Many organizations are facing the demand to reduce costs in the short term. Even if they plan to use technology in the long term to save money, they may have to make some cuts in the meantime. The question for CIOs is how to reduce costs without hurting the business in the mid-and long term.
To be successful, organizations need to take a structured and programmatic approach to cost management. They need to invest strategically in tough times to emerge as leaders.
According to Gartner, 39% CFOs will zero in on cost-cutting if inflation remains high in Q4 2022. This will turn into explicit demands for rapid cost-cutting.
How can CIOs carry out rapid IT cost reduction?
- Target immediate impact: Target expenses that are incurred and paid monthly or quarterly on a pay-as-you-go basis instead of annually and reduce or suspend them.
- Reduce, don’t freeze: Focus must be on costs that can be truly reduced or eliminated. CIOs would not wish to just freeze costs for the current period only to have them reappear at a later stage.
- Cash is king: Target items that will have an actual cash impact on the profit and loss statement. For example, saving costs in cloud services will have a real cash impact, unlike reducing on-premises software licenses or owned assets such as hardware. Selling and leasing back assets can bring actual cash savings as well.
- Plan to do it once: Most organizations are not able to cut deeply enough the first time. They may often need to revisit costs and do it again. This will lead to a destructive and unproductive cycle of uncertainty and effort as well as decreased productivity.
- Carefully inspect accounts: Working with their finance partner will give CIOs a solid view of the expense-level detail. They can then use this view to identify specific cash reductions that will have an immediate impact.
- Target unspent and uncommitted expenses: If payments can’t be recovered or prepaid amounts returned, the most immediate impact will be on any payments that have not been used or committed yet. Review contracts for renegotiation and termination clauses.
- Address capital: Operating expenditures are easier to reduce, but capital expenditures can also be cut. A study by Gartner IT Key Metrics Data shows that 25% of the average IT budget is spent on capital, so make sure you consider all areas of your IT budget when looking for savings.
- Sunk costs are irrelevant: It is important not to consider past spending when making decisions about the future. This is because past spending cannot be changed, and it would not be wise to make decisions based on what has already been spent. However, it is still worth considering whether the savings from making a decision will be more than the benefits that can be delivered by continuing with the current course of action.
- Address discretionary and nondiscretionary costs: It can be easy to cut back on discretionary spending, like for new projects or services. However, even necessary expenses, like IT infrastructure and operations, can be reduced by using less or choosing a lower service level.
- Tackle both variable and fixed costs: Fixed costs are expenses that stay the same, no matter what. This might include office rent, subscriptions, or payroll. In this case, the focus must be to eliminate them. Variable costs change depending on how much work is being done. This might include things like telecommunications, contractors, or consumables. For variable costs, CIOs can focus on both reducing and eliminating them.
In the face of rising costs and inflation, many businesses are feeling pressure to reduce their spending. While it’s important to take action to reduce costs, it’s also important to ensure that these cuts will not damage the business in the long run. Following these 10 rules will help you cut IT budgets rapidly and productively, without jeopardizing your company’s future.