IT cost reduction – a practical approach

Some years ago I was responsible as program manager for a large company-wide IT cost reduction program in an international high-tech conglomerate. At that time a decision was made by the Managing Board to bring down the IT cost within 3 years from 5% of annual revenue to 4% of annual revenue, which translated into a huge IT cost reduction target of 800 million Euro per annum in total.

Even though in the current era of globalization, digitalization, and automation the focus on IT cost cutting doesn’t seem to be that strong any more, it remains a constant challenge for each and every IT responsible to manage the company’s budget clever and responsibly.

Subsequent I would like to give some practical advice based on my personal experience, how IT cost reduction can be performed in an effective, adequate and sustainable way.

Fortunately in course of the past years an increasing number of business responsibles did acknowledge, that IT and IT Security are not only cost factors, but can be as well huge levers for productivity and competitiveness of the entire company. Having said this, it should be clear that adequate and effective IT cost cutting can never be performed on the basis of a lawn mower approach. You have to differentiate and you have to go into specifics and details, if you want to achieve reasonable and sustainable results.

Even though clear and measurable targets are always beneficial, the popular key performance indicator „IT cost in percent of revenue“ is one of the worst you can choose (at least on company level), since it does not reflect at all the specific requirements of various branches or business types. 1% IT cost in percent of revenue might be a reasonable magnitude for the food processing industry, but certainly not for the financial industry or for healthcare institutions. Besides the question „how big are my IT cost?“ the question „what do I get for my IT cost?“ should have at least the same level of attention and interest by the executive company management.

In the IT cost reduction program, I was in charge of, we used the following practical approach, which led to a sustainable 10% target overachievement at the end of the 3 year project duration:

1. Systematically and comprehensively define what should be considered, reported and controlled as IT cost and what not – to ensure that you compare apples with apples. Note: Experience shows that you continuously need to adjust and update the definition of IT cost in course of your IT cost reduction program to ensure comparability of figures between company units, as well as with historical IT cost reporting figures. When you define the IT cost framework for your company, it is (for obvious reasons) useful to apply the structure utilized by professional IT benchmarking companies in the market.
2. Utilize benchmarking figures, but on an adequate level. You need to slice the elephant into pieces and ensure e.g. that the IT cost for the management and support processes of your company are treated separately from the IT cost for the core processes of your company or that the IT cost of your service and maintenance business are treated separately from the IT cost of your factories. Companies like the Information Services Group (ISG) – based on the expertise of the former IT benchmarking specialist Compass – are able to provide you with reliable IT cost benchmarks for specific branches and business types.
3. Compare the IT cost of your business units between each other. This approach is particularly reasonable and beneficial in case of business units which have comparable business types and/or processes, e.g. regional companies or subsidiaries with focus on sales and service. Ideally by doing so, you will be able to identify IT management best practices in some of your business units, which can be leveraged by other business units on a wider scale. This consequently will foster a closer communication and cooperation between your business units.
4. Consider IT cost reduction efforts which already have been executed in the past by your business units. In every organization you will usually find rather „fat cats“ and rather „thin cats“ and one important key to success is a fair evaluation of the starting position (baseline) of each business unit under consideration of the historical IT cost reduction potentials which have already been developed in the past two to three years. It is important not to penalize those IT managers who already did their homework in the past by treating them the same as those IT managers who didn’t adequately do this.
5. Always consider the business impact of your IT (cost). Again the reminder that IT and IT Security both can be huge levers for productivity and competitiveness of your business units or even of the entire company. So you better accurately evaluate the impact of cost cutting measures on the various business units before you fix and apply these measures.
6. Involve the responsible IT managers into the design and planning of the IT cost reduction program: There is nothing worse than corporate programs pushed through the organization without alignment or involvement of the people, who are mainly affected by the programs. Comprehensively explain the rationale behind the program.
7. Ensure adequate executive management attention for the program not only at the beginning, but as well in course of the IT cost reduction program. Report the progress of the program and significant deviations on a regular basis (e.g. every 3 to 6 months depending on the magnitude of the program) to the executive management.
8. Treat the responsible IT managers fair and equal: Ideally you are able to utilize the IT cost reduction program for building up a closer cooperation between the IT managers of the various business units, e.g. in form of best-practice-sharing. Don’t allow exeptions from basic principles everybody is expected to comply with. The effectiveness of the argument „all others accept and execute it“ is not to be underestimated. However this requires fair and equal treatment of all parties involved.
9. Differentiate between IT investments (usually deployed in form of IT projects or IT programs) and ongoing IT cost (usually e.g. operation and maintenance cost for IT systems). Basically this should be a no brainer, however as former head of Corporate IT Audit I have seen too many examples, where IT managers tried to achieve their IT cost reduction targets just by stopping large IT project or programs – which is probably the least efficient, reasonable and sustainable way of IT cost reduction.
10. Focus on the big IT budget portions and prioritize them with regard to magnitude and time horizon of cost reductions to be developed. License cost are e.g. certainly an attractive object for cost reduction measures (even more, since decreasing them only hurts the IT supplier and not your own organization), however since the license cost usually only represent approx. 5% of your overall IT cost, you should not expect deciding contributions to the overall success of your IT cost reduction program resulting from renegotiation of software licenses.
11. Challenge the creativity of the responsible IT managers and don’t force them into a rigid and inflexible scheme. If they come up with alternative ideas or approaches for IT cost reductions, which do not contradict to the basic principles of your company or the IT cost reduction program, give them the leeway to go their own way.
12. Formalize the IT cost reduction target e.g. in form of „Business Target Agreements (BTA)“, let the responsible IT managers sign them and make clear, that a target achievement without surprises and excuses in due course is a matter of honour, acceptance and trust/reliability.
13. Follow-up the Business Target Agreements on a regular basis, e.g. every three months based on a mutually accepted IT cost reduction reporting, which is to be provided out of one central data source to ensure consistency of the figures.
14. Capture changes in the baseline (e.g. by retroactively identified hidden IT cost or by additional tasks to be managed by the IT organisation) or in the organisational setup of the company in „cost bridges“ in order to keep the development of the IT cost comparable. Scaling effects (i.e. existing IT infrastructure provides IT services for a larger number of users without additional investments) should be captured in the same way.
15. Reward the responsible IT managers for successful target achievement: If the agreed targets are achieved or even overachied, the responsible IT managers deserve an official acknowledgement and reward for this success. If possible and reasonable, set an incentive at the beginning of the program.

You may argue that the described approach is no rocket science and I would fully agree to this point of view. However it is a proven and practical approach which will help you to achieve significant, reasonable and sustainable results.

I have summarized additional comments provided by Christian Zalto and Achim Linger on my present blog including concrete suggestions for IT cost reduction measures in the following graphic (many thanks to both colleagues for their creative support):

P.S.: Most of the described steps are not limited to IT cost reduction and can be applied to any kind of cost reduction program.

P.P.S.: Another blog with „Major criteria for the selection of IT solutions“ is provided here: https://kubraconsult.blog/2017/01/18/major-criteria-for-selection-of-it-solutions/