Due to the uncertainty of the current economic environment, organizations often face the challenge of realizing immediate IT cost savings. When faced with this challenge, CIOs need to be thoughtful and approach cost cutting in the least damaging way to the short-term and long-term health of the business.
There are 10 rules in rapid IT cost reduction:
Target immediate impact — Determine what costs will be impacted immediately. It helps to think in terms of in-year impacts. Eliminate, reduce, or suspend items that will impact in a number of months rather than once a year. Examples include expenses that are incurred and paid on a monthly or quarterly basis instead of annually.
Reduce, don’t freeze — The goal here isn’t to freeze costs, but to actually reduce them. Only focus on the costs that can truly be reduced or even eliminated, not costs that will be frozen for the current period and then reappear later on.
Cash is king — Target items that will have a real cash impact on the profit and loss statement. Don’t focus time and effort on non-cash accounting treatments like a depreciation- or amortization-reduction impact. Savings in SaaS or IaaS costs have a real cash impact, as opposed to reducing on-premises software licenses or owned assets like hardware.
Target unspent and uncommitted expenses — To accumulate savings rapidly, look for unspent or uncommitted expenses. Evaluating contracts and commitments for renegotiation/termination clauses is an effective way to achieve this.
Be holistic and address total opex and capex costs — Typically, operating expenditures (opex) are the easiest to impact, but capital expenditures (capex) can also be reduced, especially before payments/purchases have commenced. Based on Gartner’s IT Key Metrics Data, 25% of the average IT budget is spent on capital which means it’s important to ensure that the complete range of IT spend is considered and addressed when looking for rapid reductions.
Plan to do it once — It’s important to cut deep enough the first time so your organization won’t need to revisit these choices. If you have to come back and make more cuts it can create a cycle of uncertainty and a loss in productivity.
Sunk costs are irrelevant — It’s commonly said that “sunk costs are irrelevant,” indicating that current or future spend should be considered without relation to past spending. From a rapid-reduction standpoint this is true, but consideration should be made to the cost-benefit or value of stopping such payments. In some cases, the saving is less than the benefit that can and will be delivered. These can be the hardest to evaluate, but a blind rule of cutting all project spend can be dangerous.
Address discretionary and nondiscretionary cost — Discretionary spending, such as new “change the business” projects or additional capability of services/products, can often present themselves as the option that is the easiest to cut. However, there are opportunities to reduce usage, service levels, and consumption levels of nondiscretionary expenses that are used to run the business.
Tackle both variable and fixed costs — Fixed costs are expenses that remain constant regardless of activity or volume while variable costs change depending on activity or volume. For fixed costs, focus on elimination. For variable costs, the focus can be on both reduction and elimination.
Inspect accounts — Define the cost base, both the profit and loss, and the balance sheet. Work with your IT finance or finance partner to obtain a solid view of the expense level detail, such as expense accounts, and the key balance sheet accounts. Use this view to identify specific cash reductions in opex and capex costs, which will immediately have an impact on reported financials.
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When looking to reduce IT dollars rapidly, CIOs and IT leaders need to be thoughtful and approach cost cutting in the least damaging way to the short-term and long-term health of the business. Proven Optics can help you manage your budgeting process, drive strategic decision-making capabilities, and make better business decisions. To learn more about our new Technology Business Management (TBM) solutions powered by the ServiceNow platform, visit our website today at www.provenoptics.com.