What is IT Cost Optimization?
The world spent $3.8 trillion on IT expenses in 2019 alone. That figure is expected to drop to $3.6 billion in 2020, due to the impacts of COVID-19, which has forced companies to embark on cost-cutting measures. There is no better time for businesses to reassess their standing regarding IT spending, determine cost-cutting opportunities, and rethink their strategy towards optimal value delivery. According to KPMG, IT organizations need to reexamine their costs to determine their readiness for the future.
What makes up IT cost optimization is a series of strategic measures aimed at getting more out of less. There is a lot of waste in IT spending. Businesses invest in technologies and tools that they don’t need just because that is what is trending. But the aim of every investment is profit-making and you want to ensure that your IT infrastructure is delivering value commensurate to your investment. Otherwise, you must eliminate excesses and streamline processes to achieve cost efficiency in IT spending.
Cost-Cutting vs. Optimization
Many people mistake cost-cutting for cost optimization. Cost-cutting is one-time, but optimization is continual. When an IT business optimizes expenses, it is structured around reducing expenses in order to maximize business value.
However, when many businesses say they are optimizing IT costs, what they are really doing is simple cost-cutting. Since the latter’s effects are short-term, they eventually wear off and the company is back to square one again, in search of a new cost-cutting measure.
What is IT cost optimization? To be clear, IT cost optimization techniques include cost-cutting; of course, you can’t optimize cost without eliminating some expenses. But cost-cutting is like losing weight, which can happen either because you are fitter or because you are sick. The end goal of the strategic optimization of IT expenses is to maximize value, that is, to do more with less, rather than cutting costs for its own sake.
The table below gives you an idea of the differences between cost optimization and mere cost-cutting.
|Model||Uncalculated reduction||Sustainable and strategic reduction|
|Process||One-time actions||Continuous efforts|
|Purpose||Primarily to reduce financial waste||Primarily to maximize value|
|Example||Laying off employees or reducing workers’ salaries during a crisis||Digitizing and automating processes to boost efficiency|
|Results||Reactive, short-term||Proactive, long-term|
Key Principles of IT Cost Optimization
If we differentiate between ordinary cost-cutting and strategic cost optimization, we must be ready to learn about IT cost optimization levers holding up the framework. Indeed, these are like pillars for cost optimization in IT.
Cost optimization is, first, a financial matter. You want to reduce expenses and spend on the right things. In the end, the purpose of the technology is to derive business value from it. This is impossible without some financial transparency in the process. Why? Before you embark on a move to optimize costs, the foundation is to gain visibility into the current state of IT spending in your organization. That would inform the areas where expenses must be cut.
Gartner tells the following story to illustrate the point:
The CIO at a large university in the United States faced a budget cut of nearly 10%. She could have focused her energy on securing additional funds for the following year. Instead, her strategy was to create a more transparent view of IT, which helped the university’s key stakeholders understand their IT expenses and how IT business services affect the organization’s performance.
Transparency gives you a complete view of how money flows in and out; that would help you to make smarter (fact-based and data-driven) budgetary and investment decisions.
People and Processes
Business and IT leaders need to understand that technologies can outsmart neither the people that use them nor the processes that back them. Those three areas (people, process, and technology) are complimentary.
Organizations adopt new technologies to transform their processes. But without the right people in place to harness those tools, it will all fall apart. And when we talk about the right people, we are not only referring to information tech-aptness. The right people must also understand the process and strategy.
Say, an organization wants to automate account management, for instance, it needs people who can handle the tech, but also people who understand the finance aspect. In this regard, the spindle of cost optimization techniques in IT cuts across all the facets of an organization.
This explains why simple cost-cutting is not enough. Cost optimization goes much beyond replacing expensive infrastructure with cost-effective cloud resources. It requires an overarching strategy to maximize the value of IT expenses and build up to the transformation of the company.
What determines the difference between IT cost optimization strategies and cost-cutting is that the latter is one-off while the former is continuous. An organization that is trying to cut excesses and reduce expenses strategically must also be prepared to monitor performance regularly. This ensures that waste does not build up again. There is no sustainable cost optimization without proper cost management.
You must continually review outgoings, collect reports, and analyze data to ensure that the organization remains on track. This helps you to determine anomalies in spending patterns and correct them before they spread wide the organization.
In addition, you need a control measure in order to ensure that you stay within budgetary limits and prevent abuse. Many cloud platforms, examples including Google Cloud, Azure, and AWS, build IT cost optimization services into their platform in the form of monitoring. Moving operations to the cloud is not the end of optimizing IT costs; it is the beginning.
IT Cost Optimization Framework
Having understood that cost optimization in IT is about maximizing value, the question is how do we determine value? That is, how do we determine that reducing outlay on one side will result in more value? The answer is the IT cost optimization framework, and it all boils down to priorities.
Gartner’s decision framework is established on 6 pillars, consisting of questions you must ask before embarking on a cost optimization move. Each is explained below:
- Potential Financial Benefit: cost optimization is essentially a financial decision. Determine how the action will affect cash flow and generate savings, measuring the degree of impact (small, medium, or large).
- Business Impact: determine the impact a move will have on your day-to-day business operations, whether positive or negative.
- Time Requirement: cost optimization in IT is a long-term strategy, and implementing any move will take time. You need to have a set timeframe for implementation and in order to track progress effectively. Also, there must be an expectation of what and when IT savings will be realized following the implementation of the strategic cost reduction initiatives, whether weeks, or months, or even years.
- Degree of Organizational Risk: maximizing value for IT spending requires certain risks and perhaps trade-offs. Forecast the impact that expected changes will have on the company (low, moderate, or high) and assess your readiness to adapt to such changes.
- Degree of IT technical risk: This concerns the impact that an optimization initiative would have on technical processes and architecture, including OS, databases, and applications.
- Investment Requirement: IT cost optimization services (not ordinary cost-cutting) require investment. That’s what many don’t realize. Organizations must determine the amount of investment that is necessary to realize savings as well as if they are willing to make such an investment.
The image below was drawn up by Gartner consultants too. It is an indicative visualization of the effort required and the relative risks and benefits of various initiatives that make the IT cost reduction system. The factors used to draw the map would vary by the various factors, including the company’s industry and size. Use it as a guide to draw yours and figure out the best IT cost optimization techniques for your business.
IT Cost Optimization Strategies
According to Deloitte’s 2020 Global outstaffing Survey, cost reduction is the primary reason businesses outsource, at least, for 70% of the people surveyed. More and more companies are outstaffing their IT operations in a bid to save costs.
The global IT outstaffing market was worth about $334 billion last year and it is expected to have increased to $398 billion by 2025. That’s a CAGR of 4.5% within the next five years. But IT outstaffing is not merely a cost reduction technique; it is one that drives business growth, hastens delivery, and improves agility.
Outstaffing is “still seen as an enabler of business transformation”, quoting the Deloitte report. Outstaffing does not just give you access to a wider pool of talents; it also enables you to access critical infrastructure on-demand, effectively eliminating the overhead that comes with hiring and onboarding permanent workers, as well as maintaining their services. We are talking about consultants, senior developers, and other IT professionals, all hired for more affordable rates.
Hybrid Cloud Implementation
A sweeping digital transformation is eliminating physical storage and hardware infrastructure, along with the costs that come with owning them. It is more cost-effective to use cloud-hosted services and pay on-demand than to keep physical infrastructure indefinitely. Upon this realization, businesses have been pivoting to software-as-a-service models.
According to IDG 2020 Cloud Computing Survey, business cloud adoption has grown from 73% in 2018 to 81% in 2020. And the average cloud budget expanded by 59% over the same period.
Using the cloud, you can choose the resources you want and pay for those alone, rather than paying for a whole system of which you use only a small part. Likewise, updates are delivered seamlessly on cloud resources, and they don’t have a shelf life like physical infrastructure do. In the end, the value to your company in implementing a cloud model goes far beyond cost-cutting. The cloud helps you to improve your operations and innovate better.
Replacing physical infrastructure with virtual components is a great way to reduce costs while boosting operational efficiency. Virtualizing databases is quite complex and seems high level, but the end result, which is greater flexibility and productivity, far outweighs arguments against this measure. For one, virtual servers have a reduced deployment time. And in a world where time is money, the rest is history.
However, note that virtualization often requires some initial costs for setting up servers and the likes. But, remember that cost optimization (as against mere cost-cutting) is about the long-term; ultimately, the cost-savings benefit of virtualized environments are far-reaching. Virtualization removes the overhead expenses on physical servers, licensing costs, and so on.
Many tech companies are entirely virtual, yet have climbed up the ladder of prominence and efficiency. Some examples are Buffer, Basecamp, Zapier, Automattic, Toptal, etc.
ProCoders’ experience in IT Cost Optimization
Through outsourcing, the SaaS company, FrontEgg, was able to reduce human resource costs by 38% while increasing project turnaround efficiency by 30%.
FrontEgg outsourced part of their projects to ProCoders’ developers. This removed the hassle of hiring and onboarding new developers, as well as the costs associated with it. ProCoders assembled a team of developers with the skills needed by FrontEgg within just two weeks. That example shows how outstaffing can be a source of affordable, efficient services.
As a final thought, remember that IT cost optimization levers bridge between the financial and technology departments, and it eventually affects the entire organization. It is an elaborate strategy that you must prepare adequately for if you want to be successful. The aim is not simply to save costs; the aim is to boost business efficiency while at it.
Cost optimization is improving your overall business performance while conserving resources (time, money, personnel). Although cost-cutting efforts are legitimate in some circumstances, most often they are implemented for reasons unrelated to efficiency. Cost-effective methods for improving IT efficiency generally involve developing new products or enhancing existing products in ways that increase business value.
The three principles of cost optimisation discussed in this article are financial transparency, the right people and processes, and continuous monitoring. A comprehensive implementation of these tactics would give you maximum visibility over your company’s financial operations so that you can identify sustainable cost optimisation opportunities.
Cost optimization can be described as a strategic reduction of operating costs. Therefore, every approach to cost optimization must flow from the top management. Otherwise, it’s simply cost cutting. This article explains why the ultimate aim of cost optimisation is to maximise resources with as little cost as possible.