As chief information officers strive to maximize technologies’ impact on the business, they must establish a structured approach to cost management within information technology and with business partners. This requires CIOs to build a programmatic and strategic cost optimization discipline.
Strategic cost optimization is more than cost-cutting. It is an ongoing discipline of analysis, review, recovery, productivity improvements and reinvestment. The objective is to optimize cost from inception at the planning and budgeting stage through to actual utilization and spend. CIOs must drive a culture that proactively looks for ways to optimize spend prior to contractual commitment and recover current spend on projects and services that are underperforming or in which there is overinvestment.
CIOs should use these nine rules as a starting point to frame and guide the execution of their strategic cost management activities:
1. Cost optimization must be strategic, cultural and ongoing
The process of managing costs, evaluating spend, optimizing performance and proactively investing in value creation requires a cultural change with supporting structure and governance. Create a culture of smart IT spending by communicating the importance of placing business outcomes at the center of all spending decisions. Establish an ongoing spend-review discipline with a cross-functional team to assess historical spend for current value and fit for purpose and then assess, monitor and improve value delivered from current assets.
2. An IT financial management discipline must link costs to business outcomes
IT financial management tracks the total cost of IT and provide multiple views of IT spend to help stakeholders make informed business decisions. Repeated requests from the business to cut IT costs often indicate that the value of the spend is not understood at the business outcome level. To support your strategic cost optimization initiative, ensure that all IT costs are allocated to a business-valued application, product or service. Add cost detail and complexity to the ITFM allocation model only where needed.
3. Strategic cost optimization must account for and support executive and business objectives with strategic technology investments
To maximize IT’s impact, there must be a clear and validated technology prioritization list that is tied to specific business outcomes. These technology priorities should clearly align with the enterprise strategy and leadership priorities. When evaluating budgets, CIOs should require that all IT spend demonstrates a direct impact on the business goals and mission. Map all strategic optimization activities to the business outcomes impacted.
4. Reactive cost-cutting, which is tactical, and motivated by cashflow protection, is not strategic and does not achieve cost optimization
Unstructured or reactive cost cutting is neither sustainable nor strategic. Reactive cost cutting commonly comes at the expense of unintended business outcomes, future investments and employee morale. When cutting or reducing any costs, define a plan and engage stakeholders in a structured cost-cutting process. Consider and communicate long-term implications of short-term cost cuts.
5. Strategic cost reductions require short- and long-term rationalization plans.
Not all cost reductions can be achieved with short-term actions. Many costs are committed by contract and will require a longer-term planning horizon to realize both optimization and reductions. This underscores the importance of an ongoing, strategic cost optimization discipline. CIOs should work to rationalize and eliminate spends before they are committed by contract. Build a rolling list of long-term targets for productivity and efficiency gains.
6. Optimization of IT assets requires ongoing review of initiatives and programs for efficiency
IT must continually improve efficiencies and productivity to ensure that run costs do not escalate and funds can be reinvested in priority opportunities. CIOs should conduct a formulaic review of efficiency and productivity. Prioritize a list of resources that are underutilized or redundant — which are ripe for consolidation, centralization or elimination. Identify any areas where technology can automate processes to eliminate human touch, redundancy or errors.
7. Results must be communicated in terms of the business outcomes that will be affected
Cost-cutting and investment decisions made without a business impact assessment often fail to demonstrate meaningful value. IT should be focused on delivering against the enterprise’s mission and objectives, even when optimizing spend. Engage business stakeholders actively in cost management decisions that impact business value delivery. Define IT deliverables based on impact to the organizational mission and the outcomes they drive.
8. Savings from optimization and structured improvements should be proactively invested in business outcomes
Ongoing cost reduction and optimization efforts should be programmatically reinvested in the business’ technical priorities. By reallocating savings to deliver business outcomes, CIOs can often preempt reactive cost cutting requests by demonstrating that they are already proactively executing against strategic business priorities. CIOs should work with business leadership to formally document and validate technology investment plans. Actively evaluate progress, reassess stakeholders’ needs and adapt to changing requirements.
9. Technology investments should increasingly create enterprise-wide value
CIOs must shift their focus from IT’s delivery of technology to the enablement of business processes and outcomes — maximizing technology value. The goal of technology leaders should be to create value across the enterprise in all areas of technology impact. Extend core technology skills to solve current business challenges. Partner with business stakeholders to extend, refine and innovate business operations and outcomes. Prioritize investments that maximize impact on corporate objectives and outcomes.
Using these rules as a starting point, CIOs should consider how each applies to, and should be customized for, their specific organization. Evaluate which rules are currently being actioned to manage spend and deliver value for the business and if there are opportunities to apply these rules to save money and drive greater efficiency.
Robert Naegle is a VP analyst at Gartner Inc., focused on CIO issues of finance, economics and business value. He wrote this article for SiliconANGLE. Naegle and other Gartner analysts are providing insights on cost optimization and leadership strategies for CIOs at Gartner IT Symposium/Xpo, taking place Oct. 16-19 in Orlando, Florida.
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