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5 Principles Essential to IT Cost Optimization

Written by Mike Gruia on March 3rd, 2014 at 9:55 am

IT investments face a leaner, slimmer future but the companies that master IT investment cost optimization will emerge with better ROI on their investments.  IT investments are positioned as so essential to core operations and integral to business success that they often remain remarkably resistant to cutbacks, even in economic downturns.  Although IT investment budgets can seem vague, they do need to be rigorously scrutinized because waste is built into them.  In general, companies overspend on IT because they are unwilling to say no to business and IT.  Instead, executives along with their IT and division leaders need to face some truths about what drives up IT investment costs.

Organizations have a significant opportunity to optimize their IT investments but first they need to understand the maturity of their existing cost optimization practices.  If we look at businesses with high cost optimization maturity, we find that most exhibit the same five key principles.

1.  Transparency
Higher maturity IT transparency practices are seen as a prerequisite for better investment decisions and they enable enterprises to optimize both costs and the portfolio investment value.  This is not possible until IT and the business have agreed explicitly on the value of the IT projects and what the business needs from IT.  Basic cost optimization practices often lack quantitative information to define estimated resource usage and business drivers. Transparency enables different viewpoints of IT spending, which in turn allows for better prioritization and ultimately consensus and agreement on opportunities for optimization.

As the elements of transparency are needed to contextualize or prove the value of IT, the lack of transparency often places doubt on the value of all previous IT-enabled investments validating the worst fears of enterprise stakeholders.  With transparency, additional benefits can include better demand management, identification of business value, the ability to better Run IT as a Business, better estimation capabilities and an overall improved ability to show the value of IT.  The IT organization can change its desired role in the business and enter into different value discussions that balance costs with IT benefits.

2.  Flexibility
One of the most significant factors on the path to continuous optimization depends on the ability of the organization to become more rapidly adaptable to internal goals and external conditions.  The challenge of optimizing IT costs isn’t just about trying to reduce the unit cost; it’s also about IT trying to maintain a balance between lower unit costs and sourcing IT in a flexible way so that the organization is able to remove or add resources/costs in response to internal and external factors.

A common problem occurs when an organization has been trying to reduce its costs but finds itself in a position where the majority of costs are fixed because of employment commitments to employees or contractors.  The organization is then unable to reduce or remove further costs if the demand for IT is reduced or if the skills required don’t match available skills unless it pays significant layoff or cancellation penalties.  This can also restrain the organization’s ability to increase capacity.

3.  Accountability
In order for IT to be fully optimized, both the supply and demand sides must be reviewed.  Too often, organizations see optimization as how to best supply the demand side for IT.  This can create a culture where  IT becomes reactive to business needs and not proactive enough to be able to influence demand.  In order for IT to be continually optimized, leaders must take ownership of the futures of their line of business investments.  At a minimum, leaders must engage with the business to manage the capacity, features and functions that IT provides.

4.  Duplication
Often previously purchased applications and infrastructure technology are underutilized or duplicated.  In terms of cost optimization, re-usability is about reducing duplication in order to reduce costs.   Many IT systems across an organization will lack a standard platform and inconsistently automate business processes and poorly defined projects without realizing the duplication.  Another threat facing organizations with a high degree of duplication is a complexity increase.  Complexity is a powerful force that increases the cost and holds back the completion of the investments.  The duplication represents unnecessary waste which can be one of the numerous factors driving up IT costs and increasing time to value.

5.  Frugality
Projects are often too big and take too long, partly because unnecessary functionality is built into applications.  Organizations will continually challenge proposed options and be drawn to an expensive option they perceive as more valuable.   The principle of frugality, striving for a good enough option that can often be achieved with 20% of the cost, ensures cost optimization has a prudent and accountable owner and is led from C-level.  Organizations that do this well often create a team including professionals from outside of IT to ensure optimization solutions consider options and constraints rather than purely going for what is viewed as the best.

Conclusion
IT can’t do it alone because simply saying no to business damages relationships.  IT needs support from above.  The only path to real progress involves requiring senior IT and division leaders to examine how, not whether, the five principles apply to the organization and to confront them head-on.  The discipline you develop today will pay off in a big way.  A downturn may prompt you to begin managing IT more deliberately, but making better investments and leveraging invested capital never goes out of style.

 

Mike Gruia is the CEO of UMT360.  The company’s signature product, UMT360, is a leading Enterprise Portfolio Management solution that digitalizes investment planning and controls across business and IT portfolios to deliver the transparency needed to make smarter decisions and drive performance.

Learn more about how UMT360 is helping executives Run the Business of IT.  UMT360  combines application, project and service portfolio management capabilities with financial management best practices to deliver a powerful solution that unifies siloed IT domains to provide complete transparency, the ability to rationalize costs and make smarter IT investment decisions. Its intuitive process and real-time data and metrics help businesses improve IT budgeting, effectively collaborate to assess trade-offs, and finalize multi-year IT transformation roadmaps.  Read more here or contact UMT360 today.