Before You Cut Costs – Understand Them
The global pandemic and resulting economic contraction are likely to have an impact on your IT budget. As revenue expectations change, budgets are adjusted accordingly. While some businesses have seen increased revenues, most are facing challenges of falling sales and uncertain near-term prospects. In either case, the budget may be scrutinized for a reduction or an increase.
Let’s look at the most likely scenario of a mandated cost reduction to get IT spend in alignment with revenue realities. Often, the first and last steps of IT cost reduction are (a) look at the top-line budget, then (b) direct the CIO to cut IT cost by XX%. This is often implemented either by cutting across the board – the “haircut” method – or by selectively cutting services and projects based on their vulnerability or popularity.
This approach is short-sighted and often backfires for three reasons:
- The IT budget does not reflect IT cost that is permeated into business processes, employee productivity, and technology implemented outside of IT. These factors can more than double the formal IT budget. These costs generally poorly accounted for, often poorly managed and typically more effective cost optimization candidates.
- Arbitrary operational cost-cutting often increases the total cost of enterprise IT. When costs are cut in one budget silo, costs often increase elsewhere. The classic example of this is when help desk services are reduced, technical support will go underground and while it makes the budget balance, enterprise costs actually increase, and productivity decreases.
- Projects in progress can create significant budget line items, and often incur future technical debt. Project rationalization, based on complete financial analysis, can yield savings by postponing or eliminating some projects or increase the opportunity costs of delaying the implementation.
The only way to fully understand the dynamics of IT cost is to create a holistic view of IT cost over enterprise boundaries over time. This is the definition of Total Cost of Ownership (TCO) and Total Cost of Services (TCS). This tool can be used to test various cost optimization scenarios and then assess whether those costs and benefits are actually realized after implementation. Given today’s ITFM capabilities, building a useful analytical tool should be simple and low-cost compared to the effects of blind and broad cost-cutting.
Bottom line: When you squeeze the balloon at one end, it will inevitably get larger at the other end – unless you actually reduce the amount of air in the balloon.
Full disclosure: The author is the Managing Director of the International Institute of IT Economics (IIIE). The IIIE helps IT management understand TCO and TCS and builds analytical models for that purpose.