A guide to cutting IT costs

Reduction of spending in the IT department is more art than science. Metri consultant Paul Michaels offers some advice on how to get it right.
Written by Paul Michaels, Contributor
For the past few months everyone was hoping the IT industry might be saved the worst of the credit crunch fallout, on the basis that technology is vital to enterprise strategies to increase efficiency, improve services and ultimately benefit the bottom line. However, it is becoming increasingly apparent that CIOs, along with businesses in general, are now facing increased pressures to reduce their IT costs.

In addressing cost cuts, however, one of the central issues that need to be considered is the 'balance of value'. That is, it is crucial to resist the often knee-jerk reaction to simply cut IT costs down to the bone. Rather, one needs to look at the cost/productivity equation: how to reduce costs while at the same time increasing operational efficiency and competitive advantage.

Special report: Recession and the IT economy

Radical cost-cutting may answer short-term needs but can lead to higher future costs as strategic projects that could improve efficiencies are delayed or deep frozen. With this in mind, it's vital to measure hardware, software and servicing not on cost alone, but in the context of performance and quality. Here are some key points to consider in these cost-conscious times.

Making the right cut
Consider IT staffing. Before wielding the axe, one should first ask: How productive is the individual? What staffing levels are needed not just to maintain but to improve service delivery? Are our per-capita cost/performance ratios better, the same or worse than other companies in our market sector and against industry best practice?

These questions may seem obvious but to answer them requires a pre-existing benchmark of key performance indicators (KPIs) against which current measurements can be compared.

Without KPI and other IT benchmarking measurements, decisions about where to make cuts or where to spend money can only be based on internal politics, exigency or a best guess. However, gathering this data requires access to third-party best-practice peer and market data.

The conundrum is that in cost-conscious times CIOs are naturally reluctant to invest in benchmarking specialists. However unless the right cuts are made in the right place, the negative impact on service performance may lead to more revenue loss than money saved.

Outsourcing - get the price right
Analyzing outsourcing costs is even more challenging than planning internal cuts. Businesses often feel they are overpaying their IT service providers but can't pinpoint how much or why because of the lack of pricing transparency in the contract.

Cost creep can occur because of loss-leader cutbacks on renewal, because the client wants customized services or because their legacy infrastructure is highly complex.

In such cases, the client should be encouraged by providers to standardize application platforms, eliminate redundant desktops or rationalize service centers to save money.

Apples-to-apples comparisons
Sometimes clients automatically request a premium-level service where a standard one would suffice (however, don't expect providers to point this out, since it's rarely in their interests to do so).

Sometimes a CIO needs a job done in a rush whatever the cost. To save money CIOs should be encouraged to plan ahead and always check with their providers on the cost implications of doing work under time pressure.

However the services are delivered, it is important customers are able to compare what they are paying for a service - such as hosted email or help center support - on an apples-to-apples basis with the competition.

They should be able to make an informed choice between various service components by comparing every supplier's service catalogue and then compare these with the market average. Without this capability, there is no objective basis for knowing if one is paying under or over the odds for any particular supplier.

Prosper or perish
While benchmarking cost/performance is currently enjoying a renaissance in the wake of cost-saving pressures, there has also been a trend towards companies - and outsource service providers - measuring their cost/performance ratios as a key part of routine maintenance, or 'good housekeeping'.

This ensures that at any given time both clients and their suppliers can ensure they are working to best market practice. And in the case of service providers, it enables them to make a regular check that their price and quality positioning are competitive.

And those organizations who don't benchmark? Sometimes it's because they are reluctant to face the pain of change or undergo the disciplines involved in cost-containment. Or they may simply feel that the best approach is 'don't fix what ain't broke'.

Mediocre efficiency ratings may not be an issue during economic expansion when there is no compelling need to tighten a few extra points of operational cost but in a recession CIOs can suddenly find themselves under the microscope.

On the upside, tightened fiscal conditions can be just the catalyst needed to galvanize the complacent into action. There is something very focusing in the realization that the health of a company's IT price/performance environment may just be the key determinant in whether it prospers or perishes in the future.

Paul Michaels is director of consulting at Metri.

Editorial standards