Blog post written by Anke Schlichting. Anke is a former blogger on Blogpodium and Financial Service Technology lead Accenture Netherlands till January 2012.
The imperative to reduce costs is hardly new. However, economic uncertainty has major implications for companies’ efforts to achieve and sustain high performance and has inevitably put cost reduction back on the senior management agenda. With costs again under sharp focus, much of the exploration to find savings will inevitably fall on IT—which is both a significant cost center and a driver of costs (and cost savings) in the business, and therefore a major target for cost reduction initiatives.
Reactive and Strategic approach
For CIOs facing today’s intensifying focus on IT costs, now is the time to examine a new approach to IT spending. Hereby, the CIO faces the challenge of trying to find ways to reduce costs in IT, while maintaining service and delivering the technology investments required to support the business efficiency. Their task of reducing costs is often made even more complicated by the traditional reactive approach to discretionary IT spending.
The traditional reactive approach to a recession is to cut IT-focused discretionary spending. Discretionary IT spending in most organizations can be divided between investment in initiatives that will reduce IT costs (IT-focused investments) and those that will reduce business costs and/or boost the business’s ability to grow revenues and margins (business-focused) IT investments.
Non-discretionary IT spending, which covers ongoing IT operations and service to the business, is primarily the result of many years of discretionary spending decisions in the past that the business and IT must now manage. Thus today’s discretionary spending decisions—both IT-focused and business-focused—will ultimately determine the size of tomorrow’s operational IT spending and will have the effect of reducing non-discretionary operational spending.
Strategic approach to cost reduction
Many organizations may now be planning such reactive response which will result in rising operational costs and a growing capability gap between what the business requires and what IT can deliver. By taking a strategic approach and carefully re-targeting the IT-focused discretionary spending, the CIO can redirect and reinvest some of the ongoing operational non-discretionary spending to deliver greater business value. This approach enables ongoing reductions in operational spending while maintaining the capability gap at a consistent level throughout the downturn, and provides a platform from which to close the gap once growth conditions return.
A CIO facing today’s more subdued business environment needs a proven cost reduction methodology that will enable IT to cut costs while also improving service to the business. The key is to take a more strategic view of—and approach to—the balance between discretionary and non-discretionary spending. The strategic approach indicates four focus areas to support the IT cost reduction program. The right investment decisions in the four key areas enable non-discretionary operational costs to be progressively reduced, releasing savings that can be reallocated to initiatives that will help to drive future business growth.
To enable such an approach, the CIO needs to convince the business to stop regarding discretionary IT-focused investment as less important than business-focused IT spending. Instead, organizations should see discretionary IT-focused spending for what it really is: an investment in business effectiveness and shareholder value that drives growth and high performance. Such a change of mindset opens the way to the strategic approach to IT costs—enabling the building of a strong IT core that allows the company to enhance its competitive advantage progressively while spending less overall on IT.
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