Market demands, business needs, and the role of CIOs are in a state of constant change, but reducing IT costs is an area that is always under relentless scrutiny by CIOs and business leaders alike. With the rise of digital, modern enterprises have been tasked with developing and deploying strategies that will not only support the agile initiatives of business, but do so in a way that reduces the operational and administrative costs associated with such transformations. However, cost-cutting and cost optimization are two very different strategies, and there seems to be a disconnect between the strategy that many IT organizations are implementing and what today’s digital business era calls for.
Cost-Cutting vs. Cost Optimization
Cost-Cutting
Simply put, cost-cutting is the process of evaluating an organization’s recurring costs and finding ways to reduce those costs through various strategies and tactics. These strategies will change depending on the size, structure, and offering of an organization, but all require a cost-benefit analysis in order to gauge the implications of a given tactic. However, whether it means decreasing the size of an organization’s workforce, minimizing overhead costs, employing a longer refresh cycle of equipment, or updating legacy systems rather than incurring the upfront costs of new systems and technologies, enterprises that leverage a cost-cutting strategy are lacking the same thing; long-term vision.
It may seem like the easier and quicker solution of the two, but cost-cutting is a short-sighted approach to minimizing IT expenses. More times than not, cost-cutting will only provide organizations with a band-aide for a short period. However, this sort of approach typically results in greater organizational and operational hurdles and higher costs once a transformation surpasses important, and becomes urgent.
System-related expenses aside, organizations that cut down on employee benefits or perks are falling into the same trap. Although it may seem like you’re saving on unnecessary employee privileges, like a gym membership or bus pass, the perceived value of that perk in your employees’ eyes may be far greater than you realize. Eliminating personal and professional development opportunities may end up jeopardizing the happiness of your employees and can unintentionally result in reduced employee productivity and effectiveness.
Cost Optimization
Cost optimization, however, is the process of finding an alternative to cost-cutting by analyzing systems, processes, and procedures to identify areas that will deliver the highest level of service or value, but for the lowest cost possible. With that said, there are three major components that must be built into any and all cost optimization strategies; efficiency, alignment, and ROI.
- Efficiency
CIOs and IT leaders must work to identify areas within their infrastructure where efficiencies can be gained in order to eliminate other expenses. Take tiered storage for example; many businesses have hot data that is regularly used, as well as a larger amount of cold data that is almost never used, but they can’t get rid of it. Organizations used to either waste a lot of money putting that cold data on an expensive storage array, or spend more money on hardware for an archival storage array. This is not to say that archival storage is never used, because it is often seen in cases with long retention policies such as banks and law offices. However, tiered storage now allows organizations to put their hot data on high performance disc or flash and keep their cold data on cheap disc, creating a more efficient infrastructure environment at a lower cost.
This same philosophy needs to be applied to all areas of a business. In order to achieve optimal efficiency from both an operational and cost standpoint, enterprises must leverage those tools and resources that will deliver the maximum amount of benefits and/or efficiencies at the most cost-effective price.
- Alignment
Going hand-in-hand with identifying areas where efficiencies can be gained, the strategic alignment of an enterprise’s core business functions is critical to executing a successful cost optimization strategy. Every organization has a wide variety of teams and departments that play a unique role in achieving company goals, but it’s important to ensure that all initiatives pursued by these individual teams are aligned and in support of the company’s objectives and overall vision for the future. Any initiative, and the expense associated with it, that does not support an objective that leads to enterprise-wide success should be eliminated immediately.
It’s no secret that there are a lot of moving parts involved in the successful operation of a business, but as is in any team environment, the efforts of individual departments must cohesively work together to solve for business challenges, implement strategy, and help realize enterprise-wide success.
- ROI
The concept of ‘invest now, save later’ has become increasingly important as digital transformation has become more prominent. The need for enterprises to transition from legacy infrastructure environments to more cloud-based, agile environments has grown, and in turn has caused many IT organizations to allocate the majority of their budgets to an IT transformation in an effort to better adapt to these demands.
There’s no doubt that IT transformations are expensive, but too often we see enterprises delay key infrastructure updates in the hopes of saving a few dollars. Not only does this negatively impact an organization’s day-to-day operational capabilities, but enterprises that choose to maintain and manage legacy systems, rather than incurring the upfront fees of new systems, often wind up with a higher total cost of ownership (TCO).
Enabling digital business has become a major priority for modern enterprises, and although reducing costs is always top of mind for IT leaders, the benefits of cost optimization significantly outweigh those of cost-cutting. Organizations have a choice to make when it comes to reducing IT costs, but those that seek to ‘optimize’ rather than ‘cut’ will thrive in today’s digital business era.