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It Can Become Necessary To Reduce IT Costs But The Wrong Choices Can Hurt An Organisation’s Recovery
“In the midst of chaos, there is also opportunity” ― Sun Tzu, The Art of War
If you find yourself in a position where cutting IT costs becomes necessary to the survival or financial health of your organisation then smart decisions need to be made. Done right, a short-term IT cost reduction strategy can cut organisational slack, improve efficiency and strengthen your long-term competitive position. Done wrong, it can hurt your ability to recover quickly and strongly and impact growth for years to come.
When analysing an IT budget for potential cost savings, it’s important to carefully consider the strategic impact of various decisions. The biggest mistake CIOs and other IT managers can make when reducing IT costs is often to take the easy or obvious route of freezing or discontinuing projects that have already started. Or cutting the wage bill by laying off good employees and contractors that will later be expensive to replace. But when time is tight, that is often what happens.
Take a step back and define the consequences and risks of cutting which IT costs and communicate them to stakeholders, despite the urgency and likely short lead time. That simple tweak to your approach could prove the difference between coming out of a cash flow crisis stronger, not weaker.
How You Deal With Disruption Will Define Your Future Success
A broad body of research has highlighted time and again how organisations that invest strategically through tough markets are far more likely to emerge as winners. But while there is at least an element of reality to the truism that an organisation can’t achieve growth by making investment cuts, it certainly doesn’t tell the whole story. If cuts drive efficiencies rather than losses, they can be healthy.
The challenge for under pressure IT managers and CIOs is to find the ways to reduce IT costs that create efficiencies and cost optimisation, rather than cutting strategic investments that will drive future competitiveness.
Inefficient IT Cost Reduction – Avoid Easy Targets That Will Come Back To Haunt You Tomorrow
“The goal of all organizations should be to lean into uncertainty and come out stronger and more successful on the other side” – Gartner CIO Leadership Forum 2020
When presented with the challenge of reducing IT costs quickly, CIOs and IT managers need to consider what will have the least negative impact on the mid-to-long-term performance and by extension financial health, of their organisation.
Cutting Or Freezing Investments That Represent Sunk Costs Is Usually A Bad Call
Taking the axe to projects or services money has already been sunk into usually has little value. It can be compared to panicking and selling off an investment portfolio at the bottom of a market crash. All that is usually achieved is locking in losses that would have been reversed with enough patience. If there was and is a sensible strategic reason for those investments, there still is. Cutting costs there will only stimmy your organisation’s path to recovery and hurt growth when you are ready to accelerate again.
Instead, a structured and ongoing approach to cost optimisation is what sets outperforming organisations apart from their peers. That’s not something that should only happen when the financial pressure is on. But there’s no reason why such a moment can’t be the catalyst to initiate a new, ongoing and smarter approach to IT costs. It will help you not only come out the other end stronger but be much better placed the next time a crisis comes along.
But sometimes there is a need to make quick, short term savings to keep cash flow healthy. Ideally, you’ll be able to manage this by making cost savings that can be long term and not simply by suspending expenses. As far as possible, avoid reducing IT costs that will have to be reinstated, often at greater expense than the short-term saving, several months later.
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The Golden Rules For Strategic IT Cost Reductions For Long Term Benefit
When analysing IT costs for those which might be reduced or eliminated, frame them within these 5 key considerations.
#1 Consider If A Cost Supports Organisational Savings Or Revenues
A majority of organisations, especially those that outperform, see IT costs as a strategic investment and key to future growth and organisational health. The result of that is a clear trend towards increasing IT budgets year-on-year.
Source: SpiceWorks.com
There is, or should be, a good reason why your organisation prioritises investing in its IT budget during good times. Inward and outward-facing digital efficiency and progressive development is key to driving productivity, reducing waste and creating sustainable client/user-facing revenue generation and growth.
But during a crisis it is far from uncommon, especially in the case of public companies, for short term cost cutting to be prioritised ahead of medium to long term strategic considerations. Even to the detriment of medium to long term profitability of productivity. Sometimes department managers and executives are issued a blanket, kneejerk command to “cut costs by 30%, we don’t care how”.
If you are convinced cutting IT costs to the extent being demanded will practically hurt organisation-wide efficiency, productivity and revenues, you have a responsibility to push back. Analyse where costs would have to be cut to make the demanded quota and if that means doing things that will actually harm the organisation’s financial big picture – explain why.
You never know, it might result in a more structured, thought out approach to how costs should be reduced across the organisation. In the worst-case scenario, you’ve done what you can and fulfilled your professional responsibility.
#2 Take Sunk Costs Into Consideration
We’ve already touched upon this but already invested costs should always be considered when approaching cost cuts. Does it make sense to lock in the loss of costs already sunk into IT projects and digital transformations to save the cost of investment that still has to be made to complete and launch them?
Even if such projects can potentially be re-started and finished at a later date, does cutting them to save costs now mean having to bring in new people unfamiliar with the work already done once it re-starts? How likely is it that will cost more than the short term saving?
“Taking the axe to projects or services money has already been sunk into usually has little value. It can be compared to panicking and selling off an investment portfolio at the bottom of a market crash”.
#3 Focus On Costs That Can Be Reduced Or Eliminated
Take the axe to costs that can be reduced or cut permanently, not suspended for several months before being introduced again. Start or ramp up sustainable, ongoing cost optimisation. This will hopefully accomplish the short-term goal, or at least take you some of the way towards it. And it has long term strategic value. The IT budget, and organisation, will be generally stronger for it.
#4 Prioritise Costs That Haven’t Started Yet
If you have initiatives that have been ‘confirmed’ but haven’t yet started it could make sense to freeze these, or renegotiate contracts. It will usually be much more efficient to reinstate unspent costs or freeze projects scheduled to start, but haven’t yet, than those already underway.
But again, consider the bigger picture. If those projects will lead to bigger savings than they cost, or generate more revenue than they cost does it really make sense to cut them?
#5 Don’t Forget Fixed Costs
The natural reaction when looking at cutting IT costs is to focus on variable costs such as bonuses, business trips, discretionary expenses, corporate hospitality, contractors, telecommunications etc., that rise and fall based on policy, usage and service levels.
Cutting fixed costs such as office rent, vehicles fleet, private IT infrastructure etc., can seem like harder work and more psychologically challenging. But there is often more cost inefficiency baked into fixed costs.
Can any be practically reduced or eliminated with immediate or short-term effect without hurting the organisation’s long-term efficiency, productivity and profitability? If they can, there’s no time like the present!
#6 Analyse Variable Costs For Easy Optimisation
Variable costs also shouldn’t, of course, be untouchable. Variable costs whose reduction has been debated in the past but met resistance for different reasons, sometimes due to vested interests, can often prove a surprisingly rich seam of optimisation potential.
If your organisation uses local contractors on the reasoning “they need to be on-site”, switching to a nearshored alternative could immediately cut 50% to 70% of that cost with little to no impact on the quality of work. Previously stout resistance to change might now suddenly be less of an obstacle.
Can you Reduce Or Eliminate Cloud and Other IT Infrastructure Costs?
IT infrastructure is almost always a major component of IT budget. It’s also one that can almost always be quickly optimised for significant savings.
- Are you genuinely using every environment of your organisation’s multi cloud strategy?
- Could you cut costs by moving more workloads from private infrastructure to a public cloud?
- Could you cut costs by moving workloads from a public cloud back to underused but maintained private infrastructure?
- When was the last time you properly analysed and optimised your IT infrastructure and workload allocation for Total Cost of Ownership (TCO)?
- Are you paying cloud vendors for service levels you don’t make full, or even any, use of?
- Are you fully aware of all of the ‘hidden costs’ that often come with cloud services? Add-ons, data transfer, security, backups and many other small but necessary capabilities can see hidden costs that often haven’t formed part of the estimates decisions were originally based on pile up.
“Having a good understanding of hidden costs is extremely important to create an accurate business case and estimate TCO. SVPM leaders should develop best, realistic and worst-case scenarios, and include historical data to verify whether or not the calculated future demand is what they think it is.” – DD Mishra, Research Director, Gartner.
Reduce IT Costs By Up To 30% Through Cloud Infrastructure Optimisation – 5 Strategies That Work
How your cloud infrastructure might be optimised for significant IT cost reductions will completely depend on your organisation’s use case. But it is very rare that they can’t be brought down by more than enough to make a difference.
At K&C, we’ve completed cloud infrastructure optimisation projects that have cut our partner’s IT costs by as much as 30%. Not their IT infrastructure costs. The entire IT budget.
And cost savings are far from always made by migrating more workloads to public cloud environments. Almost as often, optimising infrastructure costs involves winding a cloud strategy back and re-introducing bare metal servers and private on-premise cloud environments for a hybrid cloud strategy.
Over the past several years, a surprising number of companies and organisations have been guilty of chasing the trend on their IT infrastructure. The result encountered too often is that organisations have blindly, or as a result of poor advice, moved lock, stock and barrel into a cloud environment that is only optimal for some of their workloads. Even if it’s a majority, moving the rest to a more suitable home can quickly reduce IT costs. Cloud costs bloat can often be attributed to the weakest links.
Other times, organisations have much more on-site hardware than they need and reducing that can quickly lower ongoing maintenance costs.
Here are five approaches to cloud infrastructure optimisation we’ve regularly seen slash IT costs after we’ve implemented.
#1 Improve Asset Management
Organisations don’t go out and buy two laptops, two desktops and 5 monitors for every employee. Why? Because they don’t need them to do their jobs so it would be a waste of money. But they do regularly pay for far more power in the cloud than they actually need.
And when it comes to controlling IT costs, it amounts to exactly the same thing – a waste of money. The only difference is nobody notices that expensive but unused cloud capacity. It doesn’t fill up 3 supply rooms in head office like unused physical hardware like laptops and monitors would.
Good cloud asset management can have a major impact on overall costs. A spectacular number of organisations go and buy a data centre without customising it to their actual needs. Which means they are paying for servers whose power is multiples of what is actually needed. Better infrastructure asset management will quickly show you what you really need to pay for.
#2 Cloud Traffic Optimisation
One hybrid cloud strategy that can, depending on the amount of data an organisation processes, be incredibly effective at reducing IT costs is introducing an edge computing compliment to cloud environments. This can slash the volume of traffic and data stored with third party cloud vendors by utilising on-device processing power, optimising what needs to be fun through your data centre. Overall data processing speeds will also increase.
The edge computing strategy is effective for data-intensive organisations and is unlikely to lead to large cost savings for those that don’t process significant volumes of data.
#3 The Serverless (FaaS) Computing Strategy
Serverless IT infrastructure doesn’t mean applications are somehow magically run without the need for servers. Rather, it refers to a cloud model where functions rather than servers or server capacity are paid for. Which is why serverless is also often referred to as Functions as a Service, or FaaS.
A serverless approach can be a major cost saver for some companies. This is a great serverless case study one how converting microservices in Lambda Step Functions reduced a company’s AWS bill by a whopping 70% and saved its developers hours a day with minimal monitoring.
In a serverless set-up, the need to process a task triggers a function, which completes it. Each function uses only the precise amount of resources it needs so there is no waste at all. The cost reductions serverless can lead to for the right workloads is why serverless is currently the hottest trend in cloud infrastructure.
Source: Mohsiur Rahman in A Cloud Guru
#4 Integrate A Cloud Cost Management Platform
A majority of organisations still don’t ensure their cloud billing comes with an itemised breakdown, making it impossible for them to tell how optimised resources are. And in a majority of circumstances when billing isn’t itemised, organisations are paying for additional or unused resources when these could be eliminated.
Cloud management platforms, or cloud cost/spending management tools as they can also be referred to, are set up to provide detailed reports which shed light on what exactly is being paid for, compared to usage. This allows for ongoing cost optimisation.
#5 Split Cloud Workloads in A Multi or Hybrid Cloud Strategy
Cloud migration isn’t an all in or all out choice. You can utilise both the cloud and on-site servers and specialist software, if that’s the optimal infrastructure for your needs. You can also split demand between clouds and pricing tiers, either with one or between providers. It usually doesn’t make sense for an organisation to run all their workloads in one cloud at one pricing tier. But more organisations than you might expect do exactly that.
Splitting out less demanding workloads onto a lower priced server offering less processing power makes sense. Just like you wouldn’t pay for the premium price tier of a SaaS for all 500 employees in a company when only 50 use the features not available at lower price tiers. Dividing workloads between higher and lower demand servers, either in the cloud, between providers, between public and private clouds or cloud and bare metal servers, can go a long way to reducing IT costs.
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