you look at infrastructure costs, perhaps a key driver is the number of employees. As the company hires an additional employee, your desktop software costs increase as do disk space, network bandwidth, support calls to the help desk, etc. A key driver for some of your application costs could be company revenue. As revenue increases, perhaps hosting costs or SaaS costs increase, transaction volume increases, etc. Other potential drivers might be service level, business mix, product portfolio, number of sales channels, number of sales representatives, number of acquisitions, number of products, and complexity of products. As these drivers decrease, it is important to determine if you can decrease costs. As the drivers increase, it is important to review how you might be able to reduce or leverage costs. Of course, not all costs have drivers as there is a fair amount of fixed costs. However, the more costs you can tie to drivers the more this will help reduction analysis and communication to the business.

Reduction Enablers

Examine the key enablers that help you achieve each of the cost reduction goals to obtain the desired results. Enablers are tools that you can use to reduce costs. For example, one company had implemented a document management and workflow system for one part of the organization but had not used the tool in IT.
Top Tip : Cost drivers
"It is critical to understand the principle cost drivers behind a service provision—volume, unit cost, and service level. Understand what you can control, influence and only worry about that. Focus on the first two. Institutionalize with repeatable processes to run IT as a machine. Look at the processes, metrics, and controls—leading indications not just lagging results. Implement general management principles and lean philosophies."
—Malcolm McRoberts
Deluxe Corporation
They identified cost savings by using the document management and workflow tool in IT. Another company had begun implementing Information Technology Infrastructure Library (ITIL) but just within one process of IT. They identified ITIL as a key enabler to reduce costs in additional IT processes. Another company identified the web as an enabler to help users solve IT issues through self-service methods, thus reducing help desk costs. Even simple vehicles can be enablers. For example, one company reduced password resets to one-third of the volume by changing the time frame for password changes from 30 to 90 days.


Another aspect of analyzing costs is benchmarking. However, be careful when benchmarking IT costs. The key point to remember when comparing costs is that it is not how much money is spent, but how wisely the money is spent. Although benchmarking is interesting, do not use it by itself to dictate cost reduction actions as it is very difficult to make sure you are comparing apples to apples. To the extent they do not line up, benchmarks could create pressure to achieve savings that are neither possible nor desirable as discussed below in the precautions. Skip benchmarking if the cost reduction goals are short-term and require quick action.
Common IT costs to benchmark include:
  • IT spending as a percent of revenue.
  • Operational spending percent of IT budget.
  • IT staff as a percent of total employees.
  • Average IT staff growth.
  • Rate of IT staff turnover.
  • Employees supported per IT employee.
  • IT cost per employee.
  • IT spending per employee.
  • Spending by maintenance versus projects.
  • Total IT budget.
  • IT budget increase or decrease.
  • IT expenses by category, including desktop, client devices, software, network hardware, communications, etc.
  • IT staff time allocation by help desk, desktop services, network, project management, business analysis, application maintenance, application development, database administration, data center operations, and so on.
  • IT staffing mix.
  • Help desk staff per PCs.
  • Cost per help desk call.
  • FTEs compared to servers or PCs.
Although benchmark statistics are very powerful to supplement a thorough qualitative analysis, be very careful when comparing benchmark metrics, as you can come to some potentially incorrect conclusions by looking at the numbers without context. Benchmark statistics tell a piece of the story, but do not tell the entire story. The following are examples of a few precautions:
  • Rather than comparing to companies in general, be sure to compare to companies that are of a similar size are in a similar industry. Both of these factors make a tremendous difference to the benchmark numbers and conclusions.
  • Be sure you consider the total IT costs and know what is in the benchmark numbers. For example, determine if depreciation and amortization are included in both numbers as that makes a substantial difference.
  • Consider hidden IT costs. Your IT costs could be lower than the industry, but you have substantial IT costs hidden in user operational budgets. If you include all the hidden costs, it tells a completely different story.
  • At initial glance, it appears that it is good to spend less than the industry, but this could also mean that you are not investing in architecture for the future and could be at a competitive disadvantage.
  • Depending on where and how you spend money makes more of a difference than how much money is spent.