IT Cost Optimization

Definition: What is Information Technology (IT) Cost Optimization

IT Cost Optimization is defined as the process of aligning the money spent on information technology with the business benefit derived from it. In other words, lowering the cost of information technology while improving the returns generated by it.

IT Cost Optimization operates at two levels:

• Initiatives: optimization of the cost structure of a single project or program
• Aggregate: Optimizing the cost of the entire IT Organization i.e. all costs associated with or assigned to staffing and operating the information technology function in the company.

At both levels the concept of IT cost optimization is intertwined with that of IT Value - the two are two sides to the same coin; inseparable to be meaningful.

Another way of defining IT Cost Optimization is to think of it in terms of returns on IT investments - the highest returns for the lowest possible investment or cost. Colloquially, IT Cost Optimization is often understood as "getting the biggest bang for the IT buck"

IT Cost Optimization is a Continuous Process

Optimizing cost is a continuous process of "do-learn-do" cycles. First, one does their best to anticipate and align the cost of an initiative with the expected benefit. This is reflected in the business case for the initiative. Then, as the program moves forward, the real cost and benefits picture emerges so the leadership must make adjustments to align the two on an ongoing basis. Consequently, IT Cost Optimization is not a once-and-done project but an iterative process that takes into consideration the emerging picture of value creation and makes appropriate adjustments.

The Difference Between IT Cost Optimization and IT Cost Reduction

Even though these terms sound similar, IT Cost Optimization is very different from IT Cost Reduction. IT Cost Reduction is the process of reducing IT Costs without other considerations while IT Cost Optimization is the process of aligning costs with benefits and risks.

• IT Cost Reduction focuses on reducing expenses and this can reduce benefits derived from the initiative. Also known as "cutting muscle with fat."
• IT Cost Optimization is a business-focused effort to derive the most benefit from the money spent on a business objective.

For example, during industry downturns companies often reduce staff including in the IT Department. Often, these layoffs are done with a firm focus on reducing expenses not factoring in the benefit or risk side of the equation. Layoffs are very costly over the long term because of not just rehiring costs but also a lot of organizational learning departs with each employee who leaves as a result of one. On the other hand, negotiating a lower price for a server is IT Cost Reduction without negative consequences on benefits or risks.

An example of IT Cost Optimization would be an IT Help Desk aligning the number of support staff with the number of support tickets received. Usually, this would be done after a careful study of a specific situation to make sure wait times are not increased as a result. Another way to lower costs while improving benefits would be to reassign staff by qualification and ticket complexity. This way not only are wait times lowered but also business operations would improve.

It can be argued that IT Cost Optimization is a long-term paradigm while IT Cost Reduction is a very short-term perspective.

Why is cost optimization important?

As the example above illustrates, IT Cost Optimization is a strategic activity that can result in substantial benefits to the business. Budgeting and spending decisions in line with benefits and risks ensure a lean organization primed for growth.

The concept of optimizing IT sounds logical, but opinions vary on what the term “IT optimization” really means. What does it really mean and what are the benefits to IT departments and the organizations they serve? Optimization is a two-fold IT asset management solution that aims to reduce costs associated with delivering IT solutions, alongside leveraging current IT assets to provide organizational value. The blending of these two philosophies generates IT optimization that truly reduces costs, mitigates business risk, and lays the foundation for new business opportunities.

IT Cost Optimization Process and Framework

A structured approach to cost optimization can:

• Embed a culture of cost management throughout the business
• Improve cash flows position, balance sheet and performance
• Improve accounts payable, accounts receivable and aged debtor collections
• Generate efficiencies around production, inventory and supply processes
• Create flexible and agile operating and business processes
• Streamline traditional financial and regulatory processes to reduce costs and free up resources
• Simplify planning, sourcing, collaboration and supy chain execution

Typically, successful cost optimization efforts produce positive ROI that sets the business up for future growth.

Gartner's IT Cost Optimization Framework

source: Gartner

Key Principles of IT Cost Optimization
According to Gartner's report Five Principles Underpin IT Cost Optimization Success the difference between organizations that optimize cost cutting and those that don't isn't the level of effort or the number of initiatives taking place. Success typically revolves around five guiding principles that create a long-term focus rather than specific short-term financial targets.

The five principles encompass:
Transparency. - greater transparency translates to better supply and demand decisions. This, in turn, helps organizations optimize costs the right way. By defining business outcomes, an enterprise can better weigh the effectiveness of transparency. However, this approach isn't possible until IT and the business have explicitly agreed on what IT provides the business and what the business needs from IT. A quantitative assessment that defines consumption, drivers and inhibitors for IT and business services is essential. This leads to better prioritization and consensus about optimization opportunities.
Agility. Organizations that achieve continuous optimization typically display a high level of agility and adaptability. They also recognize that the goal isn't to merely lower IT costs but to adopt a more efficient and cost-effective long-term sourcing strategy. In most cases, this means moving away from a focus on contracts that create fixed pricing and moving to a variable model.
Accountability. Organizations must review both supply and demand side issues that involve IT resources. According to Solanki, IT often becomes reactive to business requirements because organizations view optimization within the prism of how to best supply the demand for technology. However, this approach creates a "reactive" culture. Instead, leaders must take ownership and use devices such as chargebacks and showbacks to create greater accountability.
Simplification. Reducing complexity generally leads to cost optimization, Gartner notes. Although IT systems are inherently complex, enterprises can benefit by introducing standard platforms, consistent business processes, and clearly defined IT services and service levels. Gartner's IT key metrics data indicates that best-in-class performers in this area spend 38 percent less than average performers to deliver similar results.
Discipline. Gartner stresses that IT cost optimization isn't a one-and-done initiative and CIOs can't view it as a series of discreet projects. What's more, successful cost optimization revolves around CIO ownership and the use of dashboards and metrics to focus on longer-term cost efficiencies. Finally, best practice organizations frequently rely on a cross-functional team to oversee an initiative.

IT Cost Optimization Framework and Methodology
Cognizant Business Consulting has developed a framework and related methodology to help IT leaders meet cost-cutting objectives while preserving ongoing business transformation initiatives. The framework is based on experience in working with companies that are facing the challenge of delivering new business capabilities despite facing resource constraints for funding them. Through a repeatable, six-step methodology (see Figure below), the framework enables companies under duress to do the following:

• Assess their IT budgets and pinpoint optimization opportunities.
• Collaborate with a strategic partner on new ideas to drive effective cost management.
• Identify short- and long-term savings from IT resources and optimizations.
• Syndicate an implementation roadmap to transform cost-savings opportunities into reality.

source: Cognizant

It is not unusual, but neither is it optimal, in organizations, for maintenance, application development, and infrastructure costs to squeeze out the ability to be strategic (see Figure below). A structured and detailed cost-optimization framework and underlying methodology and governing principles can specify the savings potential in all of these areas so the client can focus on strategy.

source: Cognizant

See Also

• Federal IT Acquisition Reform Act (FITARA)
• Total Cost of Ownership (TCO)

Further Reading

• IT Cost Optimisation, A Game of Many Halves Kevin Duffy, Gartner Consulting