How to respond to mandatory IT budget cuts
- 28 November, 2019 08:00
Without a transparent cost base, CIOs will struggle to identify valuable opportunities, particularly when given a short time frame to cut costs
CIOs are under constant pressure to reduce costs, while at the same time maintain or improve performance. This often comes in the form of a direct cost challenge, with a specific target and time frame.
Over the past year, 70 percent of interactions Gartner had with CIOs on IT cost management focused on cost optimisation and cost cutting; with the remainder on value. While most would like to focus on longer-term cost and value optimisation, cutting costs still represents a considerable part of the IT cost management landscape.
Those facing a mandatory budget cut often grapple with how to respond in a timely and effective manner. It’s not easy to substantially reduce a cost base over a short time frame.
Flawed decisions can be made if the rationale and reason for the cost challenge aren’t fully comprehended. Without a transparent cost base, CIOs will struggle to identify valuable opportunities, particularly when given a short time frame to cut costs.
Mandatory budget cuts require the effective generation, evaluation and communication of cost-saving ideas.
Define the scope
The starting point must be to understand the question being asked. Seek clarity on the terms of the cost challenge by asking:
What is the rationale behind the cost reduction?
What is the target and against which baseline?
What is in/out of scope?
Over what time frame are the reductions expected?
Gaining clarity on the specifics of the cost challenge will enable CIOs to form a clear picture of the question being asked, and how to go about answering it. Armed with this knowledge, they can move on to ensuring their cost base is understood and well organised, before beginning to look for cost-saving ideas.
Create transparency in the cost base
The basis for any response to a cost challenge must be organised, solid financial data. To objectively and rationally assess cost opportunities, CIOs must work with their finance teams to gain as much transparency as possible on their current cost base. This means the lowest level of granularity possible within the time frame allowed.
Ensure the asset/general ledger shows IT costs coded to the correct categories with the right accruals in place as a minimum standard of transparency. If this is the only source of IT cost information available to the business, it should tell the story of IT spend as accurately as possible.
If such clarity is lacking, ask the CFO for finance support and enough time to get this base level of cost organisation, before responding to the cost challenge.
Identify cost saving opportunities
The key to realising cost savings is identifying and evaluating ideas in a quick and structured way. Generate a comprehensive list of opportunities, then narrow it down into a set of achievable actions.
Identify and evaluate ideas in a quick and structured way
Plot each idea against the year the saving will be delivered and the size of the saving (high/medium/low). This rules out savings that don’t deliver in the allotted time frame or savings that are far too low to be considered.
With the remaining ideas, look at more detailed challenges against each idea, involving analysis of risk (business and technical) and impact to the business. Remove any ideas where the risk outweighs the benefit.
Finally, reduce and prioritise the list to an actionable plan of 10 to 15 ideas, keeping only the highest-value, deliverable ideas.
Create an action plan
Put the actionable list of ideas into a plan for communication, prior to delivery. Describe any risks in business terms to give the true value impact.
Once your plan has been created, communicate the results to major stakeholders to maintain credibility and momentum. Getting their buy-in is crucial. Start by identifying relevant stakeholders for each initiative. They must sign off on initiatives in their area before the plan is taken to CFO/CEO.
Once executed, provide monthly updates against the plan, informing stakeholders of progress against each initiative, both in financial and risk terms. Changes are highly likely, so ensure they are understood and agreed on, particularly where they lead to a change in the total forecast of savings or level of service provided.
Execute the plan
A knee-jerk, quick response to a mandatory cost-cutting challenge can certainly reduce cost in the short term. However, without proper evaluation, these costs often return in the medium to long term, while damaging business continuity and performance in the intervening period.
To avoid this, follow a structured approach, using an organised cost base to generate and assess actionable, sustainable ideas. Take the time to present a fully thought-out plan, with associated risks clearly identified, understood and agreed to by the CFO/CEO.
Bryan Hayes is senior director analyst at Gartner in the IT finance, economics, value and risk team.
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