Traditional, on-premises IT—amortized software, depreciating hardware, etc.—is burdened with fixed costs that are harder to pivot than the variable, consumption-driven costs of cloud solutions. Organizations can deliver cost-cutting quick wins with traditional on-prem IT, but the wins look different than for cloud.
Unlike cloud solutions, many on-prem IT costs are fixed—they don’t change based on consumption. A four-year depreciation cycle on a server array is a fixed cost regardless of utilization. A budget with a high amount of fixed costs (e.g., FTEs, data centers, owned infrastructure) has fewer options for cost-cutting than one heavy with variable spend (e.g., contract labor, SaaS/PaaS/IaaS). Fewer, but there are still options.
Immature organizations recover IT costs with even-spread allocation—the simplicity of the process is burdened with unfairness. When every line of business (LOB) pays the same for IT—regardless of how much they individually use—there are no brakes on consumption. Allocating costs by fairer methods (e.g., by headcount, by revenue generation, by consumption) give each LOB a lever to cut costs by changing behavior.
Five steps to cutting IT costs
#1 Scrutinize existing IT spend. On average, organizations report that between 11-15% of their IT budget is tied up in contingency. Reduce the padding and fund cost-cutting—without impacting vital IT services.
#2 Leverage a rolling forecast cadence. Identify variable spend you can cut (e.g., vendor contracts expiring in less than 30/60 days, contractors) or projects that can be either canceled or deferred. Ignore on-prem infrastructure still within a depreciation cycle— fixed costs can’t be repurposed elsewhere.
#3 Have the right insights available to cut down the time to act. An exercise in understanding application costs to identify areas of savings begins in a defensive posture if the first act it to hire analysts for a couple of weeks to calculate application total cost of ownership (TCO). These are the right insights, but the timing is all wrong. CIOs don’t have time to wait for the right insights before acting—insights must always be available.
#4 Focus on business value. In the current economic climate, IT spend not delivering business value is a prime candidate for cost-cutting. But 45% of organizations have no formal way of measuring IT’s value, and only 7% are successful at demonstrating the value of IT to the rest of the business. Demonstrate how IT delivers business value to avoid across-the-board cost-cutting mandates.
#5 Deliver quick cost-cutting wins to get ahead of the re-forecasting process. Annual plans in every organization are being re-forecast. It’s time to consider a purpose-built ITFM solution.
Quick cost-cutting wins
Apply IT financial management principles
- Accelerating D&A schedules for underused assets
- Retiring assets reaching end-of-life
- Replacing ITFM manual data entry with automation
- Analyzing variance for an indicator of over- or under-provisioned IT
- Retiring over-provisioned IT assets
- Tailoring infrastructure to business need (e.g., using tier 0 storage for Production environments)
- Reassigning unnecessary SaaS licenses
- Negotiating volume discounts with your cloud service provider
- Showing BU’s the TCO of duplicate capabilities
- Retiring legacy infrastructure
- Consolidating contracts with a single vendor
- Using larger cloud instances to reduce the # of software licenses needed
- Limiting VM size through self-service
- Enabling cloud adoption and cost management with a bill of IT
- Tying costs to consumption with showback
- Transferring IT budgets to business units based on consumption
- Using chargeback data to make a business case for moving legacy apps to the cloud
In disruptive times, some organizations thrive, and some flounder
Delivering cost-savings with cloud solutions in 2020 shows leadership. CIOs who react to cost-cutting initiatives may struggle to recover—both their budgets and their credibility. CIOs who lead cost costing initiatives emerge from crises better able to fund business initiatives and with their credibility enhanced.
Apptio and IT cost-cutting
Apptio built its suite of automated solutions for Technology Business Management (TBM) in the aftermath of the Great Recession. Our solutions enabled Apptio customers to make informed cost-cutting initiatives that met the demands of the CFO while still satisfying the SLAs of business partners.
As the economy improved over the last decade, we continued to deliver the core business outcome of IT cost optimization—but those savings were usually reinvested back into IT to fuel more innovation.
In 2020, our customers are using our solutions to deliver the business outcome we first brought to market over a decade ago--smart, deliberate, and cost-effective cost-cutting.
With Apptio Financial Management, close variance, avoid padding, and cut costs: