Short-term cost-cutting measures helped companies survive an ever changing business landscape through 2020, but those quick fixes could lead to downfall in 2021 if IT leaders fail to strategically navigate future investments.
As IT budgets bounce back from pandemic cuts, strategic budget management is necessary to transform from cost-cutting measures to value creation, said Chris Ganly, senior director analyst at Gartner, during a Gartner IT Symposium/Xpo Americas session Monday.
Across industries, companies experience a 7.3% decrease in IT spend change from the previous year, according to Gartner analysis. Looking ahead to 2021, spending is expected to increase 4.3%, but businesses will rely on cost cuts to realize the benefits of additional cash flow.
"This means that there's a heightened need for organizations around their cost management. Structured and strategic cost management is going to become even more important to organizations," Ganly said.
Recognizing every business faces unique needs, Ganly provided IT departments with a 10-step guide to building a 2021 budget in the wake of the COVID-19 pandemic.
1. Urgency drives quick cost-cutting measures
There's little point in trying to reduce a cost if the benefits won't be received until the following year, Ganly said. By immediately targeting the investments that can mark quick cost-savings for the company, the impact will be seen in upcoming months rather than stretched over time.
2. Eliminate costs, don't just freeze them
Rather than eliminating them, frozen costs appear further down the line in an organization's yearly budget, according to Ganly. Reducing use and renegotiating existing rates can ensure that final costs are truly reduced rather than merely shifted.
"The point here is that you're trying to reduce your overall expenditure. You're trying to free up the ability to do other things. You're trying to find things that can truly be reduced, or can be truly eliminated in the organization," said Ganly.
3. Target immediate cash impact
Focusing on cash investment will have immediate impact on the profit and loss statement, rather bringing attention to already owned or paid assets, Ganly said.
"Beyond that, some organizations in this environment have moved a step further in looking to sell existing assets, bring in the cash for those and then lease them back," Ganly said.
Opportunities exist at every company to manage how prioritizing the cash can accommodate business needs, and focusing on depreciation and amortization hinders immediate flow.
4. Plan carefully and do it once
Budget cuts are hard enough the first time around — don't stretch it out over several rounds. Especially when it comes to personnel changes, several rounds of cuts can create an unproductive and destructive cycle of uncertainty that hurt the bottom line, Ganly said.
5. Take a holistic view of the cost base
Understanding the complete cost base by working with financial departments provides a full view into what cost cutting measures will be most productive. Exploring and dissecting full IT spends through methods such as benchmarking will give a better view of where organizations can make the most effective cuts, Ganly said.
6. Cut unspent and uncommitted expenses
Recovering payments is a last ditch effort to cut costs, and is often difficult to maneuver with vendors. Instead, stop spend before it's incurred, Ganly said. Identify all uncommitted money and evaluate contracts for renegotiation.
"Target those unspent, all those uncommitted things at an early stage before they hit home," Ganly said.
7. Include capital, not just operational costs
When looking to cut costs, it's a common mistake to focus solely on operational expenditures. Addressing capital alongside the operational expenses can help with reduction before purchases are committed even if it takes more time to plan. Plus, capital reductions can lead to operational savings, Ganly said.
8. Stop dwelling on sunk costs
Keep looking ahead at cost savings instead of behind at bad spending, Ganly said. Taking the time to assess whether there's greater benefit in continuing rather than stopping will be more beneficial to companies than worrying about completing projects in motion.
9. Address both discretionary and nondiscretionary spend
While sunk costs should be avoided, not all projects can and should be stopped. Cutting discretionary spending is often the easiest way out. Reducing usage, service levels, and consumption levels of non-discretionary spending can have a greater impact, Ganly said.
"Look to use less, pay less. Look to the service levels, what can you do within the organization to achieve a better outcome," said Ganly.
10. Tackle variable and fixed costs
By simultaneously addressing the variable and fixed budgets, companies capture a more well-rounded view of where cuts can be made. IT management should focus on eliminating and reducing variable costs as they change with activity or volume, but fixed costs should mostly be solved through elimination, Ganly said.
"Chase where the larger elements are, chase where the easier elements are, but follow the money and put your effort into those," Ganly said.
Budget cuts also rely on strategic planning that is well communicated throughout the team along the way. Understanding the consequences of costs and how to manage possible downfall are keys to guiding success.
While doing as much as the deadline permits, planning and measuring success will help determine the best approach to budget cuts, according to Ganly.