Editor’s note: The following is a guest post from David McIntire, director, ADM Solution and Offering Development, Capgemini Americas; and Pieter Pottie, senior director, head of CIO advisory, Capgemini Invent.
Transformation is key to remain competitive in the face of rapidly changing customer demand, but executing those projects often means optimizing costs across IT and the business.
However, traditional cost cutting approaches are not designed to find this balance, because they typically target transformative investments for cuts, prioritizing current operations. This short-term cost efficiency focus doesn’t lead to sustained savings, as the environment stagnates and requires greater investment later on.
Nowadays, CIOs are expected to do more with less. While digital transformation and customer experience efforts remain a top priority for these executives, efficiency improvements and cost reductions increase in focus as economic uncertainty grows.
Higher borrowing costs, skills shortages, increasing cloud pricing and disruptions in the supply chain are also leading to reconsideration of new projects and reevaluation of ROI for ongoing and proposed projects.
To counteract this, CIOs should establish a culture of proactive IT cost optimization across their business to strengthen their position with their C-suite and stakeholders; leveraging cost reduction initiatives across different time horizons to act as a funding mechanism for the broader transformational initiatives.
For an organization to achieve sustained, long-term results, cost reduction efforts should be woven into the business structure itself.
Leaders should consider implementing a top-down approach to their cost reduction program to help drive significant, sustainable cost optimization while increasing agility, speed and customer centricity.
Here are three steps enterprises should take when they’re staring down at budget constraints across their business:
1. Understand what has already been done to reduce costs:
Identify current and past reduction programs and analyze realized cost savings.
2. Look for significant opportunities for additional savings:
Connect running initiatives to a cost optimization framework and identify blank spots and underexploited potentials where incremental value may be uncovered.
3. Determine how to capture savings:
Create an action plan and establish a framework to continuously track costs.
In place of the traditional approach of targeting discretionary or transformational spending for cuts, the top-down approach can be leveraged to identify how ongoing operational spend can be reduced.
Examples of areas of operational spend that can be targeted to drive value include:
- FinOps and software license spend: Over time, spending on cloud instances and software licenses can proliferate beyond what is needed by the organization. Analyzing and understanding the current spend versus the requirements can drive rapid cost savings.
- Industrialization and automation: Expanding the use of automation in infrastructure and application management can reduce support costs and improve customer experience. Maturing and industrializing support processes can also increase the efficiency of service delivery and free up resources for transformational initiatives.
- Rightshoring strategy: Ensuring that the delivery organization is balancing the efficiencies of lower cost delivery locations for low-criticality work with local resources can reduce the organization’s overall total cost of ownership without impacting delivery.
A focus on IT cost optimization enables companies to target their IT spending at the areas with highest value.
By leveraging a structured cost optimization program that identifies value across various time horizons, an organization will not only free up resources to self-fund the next generation of transformation but also increase buy-in through the rapid demonstration of value.
But the value of this approach isn’t limited to dollars and cents.
Cost optimization programs that simplify and modernize both the IT organization and technical landscape also increase the ability of the organization to respond to challenges and opportunities.
As the past several years have demonstrated, challenges can take unexpected forms and require a variety of responses. A simplified environment and agile organization is better positioned regardless of the form the next challenge or opportunity takes.
The common pitfalls
Achieving IT cost optimization is not always easy. Along with several organizational complexities and constraints, businesses may find it difficult to optimize and improve cost performance.
Below are some common hurdles that companies might face as they seek to optimize IT costs:
- Cost cutting instead of cost optimization: Traditional cost take-out initiatives follow a bottom-up approach and mostly fight cost symptoms, generating quick but unsustainable impacts. Instead, seek to transform IT spending structure sustainably to enable the digital agenda.
- Unclear alignment between IT and the business: There is usually a lack of clarity around IT spend with the overall objectives and priorities of the business.
- A siloed approach: When teams operate individually, often, there is duplication of effort and inefficient use of resources.
- A lack of accurate data: If there’s inaccessible, obsolete or unavailable data, this can impact cost optimization efforts.
As enterprises scale and add on more expenses, IT cost optimization should quickly become an integral part of an effective IT business strategy. By implementing the right tools and measures, organizations can ensure they’ll gain momentum, build a culture of continuous improvement and innovation and be competitive in the marketplace.