IT Cost Reduction Strategies

Introduction

It’s become important for modern organizations to develop a variety of IT cost-reduction strategies, especially during periods of economic uncertainty. When faced with the challenge of reducing costs quickly, IT architects need to examine what areas can be quickly and efficiently cut to immediately relieve pressure on the overall company.

Cost reduction is different from long-term cost optimization – which is the ongoing evaluation of IT processes to eliminate waste and reduce spending. IT cost reduction reduces IT spending quickly and is usually a one-time measure introduced to protect the medium to short-term health of the company.

IT cost reduction framework

IT cost reduction is a set of measures introduced to cut IT costs immediately with the least amount of damage. It is done to save or benefit the mid-to-long-term health of the company. This usually happens during difficult economic periods such as inflation and recession. It is not a strategy used for the long-term growth and health of the business.

A strong IT cost reduction framework is not something that can be introduced arbitrarily. Gartner explains that there are rules IT architects need to consider before introducing IT cost savings.

A structured and measured approach to the process will make sure the business achieves its cost-saving goals with limited damage.

Follow the rules below:

1. Do it once

If companies don't cut deeply or efficiently enough the first time, they may need to repeat the process more than once. This drives uncertainty, loss of productivity, and could lead to other more serious problems down the line. This may include loss of morale and possible insecurity.

2. Map the IT landscape

IT cost optimization will evaluate expenditure throughout the entire IT landscape – which means you need to track the inventory of IT resources. IT visibility is a key part of cost optimization. A thorough, accurate inventory of your IT landscape and visually mapping it are essential to any potential tech stack optimization.

The LeanIX Enterprise Architecture Management (EAM) and SaaS Management Platform (SMP) are two of the tools which provide visual maps for organizations to evaluate their IT environments. That way, leaders can make informed decisions about where value can be maximized.

The SMP and Application Portfolio Management (APM) allow businesses to discover which On-Prem and SaaS applications already exist within the IT landscape and what business units they are part of. From here, architects can visualize where money is being spent. They can also quickly rationalize based on the respective lifecycle stage, usage, business value, and risk.

3. Define baseline

Before making any cost-saving decisions, a baseline needs to be defined. This involves collaborating with stakeholders and business leaders to establish a clear and structured approach to what cost-saving strategies are necessary. Questions IT architects need to establish with stakeholders before cost-cutting include:

1. Determine the desired result. What does the organization wish to achieve through IT cost reduction?
2. Next is the timeframe. Stakeholders and IT architects need to determine how long it will take to make the necessary cuts, as well as how long it will take for the business to see whether this has succeeded or not.
3. Lastly, teams will need to determine the best approach. How will the business tackle the issue? What needs to be done and what steps must be taken to ensure the project’s success?

4. Target instant impact

Fast IT cost reduction involves targeting areas of instant impact. This means eliminating, reducing, or suspending items that will deliver the results in days, weeks, or months rather than years. You can do this by eliminating services, rationalizing assets, projects, personnel, and renegotiating contracts.

5. Focus on cash

The goal of IT cost reduction is to release cash quickly in a way that affects the profit and loss statement, rather than non-cash items. Reexamining cloud services is a great opportunity to release money, as there are many strategies you can use to negotiate or evaluate cloud systems so that they are better aligned with the monetary and functional needs of the company.

6. Reduce, don't freeze

Make sure you reduce or eliminate costs right away, rather than freeze them. This is important because frozen costs may return to haunt the balance sheet down the line. In this way, it’s beneficial to take a more determined approach to IT cost cutting.

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IT cost reduction strategies

Once the need for IT cost reduction has become pressing, working with the right framework, complete visibility and real insight is vital for elimination and rationalization efforts.

Data needs to be gathered effectively so the health of the company can be evaluated post-cut. This will also show whether the process has been successful. These IT cost reduction strategies should bring impact 1-6 months in the future; thus, have almost an immediate effect on a company’s profit/loss balance sheet.

The three main strategies are eliminate, rationalize and renegotiate.

Eliminate

The first and fastest way to release cash is to eliminate IT assets. By visualizing your IT landscape, it is easy to see which IT assets no longer add value to the company.

Examples of assets that can be eliminated are application licenses, end-user computing, services and service levels, and infrastructure assets.

• Application licenses
  Software licenses for on-premise or SaaS software are usually one of an organization’s biggest expenses. Eliminating old or unused licenses can be achieved quickly when a business is actively managing its application portfolio.
  
  The LeanIX EAM and SMP can provide these insights, making application rationalization and elimination an easy way to cut IT costs quickly.
  
  By managing their application portfolio effectively, IT architects can see which licenses are unused, duplicated, or excessive and remove them from the portfolio.
  
  
• End-user computing
  Even though hardware and end-user assets are becoming less important, it is still one of the highest costs right behind the applications. Therefore, companies can quickly eliminate unused devices that are not needed anymore.
  
  Ways to reduce IT assets include eliminating printers, reducing the number of company phones and laptops, using cloud storage instead of on-site, and exchanging expensive hardware for something less expensive.
  
  
• Services
  Examining and eliminating services such as maintenance and outsourcing for what brings the most value can provide many cost-cutting opportunities. Services such as cloud computing provide many benefits but also come with caveats that must be considered to make them worthwhile. This includes licensing agreements, shadow IT, and a lack of in-house expertise.
  
  However, they offer businesses the benefit of less technical maintenance and not having to hire large IT teams. Companies can easily reduce service spending by downgrading service levels, eliminating maintenance services, and decreasing service instances over weekends and holidays.

Rationalize

The second strategy to reduce IT costs quickly is to rationalize infrastructure assets, subscriptions, IT projects, and personnel. Rationalization is the process of evaluating the application portfolio, ongoing projects, and other areas of the IT landscape to determine which assets should be eliminated, retained, or reimaged to help the company save money.

This is done by examining the IT landscape to discover where the most value lies. Once this has been established, IT architects can make informed decisions on where best to cut costs for immediate benefit.

• Infrastructure assets
  Unused infrastructure assets such as data centers, servers, hardware, communication systems, etc. can be completely eliminated or consolidated from the application portfolio to save money.
  
  This IT cost reduction strategy is done by assessing the value of all infrastructure assets and making the decision to rationalize.
  
  Infrastructure rationalization includes consolidating data centers, eliminating unused servers, selling assets, and adopting cloud services, eg. IaaS.
  
  
• IT projects
  Review and prioritize planned and upcoming projects for value and urgency, and then reevaluate the need to proceed in line with your IT cost reduction strategy.
  
  It’s important not to cut projects where costs are incurred and ongoing – this may cause problems later on.
  
  Instead, review future plans and rationalize lower-value projects and cancel any that don’t bring immediate value.
  
  
• Personnel
  Rationalizing personnel can come in many different forms and is a quick way to cut costs effectively.
  
  There are several different avenues to minimizing personnel costs that have an immediate impact. One well-known way to do this is to reduce the number of permanent staff, contractors, and consultants hired by the company.
  
  Other ways to reduce personnel costs include limiting business travel, and postponing or canceling external training. In-person meetings can be done virtually, whole workforces can go remote, and open job positions can remain open until the time is right to resume them.

Renegotiate

The third cost reduction strategy IT architects and business leaders can use is to negotiate contracts with SaaS products and other IT suppliers. By working with vendors to eliminate unnecessary spend and services, businesses can negotiate contracts to reduce costs.

IT vendor management is beneficial both as a cost reduction strategy, but also as a way to optimize and streamline SaaS, IaaS, and other services to better suit company needs.

• SaaS contracts
  Managing and renegotiating SaaS contracts is the fastest way to examine and lower the costs you're paying to use the service. Cloud budgets can get out of control if they’re not properly monitored, so modern tools such as the LeanIX SMP can give you insight into SaaS usage, different renewal dates, costs, overlapping tools, etc.
  
  A successful SaaS strategy requires a renewal strategy, and tools help keep track of SaaS usage and come prepared for the contract's notice period.
  
  Examples of SaaS contract renegotiation include negotiating with lower than the contractual value of users and setting vendor price benchmarks which can be found in the LeanIX SMP reports or by peers.
  
  
• Suppliers
  Evaluating IT suppliers using IT vendor management will pinpoint where money can be saved. It uncovers which software is bringing value to the company and which can be eliminated or negotiated.
  
  Questions IT managers can ask themselves about their suppliers include whether or not the service is used by the employees, whether the supplier is critical or just “nice to have,” whether it works with the new budget you are trying to create, and if it satisfies the evaluation criteria you set for it. Do you have a similar, cheaper product that essentially does the same thing?
  
  Once these questions have been answered, the next step is to renegotiate IT supplier contracts. This includes renegotiating contracts and costs with manufacturers, software resellers, distributors, and system integrators.

Conclusion

IT cost reduction can be the thing that makes or breaks a business in times of economic uncertainty. Having a mapped-out strategy in place – such as managing an application portfolio – eases the pressure of rapid cost reduction.

This helps IT architects and business leaders mitigate damage and make sure it’s deep enough to only need to be performed once.