With an economic downturn well underway, top managers are prioritising cost reduction as never before — and they are looking for new solutions.
It’s inevitable that cost-cutting efforts will land heavily on IT since it is a significant cost centre and because it influences costs in almost every business activity. In fact, a recent Accenture survey of US and UK IT executives revealed that 72% are being asked to reduce costs.
Many CIOs are tempted to concentrate this next round of cost-cutting efforts on IT’s discretionary spending budget, partly under the assumption that non-discretionary operational costs are irreducible because they are the results of decisions long past. Although these efforts in discretionary budgets have added somewhat to the bottom line, they often fall short of achieving the sustainable and dramatic cost reduction that is called for in such tough times.
The challenge: how to save now without paying later.
Organisations need to look beyond discretionary budgets and adopt a three-stage strategic approach to cost reduction, which allows businesses to cut IT costs significantly and for the long term, shifting spend toward business growth to ensure that IT performance is stepped up at the same time.
With this approach, the discretionary IT budget that supports innovation and growth is not only protected but enhanced. Importantly, cost cutting and high performance become attainable together – not at the expense of each other. Here are three practical steps that IT leaders can follow:
Minimise: Identify areas of clear and immediate cost reduction opportunity. This step provides increased room to manoeuvre while boosting the confidence of stakeholders in the prospect of near-term cost relief.
For example, while looking to minimise operating costs, one large retail organisation found that its business units had developed their own IT budgets. As a result, some $60 million was annually spent on IT initiatives that the CIO was unaware of – including salaries for nearly 100 IT professionals on the business units’ payroll. The CIO reclaimed the $60 million, rationalised the IT services to support these units, and then provided services to the business that resulted in savings of $30 million.
Optimise: Work to run current operations more efficiently by improving the use of software and hardware assets, thereby divesting non-essential assets and decreasing the average IT unit costs.
For example, by migrating company-wide messaging and collaboration solutions to a single technology platform for nearly 80,000 email users in 48 countries, Accenture employees were able to send and receive larger email files much quicker and manage their email through mobile devices.
Redesign: Embed structural changes by shifting the focus to an efficient and effective IT operating model. This drives significant improvements in labour costs, extracting savings through better operating models, industrialised processes, transformational technologies, and sourcing strategies.
For example, by launching a new operating model based on the industry standard ITIL v3 framework, a banking and investment institution was able to retain its responsive customer capabilities at a local level while realising global economies of scale, standardised working methods, integrated tools, and governance.
This strategic approach allows CIOs to achieve durable cost reduction that is up to four times greater than with traditional budgeting efforts.
The idea that cost-cutting and performance improvements are not mutually exclusive is gradually gaining acceptance among CIOs and their business colleagues. Now, with a clear economic mandate and greater stature within the enterprise, CIOs are uniquely positioned to find opportunity among the negatives of today’s economic climate.
Stephen Page is a senior executive with global responsibility for large-scale IT transformation at Accenture Technology Consulting