Managing IT Costs

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IMAGE Managing IT Costs

This is the third installment on the topic of IT value. While not intended to be exhaustive, I have touched on aligning with the business to understand where there is perceived value, then designing the IT organization to deliver it. But what happens if your costs are out of line?

There’s a difference between how tech companies view IT versus the rest of us. If you’re a technology company, most of your technology costs (i.e., software development) are costs of revenue. However, even tech companies have an operating component like the rest of us. They have back-office business processes (like accounting) supported by applications (like Dynamics) that create data that sits on virtualized infrastructure somewhere (like Microsoft’s Azure cloud). They need to manage the cost and value proposition, too.

Why start with demand? If you don’t manage demand for IT (or any) support services, then whatever cost reductions you achieve can quickly be lost to low value-added demand. What is low value-added demand? Things you buy too much of or do too frequently, for example (see the chart). I’ve advised clients who had to negotiate furiously for outsourced unit cost reductions that their total cost savings proposition would be erased if they did not repurpose some of the savings to use in managing demand.

Demand Levers

More companies practice good demand management for capital projects, in my experience, as they are more focused on large outlays of capital that will impose changes on the organization. You sometimes have to decide how to value the ROI (business benefits) from that investment. A few suggestions here:

  • Use cash flow from “quick wins” (those can you realize within a year) to help fund longer-term, more expensive initiatives. Also, win early, win often. When you start your plan and produce some quick wins, it adds veracity to the achievability of the rest of your plan.
  • On a “how much, how hard“ matrix, prioritize other cost reduction efforts (through either demand and/or unit costs). If there are any, focus on the “high” value and “not hard” quadrant (hint: those are like unicorns). Avoid anything in the “low value” and “hard” quadrant.
  • Don’t ignore cost avoidance. This is postponement of planned future investment (I call it “sweating the assets”) by deferring the need, a classic demand management strategy. If you can postpone $100,000 of investment in new infrastructure or cloud services by getting rid of old data (or copies of data) that nobody was using, that’s a win for the coming year.

Using these methods you can right-size the cost of IT capabilities without impairing the ability to support the business activities that you count on to drive your plan. Shouldn’t you be looking at that anyway?