Costs & Benefits
Reducing IT operating costs - with sense and reason
by David Warren
In times of crisis, seemingly simple solutions to cut IT costs are very popular. But they also come at a high price, for example in IT operations. Three critical pitfalls must be avoided to help CIOs and IT managers prioritise spending more effectively and sustainably.
Since ancient times, bloodletting has been one of the best ways to heal the sick. When it became scientifically clear that bloodletting had little benefit, it took more than two centuries for the practice to die out. Even the Austrian emperor Leopold II is said to have been bled four times in 24 hours - the day before he died in 1792.
Even today, when times are tough, business pursues a strategy similar to bloodletting - saving money at all costs. This includes the IT organisation. Given the many economic challenges, such as inflation, disruption and subdued demand, this is hardly surprising, especially as the cost and price of IT spending has risen sharply. Strategic software supplier as well as SaaS vendors, chip manufacturers and cloud providers, have also turned the pricing screw. These developments will continue in the future because, unlike inflation, IT costs are not going to fall again.
IT cost predictions for 2024
In our annual IT Agenda survey, we also asked IT managers about expected cost increases in 2024. Applications are leading the way, with respondents expecting an increase of 8.15 per cent. The cost of external consultants is expected to rise by 6.97 per cent in 2024. Workplace, network, infrastructure, IT staff salaries and freelancers' daily rates are forecast to increase by between five and six per cent.
Vendor lock-in with IT suppliers
However, it is dangerous to try to cut IT costs quickly and across the board in order to meet requirements. Rigorous cost-cutting may look good on the next balance sheet, but in the medium term it can be a threat to survival. After all, a large proportion of IT expenditure is spent on running the systems. If you open up the wrong vein here, you run the risk of damaging the company's competitiveness - because the share of value added by IT in the central processes of many organisations is now very high. There are three serious mistakes:
- If you make cuts across the board beyond the core of your IT operations, you will limit the scope for future optimisation. This is particularly the case when there are strategic dependencies on technology partners and high barriers to change. In such cases, spontaneous cuts in IT spending tend to affect areas that are perceived as easy to do without. However, IT projects that can make a company fit for the future are increasingly coming to the hit list.
- When it comes to optimisation efforts, consultants are quick to point out the seemingly obvious levers in IT operations that can be used to reduce costs. However, once the easy options have been addressed, repeating the same approach leaves little potential for further improvement. Inevitably, when new savings targets are set, the focus turns to the substance - and the risks in IT operations increase.
- In addition, IT tends to look inwards and focus on its value chains when it comes to cost-cutting measures. Customers (stakeholders) are left behind, as they are usually - undiplomatically - confronted with decisions where to save. In addition to the deteriorating relationship of IT and business, there is a risk that stakeholders will be affected by IT decisions with serious implications for their business outcome.
Aligning IT costs and business strategy
To meet these challenges, an integrated approach is needed that compares an IT benchmark analysis (Where am I?) with the business / stakeholder strategy (Where do I want to go?). The following cost assessment can focus on areas that promise effective savings with minimal side effects. Results of the analysis are translated into a list of actions, including an implementation roadmap, which is reported to all stakeholders and agreed. In this way, IT costs can be optimised in line with the strategic direction of the business.
Find and exploit savings potential
For example, best-in-class organisations are able to increase the proportion of IT operational improvements to over 15 per cent and to reduce the core to under 70 per cent. Simulations reveal where the greatest savings can be made and how other companies have done it. It is not just a question of cutting supplier prices across the board, but also of aligning them with the real needs of your own customers. On the other hand, those who try to force decisions during the crisis and create room for manoeuvre by making quick cuts usually achieve the opposite of what was originally intended.
