CIOs must develop a strategic cost optimization discipline within IT to maximize business value and minimize spend.
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Deliver IT Strategic Cost Optimization Through Smart Spending
Maximize technology’s impact on the business with smarter spending
CIOs who establish a common language and a structured approach to cost management within IT and with business partners are more successful at building a proactive, programmatic and strategic cost optimization discipline that delivers greater value from IT. This research offers best practices for CIOs to:
- Cut/reduce spend by eliminating waste or redundancy
- Optimize performance by improving efficiency and productivity
- Create value by aligning spending to drive critical business outcomes
IT strategic cost optimization moves IT spending from reactive to proactive
To maximize business impact, CIOs must engage in smart spending by continuously looking for ways to rationalize spend, optimize unproductive assets and reinvest in high-performing technologies.
- Embrace smart spending
- Continuously reduce spend
- Optimize existing spend
- Fund new capabilities
Establish strategic cost optimization as a discipline ingrained in IT
IT strategic cost optimization focuses on putting longer-term business outcomes at the center of all financial decisions. Instead of cutting costs during recessionary times and spending generously during growth periods, a “smart” spending approach emphasizes sustainable financial decision making driven by business value.
IT cost optimization through smart spending starts by taking three sequential steps:
Step 1: Establish why smart spending matters.
Bad habits in spending are created in good times, when IT organizations put few restrictions on spending. This leads to a lack of cost awareness in the IT organization.
IT cost optimization requires IT to develop new spending behaviors and remove the old ones. This requires a sense of purpose — a “why.” To cultivate that purpose, CIOs must raise awareness about the importance of smart spending. For example:
Share examples of habits that reflect a lack of smart spending, such as unnecessary complexity in solutions, oversized service levels (24/7) demanded by other departments or business units, “ego spending” from IT or other departments, etc.
Share cases of companies that simultaneously optimized their costs and invested in increasing the IT capabilities to yield superior business value.
Ask team members to consider the business impact of reducing a certain IT cost category by 30% or increasing it by 30%.
Articulate a simple and understandable “why statement'’ about the importance of IT cost optimization.
Step 2: Identify and operationalize IT spending behaviors.
To affect change in spending, IT employees must adopt new mindsets and behaviors that help them transition from their current way of thinking to a new smart spending approach. To do so, identify the new required behaviors, habits and ways of working, as well as current behaviors that should be stopped.
Next, operationalize the behaviors to embed them into your team members’ daily work. Ask each team member to pick two of the new desired behaviors to commit to acquiring immediately, an ongoing initiative with which to test these behaviors and ideas about how to perform that behavior. This individual commitment will make the new spending habits tangible.
Step 3: Reinforce the IT smart spending behaviors.
Gather people together to talk about difficulties and successes. Recognize progress publicly. In that time, look for knowledge gaps to fill. For IT teams to make smart spending decisions, they need both financial information and the skills and knowledge to understand, interpret and apply it.
Also consider setting rituals to reinforce behaviors. Rituals are frequent and repeated actions, the objective of which is to reinforce the new cultural traits. An example is a monthly meeting with IT staff to share enterprise and IT financial information that is relevant and easy to understand and that directly relates to IT activities.
Set a positive context for change. IT employees should approach smart spending decisions as a journey. To help reassure the team, CIOs should highlight not only successes but also failures the team can learn from
IT cost optimization requires continuous cutting of spend that does not deliver
CIOs often undertake cost cutting as a reaction or a mandate in tough economic times. The smart spending approach instead embraces strategic cost optimization and rationalization of IT spending. Constant change means there are always investments that can be reviewed, rationalized and even cut from a technology budget.
Engaging in continuous and disciplined IT cost reductions is associated with greater financial maturity, according to the Gartner IT Score for CIOs Assessment. It shows that 77% of mature IT organizations continuously initiate IT spend reduction ideas and actions across the enterprise, compared to only 18% of nonmature organizations.
CIOs can seek spend reductions in the following ways:
Proactively and programmatically review and cut spend that does not have a demonstrable impact on business outcomes. For example, look for outdated or duplicative monitoring and management tools.
Eliminate or reduce spend before it is committed by contract. This allows funds to be reinvested in projects that drive increased business value.
Rationalize all new spend against business priorities. Renegotiate to improve terms to allow for greater flexibility.
Renegotiate with vendors and suppliers before spend is committed by contract.
Shift spend toward areas of higher value and greater return
Beyond reducing spending on underperforming assets, IT cost optimization also requires CIOs and IT leaders to reallocate resources to IT initiatives with potentially higher impact on business value, for example by improving productivity for both IT and the business. The key idea here is to be smarter about spending before we commit resources.
To do so, CIOs should identify functional or business areas that have cost variances above vertical industry averages and look for differentiated spend approaches for each. A seasonal business unit consuming significantly more capacity during peak periods, for example, may be able to reallocate or cut capacity during its off-season. In contrast, a business unit with relatively higher business performance, such as a luxury line of business, may justify higher spending on customer experience technology and seek other sources of optimization.
With IT cost optimization, CIOs continuously reprioritize resource utilization to improve how current assets contribute to IT operations and business outcomes. There are a number of possible ways to do this, such as:
Improve cost efficiency: Help IT teams do what they currently do better using fewer resources, so that more spend can go to differentiating activities.
Increase productivity: Use existing resources to do more higher value work — for example, by automating workflows.
Shift spend: Free up funds and resources to put more emphasis on areas that bring higher returns or impact — for example, by shifting spending from reactive monitoring to proactive process automation and governance capabilities.
Invest in new capabilities that deliver business value
Top-performing CIOs extend their cost optimization efforts to invest resources in areas with high potential to drive business outcomes and thus optimize the business value of IT. This requires CIOs and business leaders to work in close collaboration to identify and prioritize new capabilities aligned with strategic priorities as follows:
Align to value: CIOs must lead efforts to align spending with priority business outcomes. Success in this effort requires an understanding of the needs and desired outcomes of IT stakeholders. To gain this understanding, IT leaders must partner with stakeholders to define what they value.
Plan and prioritize: Prioritize initiatives based on their predicted impact on the business mission. Work with business stakeholders to set these priorities, and build and validate a business case.
Execute and measure: Work with the business leadership to formally document and validate the technology investment plan, communicate changes and evaluate value contribution against clear measures of success.
Iterate and innovate: Evaluate progress, reassess stakeholder needs and adapt to changing requirements. Listen and react to customer needs, and be agile and flexible.
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