When economic turbulence strikes, information technology needs to realign quickly with new business priorities. CIOs are charged with keeping IT investments under control, radically cutting costs and, at the same time, doing some savvy prioritising to address new business needs. Doing even more with less becomes the mantra. The trouble is that many companies see their IT departments primarily as an easy place to cut costs. Unfortunately, it's a tactic that proves expensive further down the road.
Downturns create opportunities for businesses to take advantage of weaker players and improve their competitive position. Gains made during a bust are more likely to sustain companies through the next boom.
That's why winning companies view IT cost-cutting as a chance to strengthen operations.
Bain & Company research shows that effective leaders look at IT more strategically during a slump, seeing it as an opportunity to move ahead of the pack when conditions turn upwards. Instead of simply going for easy budget cuts, they reassess their strategy, ensuring that their IT investments yield quantifiable benefits in line with strategic goals.
They do reduce IT costs. But they carefully select the areas where cuts are made so as to avoid damaging valuable assets built up after years of investment. And they use the downturn as an opportunity to invest selectively in initiatives that promote growth. They identify technology investments, such as data centre virtualisation and cloud technology, that reduce the costs of maintaining the status quo - aiming just to keep the lights on. Then they divert the savings back to the company.
Firms employing this approach during tough times can save as much as 20 per cent of IT costs, while also moving a greater portion of budget allocation away from lights-on investment into more strategic moves. The reductions have to be fast, delivering a return on investment within the year.
A five step process
Consider the case of a large services company we'll call ServiceCo. It needed to reduce IT costs by more than 20 per cent and also change the allocation of such outlays to more strategic business-driven initiatives. The company's IT budget was 15 to 20 per cent of all operating expenses and was crucial to helping reduce costs through all operations. But ServiceCo was spending more than its peers on IT, and getting less in return. It was spending in the wrong areas. More than two-thirds of the IT budget was spent just to keep the lights on.
The company used this five-step process to trim charges while improving effectiveness:
1. Aggressively manage cash flow: Leaders start by looking inward to trim costs quickly. They eliminate outlays that the CIO can act on unilaterally, such as non-essential travel and overtime, extending desktop upgrade refresh cycles by six to 12 months, re-examining platinum service needs and pushing out timetables for non-critical projects. ServiceCo captured 6 per cent of its total IT savings just by reducing IT discretionary costs through tighter recruitment, travel and other expense policies.
2. Change the IT cost model: Winners also scour their budgets for extra ways to trim fat. They find lower cost storage options - accelerate investments with hard-dollar savings and make use of virtual servers. They also re-examine all external spending, including renegotiating vendor and outsourcing contracts. By doing this, ServiceCo achieved 20 per cent of its IT cost savings.
3. Capture the savings identified: It's one thing to make cuts but another to realise the savings. Too often, companies fail to achieve projected savings after trimming costs because they don't eliminate related resources and expenses. They leave people in positions that are no longer necessary or outsource too much work, ending up with a duplicate IT operation. ServiceCo found 3 per cent of its total cost savings simply by using permanent staff in place of high-priced contractors.
4. Realign IT to new business priorities: By doing this, IT accelerates savings. Instead of across-the-board cuts, winners are discriminating, making deep reductions in some areas and less - or none - in others. They reduce IT services after evaluating the trade-off between cost and benefit. ServiceCo prioritised new projects by weighing strategic value and ease of implementation. It fast-tracked projects with direct customer impact and delayed those that weren't critical. This allowed it to gain nearly 20 per cent of targeted IT savings.
5. Reshape the IT organisation: Currently, technology leaders see the power of a more centralised IT model. They centralise or combine groups, streamline operations, cut out layers and take advantage of scale. Nearly 8 per cent of the cost savings at ServiceCo came from reshaping of the IT set-up.
Donie Lochan is a partner at Bain & Company and leads the firm's Asia-Pacific IT practice.
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