Eight lessons learned when reviewing IT cost

While most IT organizations have been conducting IT budget reviews regularly for years, there are always opportunities to further improve the processes and get even more out of the IT cost review effort. COVID-19 further amplified the need to review IT budgets and reallocate precious IT resources. Having done this exercise many times for clients across different industries over the last 20 years,  I am sharing my eight key lessons learned in this blog. When those issues are resolved, I have seen opportunities to rebalance 15-35% of the IT investment portfolio.

Companies are increasingly conducting IT cost reviews and IT budget reallocation. There are a number of reasons for this:

  • Shifting investment to fund new initiatives: AI, analytics, IOT, 5G etc. are emerging technologies that are getting a lot of attention. However, all those emerging technologies require significant investment before they can generate tangible paybacks. Companies are reviewing current IT spend to identify opportunities to shift investment into the new.
  • Enterprise priorities: Many companies continue to focus on enterprise efficiency opportunities to improve overall profitability. Given that IT cost is often one of the largest expense line items, IT gets more attention and must contribute to the overall company savings as everyone else.
  • IT’s internal drive to become more efficient: CIOs might also be conducting annual exercises to review the IT budgets and identify improvement opportunities.

The recent war on COVID-19 will further amplify the need to review IT budget and reallocate precious IT resources. As companies move to launch the re-starting of their post-COVID 19 business operations, many will no doubt review their IT budget and reallocate capital to more urgent areas.

 

Having done hundreds of IT cost review projects, I have observed eight key issues that companies often face and should proactively address:

  1. Start with low aspiration
  2. Does not challenge the “sacred cows”
  3. Make this an IT only effort
  4. Not willing to kill in-flight projects
  5. “Not invented here” syndrome
  6. Make the effort only about IT cost reduction
  7. Make this a short term exercise and not identify structural changes
  8. Not creating an “ongoing system”  

 

Let me go through the issues in detail one by one.

 

1. Start with low aspiration

This is probably the biggest untapped opportunity for effective IT cost review. One of the recent IT cost reviews I did was for a major healthcare company. When I started the exercise, the clients told me that they had pulled all the levers and were able to reduce IT budget every single year. “There is no juice left to be squeezed”. I challenged the client to think about the scenarios of reducing the current IT budget by 25% and even halving the current IT budget. Guess what? By thinking out of the box and challenging the current thinking, we identified a number of major opportunities and significantly rebalanced the current IT investment portfolio.

At another payment technology company, the CIO set a goal to reduce the IT unit cost by 7% every year. There was no science behind the choice of 7%. As he said, “I picked 7% because 5% is too low and doing 10% every year for 10 years might be difficult”. But the aspiration of 7% unit cost reduction a year raised the ambition level for the whole IT department and they over-delivered on that every single year.

 

2. Does not challenge the “sacred cows”

Most companies have existing operating principles. Some of those might be explicitly documented and some might not be. An IT cost review effort should explicitly document and challenge the status quos and “sacred cows” since those tend to be the true demand drivers behind the current cost structure. Challenging the “sacred cows” will be extremely effective when the aspiration has been raised.

Some examples of “sacred cows” include:

  • One of my payment technology clients would declare that all applications should have the same level of service levels as their core transaction processing systems.
  • The healthcare company aforementioned would argue that all field support must happen onsite, even though there are opportunities to provide some support remotely. However, the COVID-19 virus proved that my hypothesis for remote support was spot on.
  • Another one of my healthcare clients would state that IT can’t say no to the business. In reality, business doesn’t understand the cost associated with their requirements. Once the cost tradeoff is explained, business is very likely willing to make necessary adjustments.
  • The CTO of a company wanted to ensure all applications can be multi-cloud compatible. However, a number of cloud providers directly compete with the company already and the chance of the CEO approving the company to adopt such competitors’ cloud offerings just doesn’t exist.

Those “sacred cows” must be explicitly captured and challenged.

 

3. Make this an IT only effort

IT costs are driven by business demands. Business decisions such as growth projections with increases in the number of customers, number of partners, and number of locations, service level agreements for IT services, and IT projects to invest in are often the biggest cost drivers for IT. Thus an effective IT cost review must start with the review of business demand so that explicit debates between business demand and associated IT investment can be conducted.

Unfortunately, many IT organizations don’t have the will to stand up to the business for this. They often don’t have full transparency into the current IT cost. And they don’t have the ability to adjust the cost even when the business is willing to reduce the demand. For example, one of my clients told me that after conducting an IT cost review, they were willing to sunset 20% of their IT applications. However, the IT infrastructure group told them that IT Infrastructure can only reduce the cost by 2% because of contractual agreements and IT infrastructure set up. With this, the business lost interest in helping IT optimize the IT application and investment portfolios.

 

4. Not willing to kill in-flight projects

Capital expenditures or new project proposals often get the highest attention during an IT cost review. Given that the money hasn’t been spent, it is natural for companies to scrutinize proposed spending and identify ways to adjust the proposals. Another big opportunity for IT investment rebalancing is actually to review the proposals for the remaining spend of in-flight projects. Given that many IT projects are often behind schedule and over budget, just because the projects have already been started doesn’t necessarily mean that companies should continue to invest in them. In practice, however, many companies would treat those in-flight projects as business-as-usual and not willing to challenge the need for continued funding.

 

5. The “Not invented here” Syndrome

“We are different” – this is probably one of the most commonly heard statements in IT. Given that technology decisions are typically not black and white, this “we are different” statement is often true. However, this statement is also most likely a key reason for companies to not be willing to adopt best practices. And sometimes they are not even willing to adopt practices from other business units within the same company. For IT cost review exercises to generate significant impact, the reviewer must be willing to push the envelope and identify where things are the way it is because of the “not invented here” symptom.

 

6. Make this only about IT cost reduction

As we discussed above, one of the big opportunities for IT cost review is to actually rebalance the portfolio and shift IT spend to more strategic areas. However, some companies still focus solely on reducing IT spend vs. rebalancing the portfolio. Given that technology is increasingly becoming centric across many industries, such cost-only focus will potentially reduce companies’ long term competitiveness. While waste in IT must be removed, new technology investment should also be made to ensure that companies continue to explore strategic technologies and identify new ways to invest in technology to grow revenue and improve operational efficiencies.

 

7. Make this a short term exercise and not identify structural changes

IT cost review is often done as a one-time exercise. IT budgets were reviewed, IT project proposals’ business cases were assessed, vendor contracts were renegotiated, mission accomplished!

The right way of doing IT cost review is to also identify structural changes that will make IT more efficient and effective. For example, moving to Cloud is a structural change that will transform the cost structure of companies’ IT infrastructure. Outsourcing non-essential applications’ maintenance and support will also be a structural change. When conducting IT cost reviews, companies must identify a list of potential structural changes and discuss with business jointly on if those structural changes should be taken.

 

8. Not creating an “ongoing system”

Lastly, IT still has not created an effective cost management system to document costs, cost drivers, and opportunities to improve IT cost. For some big companies, getting to a consolidated set of IT spend across the enterprise is already a daunting task on its own. While initiatives such as Technology Business Management (TBM) are trying to create a set of repeatable processes to allow companies to effectively manage IT cost, the adoption of TBM and similar disciplines is still low. Thus when companies conduct IT cost review, they must consciously also invest in the creation of a set of  IT cost management capabilities so that reviewing IT costs can be as easy as Google analytics.

 

 

 

When those 8 lessons learned are applied, my teams and I were usually able to shift 15-35% of IT spend to more strategic business and IT areas.  Some of the lessons learned here are not easy to do. It requires significant analytical work and more importantly, healthy debates among senior business and IT executives on what sacred cows must be challenged and what structural changes should be made and. In addition, a modern IT investment rebalancing is no longer an exercise solely for left brains. Bringing in designers who apply design thinking to IT spend review and getting everyone to envision an unconstrained future has been proven to be a very effective mechanism to challenge the status quos and raise everyone’s aspirations.

Please definitely let me know if you have additional lessons learned that you would like to share!

Copyright © 2022 Parker Shi. All rights reserved.

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