How to Cut IT Costs to Fund Digital Innovation

The IT department’s metamorphosis from a cost-center into an innovation driver has changed the public debate about the role of technology in the enterprise. CIOs now have exciting things to think about and to plan for.

But IT budgets continue to be a barrier to innovation. Gartner’s report Taming the Digital Dragon: The 2014 CIO Agenda predicted that “…the global average weighted change in CIO IT budgets is +0.2%.”

CIO’s are not getting a lot of leeway to fund the interesting stuff.

So CIOs must resort to finding creative ways to fund innovation. A good place to start would be to look at cutting IT costs.

But don’t rush to implement across the board cost cutting like many organizations did following the economic crisis of 2008-09. Some of these indiscriminate cuts could get your project written up in a future version of the 20 Real-World IT Cost-Cutting Mistakes You Need to Avoid.

A better solution is to make IT operations more efficient in order to keep costs down for the long-term.

Here are a few IT efficiency measures to consider:

1.     People

Labor is often the most expensive part of an IT operation, and an obvious place to cut costs. But instead of knee-jerk force reductions, consider the following:

1. Use automation as a force multiplier instead of as a way to replace people. For example, a great way to reduce help desk costs is to implement automation systems to analyze data about frequent service calls. Data mining can identify issues your development staff can solve at the source.
2. Outsourcing is also an obvious answer to reducing labor costs. But be careful how you deploy your outsourcing resources so you don't end up duplicating efforts unecessarily and creating more costs than you cut. For example, at the headquarters of a global fast food chain help desk support was outsourced, but on-premse support was managed internally. When a projector or laptop had problems, HQ employees would call the outsourced help desk who would trouble-shoot the issue and then call the company's on-premise support team. We helped them avoid this duplication of effort and provided a direct path to on-premise support.

2.     Hardware

Another area where the obvious is not the best approach is hardware. Conventional wisdom says to buy a lot of cheap servers made with off-the-shelf parts to manage applications and data. But these can become a maintenance sinkhole.

1. Perform a regular audit of your data center hardware usage. Softtek helped one firm reduce expenses on redundant hardware by performing an audit of their outsourced data center. We found several racks where servers had been turned off but had not been de-commissioned, but they were still getting invoiced by the services firm for the unused servers.
2. For data storage and retrieval, borrow from the Google or Facebook playbook. Instead of storing archived data on tape storage drives, which can take hours to deliver critical information, leverage hyperscale storage appliances. For example, Facebook stores older photos, the type of images not likely to be accessed as frequently as the cat picture posted yesterday, on “cold storage” servers in their Exabyte storage facilities in Prineville, Oregon. But unlike traditional tape drives which can take 3-5 hours to retrieve data, these cold storage servers can serve up older images almost instantaneously.
3. While we’re on the topic of hyperscale computing, if you’re managing petabytes of data you can save up to 89% on energy consumption as HP claims for its some of its newer servers

3.     Software

Software is the lifeblood of most companies today – but many cost-conscious IT departments would prefer to keep their current versions instead of upgrading software, believing the savings can contribute to the bottom line. But this can come at a cost, as newer versions of software may actually bring efficiencies that can save time through automation and reduced workloads.

There are better ways to save money with software:

1. Implement applications with intuitive front-ends. Newer versions of ERP and HR software come equipped with user-friendly GUIs that emulate today’s most popular consumer apps. This can lead to tremendous savings in training and reduced help desk calls.
2. If you haven’t already done so, implement agile development methods to reduce development times and costly re-work.
3. Software-as-a-service (SaaS) is a popular solution for cutting software costs, but this also moves costs from capital to operational expenses. Proceed with caution when considering hosted software, and look to the productivity and maintenance advantages instead of just the cost factor.
4. Take an application portfolio approach. We helped one company save money on software subscription and maintenance fees by helping them adopt this approach. The process entailed reviewing each application, determining if the application should be hosted in the cloud, or even if the application should be de-commissioned altogether due to low or non-use.

4.     Maintenance

On the surface, maintenance contracts are an easy target for budget-conscious IT managers, but these can often have negative consequences later on.  

1. Consider reducing service levels on some of your maintenance contracts, or consider moving maintenance contracts to outsourcing partners.
2. Regarding outsourcing partners, you might already work with two or more firms, with different teams in different parts of the world. Consider consolidating maintenance operations with one firm, which can save you from paying two service contracts, and can reduce communications costs as well.

5.     Infrastructure

Infrastructure is a tricky area as you can’t achieve instant savings here – but cutting infrastructure costs can contribute to the bottom line in a big way:

1. Look for duplicate infrastructure across departments or geographic areas. For example, consider bringing help desk operations into a single physical location. Eliminate duplicate software licenses. And now that business units are buying their own technology, negotiate with department heads to ensure disparate purchases can integrate with other applications.
2. Consider delivering IT as a cloud service to your far flung offices across geographic locations, as Australian budget airline Jetstar’s CIO Stephan Tame did for his offices in Japan, Hong Kong, Singapore and Vietnam.

6.     KPIs

KPIs are not just for marketing or finance departments anymore. Institute a culture of setting and tracking the achievement of cost-cutting KPIs to make IT efficiency ingrained in departmental culture.

For example, Jetstar’s Stephan Tame had an ambitious goal: keep IT costs at 1.1% of company revenues. Through innovative practices he has been able to reduce IT costs 6% year-over-year.

Conclusion

This is far from en exhaustive list for how to cut costs – we could write a book about it. But I wanted to emphasize that cost-cutting can be done intelligently, thinking of the long-term cost implications. To paraphrase Matthew Podowitz: use a scalpel not an axe.

And remember the purpose of making your IT operations more efficient: you want to free larger chunks your imperceptibly growing IT budget to fund the sexier and more business impactful innovation projects which and impact on business strategy. More on that in a future post.