Strategic IT Spend: A Guide for CIOs Amid Economic Uncertainty
With the US gross domestic product down 1.6% in the first quarter of 2022 and consumer prices up 8.6% in May, the economic forecast is increasingly uncertain. The Federal Reserve appears to be trying to thread the needle by raising interest rates just enough to reduce inflation but not so much as to tip the economy into a recession. In light of the uncertainty, company executives and finance leaders must prepare for an environment of increased borrowing costs. In response, business leaders across functions will be keen to ensure cost structures are optimized to weather any potential storm, and chief information officers (CIOs) can lead this effort by proactively assessing the effectiveness of their organization’s IT spending using a simple three-step approach.
Step 1: Improve situational awareness
It can be challenging for CIOs and their teams to understand the current IT landscape and how much is being spent across the various dimensions organizations need to manage. Gathering a clear and complete picture of current IT spend is the first step to strategically guiding and optimizing costs during a challenging economic phase. Mature organizations use spend visibility tools like Apptio to help allocate costs and improve transparency to the total cost of ownership for each IT service provided. Even without advanced spend visibility tools, collecting all internal and external sources of IT spending and categorizing them can illuminate potential spend optimization opportunities. Regardless of the maturity of the organization, current IT spend should be understood across all elements including internal headcount, professional services, infrastructure, applications and tools, software, end user devices, and more.
To harvest the savings from simplifying a company’s technology landscape requires specific actions on specific machines. Here, knowing where things are and how they are connected is critical. While most enterprises will have a configuration management database (CMDB), the quality of the data is often suspect. By contrast, organizations without a robust CMDB can easily miss out on harvesting all the benefits associated with decommissioning hardware and truing down software t licenses to match need. A robust CMDB from software providers like ServiceNow or BMC is an important step in getting a handle on an organization’s IT assets.
Applications and tools inventory
Applications and tools represent logical collections of technical components that include software and infrastructure. Mature organizations areable to conduct effective impact analyses because detailed mapping exists between each infrastructure item and its supported business applications. As organizations move to software-as-a-service (SaaS) models, the need to track the individual technical components that make up a business application is reduced because the burden resides with the software provider to manage all that detail. For example, a legacy enterprise resource planning (ERP) application might be made up of Oracle EBS, Oracle Database, Linux operating system, virtualization software, anti-virus software, as well as the underlying physical hardware, while a similar offering from Oracle in the cloud would have all the required technical components integrated into a single SaaS solution like NetSuite.
Software asset management
There are three critical pieces of information that should be tracked for each piece of software: (1) the license entitlement, what the organization owns, (2) the install base, the number of licenses that have been installed, and (3) the consumption, what people are actually using. There is often 8-15% waste between what is licensed versus and what is actually being used. Common pitfalls that CIOs should look out for include “shelf-ware,” which is software that is purchased but remains on the shelf and is never installed, or “gold-plating,” which is the purchase of features that are never used. Organizations that consume substantial cloud-based services need to continuously monitor and optimize cloud services in order to get the most value out of them and avoid over-consumption. It is common for companies to overconsume cloud-based services if they failed to reevaluate their IT operating model when they migrated from delivering IT services on-premise to delivering them in the cloud. These classic examples of ineffective software asset management processes can frequently be identified and corrected to help curb IT spend. Software from companies like Flexera or ServiceNow can help organizations better manage their software assets.
End-user devices management
The lasting trend toward work-from-home models has made it harder than ever for companies to manage all the end-user devices (laptops, monitors, mice, keyboards, tablets, ruggedized devices, tokens, and mobile phones). An up-to-date device inventory is foundational for several cost optimization strategies. CIOs can assess related spend by mobilizing an audit of recurrent subscriptions associated with end-user devices like cell phone, tablets, or hot spots. Often, an audit will reveal savings opportunities regarding devices that are no longer in use while subscription charges are still being incurred month after month.
Networking and communications optimization
Organizations that have grown through acquisition often have multiple communication providers and redundant data links, so having a clear view of the network of the leased lines is critical to optimizing spend on communications and network gear.
Step 2: Benchmark IT costs
It is critical for CIOs and their finance function counterparts to understand where the IT organization stands on key benchmarks like spend as a percentage of revenue, spend per user, or per personal computer. Comparing this information against similar-sized companies in the same industry can help determine whether the organization is spending too much or not enough. Computer Economics or Gartner are great sources of IT benchmark data that can help teams get started.
Benchmarks alone should not inform cost cutting decisions. Blindly reducing IT costs based on an imperfect benchmark may actually do more harm than good. Any cost optimization effort should align IT spending with an organization’s strategic priorities. For example, a retailer that reduces IT costs across the board to cope with declining retail sales may be hobbling their ability to build out new e-commerce capabilities, and these technology-enabled capabilities could be essential to competing in the current economy where online shopping has become much more prevalent.
While benchmarks can point CIOs in the right direction of where to look for potential savings, they will not reveal whether those savings should be pocketed or reinvested in the business. CIOs need to collaborate with their business partners to identify those technology capabilities that create competitive advantage and ensure there is sufficient investment in those areas to grow, transform, and innovate.
Step 3: Optimize IT spending
There are a wide variety of IT cost optimization techniques available to organizations trying to reduce IT spending. It is important to have a good understanding of the time horizons involved with any spend optimization strategies in order to properly forecast their budgetary impacts.
To prepare an IT organization for possible economic downturns, CIOs should consider short, medium, and long-term strategies that can optimize IT cost models.
Short-term IT cost-reduction measures
While canceling projects, contract renegotiation, or headcount reduction exercises may be the first things that come to mind when organizations are looking for short-term cost savings, they might have negative impacts on IT service levels and strategic priorities. There are other frequently overlooked sources of short-term IT cost savings. For example, organizations that have grown through acquisition will often have multiple leased lines from a variety of communication service providers, and unless the built-in redundancy is absolutely necessary, substantial savings could be achieved through related network optimization.
Medium-term IT savings strategies
Typically, moving to a managed service model will drive over half of the savings from any IT cost reduction exercise. Depending upon how extensively an organization is already taking advantage of low-cost locations, managed services providers are often able to reduce costs by 25%-50% (over a contract term of three to seven years). This can be achieved by moving work to low-cost locations, eliminating frequently recurring incidents, automating manual processes, deflecting requests to self-service channels, and shifting work from high-cost experienced resources to lower-cost more junior resources through well-defined processes and procedures. The ability to realize benefits typically starts within six to 10 months, assuming a three- or four-month bidding and contract negotiation process followed by a transition process of three to six months.
Long-term IT landscape simplification strategies
Much like credit card debt, technical debt can sneak up on an organization, resulting in the accumulation of significant risk that can become difficult to dig out from under. Even technologies that are fully depreciated and appear low cost to operate can have substantial hidden costs like increased maintenance costs, increased power and cooling costs, increased cyber remediation costs, or extended support costs. Investing in initiatives like rationalizing a company’s application portfolio might have a long payback period, but these types of analyses are crucial to maintaining a healthy IT ecosystem. Responding to exigent circumstances with budget cuts can offer short-lived results, but the ongoing benefits of a simplified IT landscape will be sustained well past the current business cycle. By investing in a simplified landscape early, IT leaders will be much better positioned for any future belt-tightening initiatives.
Variable-term options for IT cost reduction
Technology modernization investments that are justified based on hardware or software savings are highly dependent upon the software contract renewal date and the hardware refresh cycle. For example, a CIO could mobilize a software asset management initiative, which could identify a number of software maintenance contracts that are no longer required, but the company must wait to harvest the savings until the contract comes up for renewal, typically every three years. One of the often-overlooked benefits of cloud solutions is that they are charged out as monthly subscriptions or consumption-based so they can be immediately trued down to harvest the savings.
With economic headwinds on the horizon, CIOs should invest in IT spend optimization to make their organizations ready for a lean economic climate. A robust situational awareness helps to equip the IT organization with up-to-date information instead of scrambling to respond when the inevitable questions arise around how IT can help with cost-cutting efforts. External benchmarking provides a roadmap of where to look for savings and where to make strategic investments to keep up with the competition. Evaluating possible cost optimization measures before external circumstances force the issue allows for long-term strategic thinking rather than reactionary cost-cutting.