Failure is not an option. 

Summary 

CIOs are regularly tasked with cost optimisation initiatives which initially start well in the short term but don’t stick over time.  It is easy to accomplish many of the identified quick wins but as time progresses life becomes tougher and more challenging.  KPMG and the Economist Intelligence Unit estimate that 9 out of 10 cost reduction programs fail to achieve their targets.1 

There are many reasons why in the long run cost optimisation fails, some of which include not knowing what is within their scope, lack of ambition and leadership, and failure to co-ordinate and communicate. 

Most importantly cost optimisation should not be confused with cost cutting.  Simple cost reduction in most cases is an arbitrary cash or percentage cut without considering the capabilities and business outcomes that will be affected. 

Challenges  

Delivering a successful and sustainable cost optimisation programme is not easy, if it were then many academics and consultants would be having different careers.  Some of the challenges faced by include: 

• Many IT leaders do not have the data and information to always know what drives costs, therefore they don’t know what levers they and the business can pull to optimise costs; 

• Short term behaviours and decision making dominating the agenda, therefore making sustainable long term change an uphill task;

Recommendations  

Whilst the challenges look tough there are ways of creating an environment where in the long run cost optimisation remains sticky and part of the enterprise’s DNA. 

• IT leaders need to understand what they own and control. This includes knowing what drives the cost of their activities and the services they provide.  Only then can CIOs pull the right levers and impact spend over the longer term. 

• There needs to bethinking beyond short term cost savings and question raised on the underlying business model so as to take steps to effectively manage costs in a sustainable manner.  Once the strategy has been defined, there needs to be commitment and leadership to deliver on the savings and embed a cost culture. 

Analysis  

Own, Control and Understand 

In most instances IT leaders only have a financial or cost centre view of their world.  Whilst some costs are easy to drive out such as arbitrarily reducing headcount this does not drive long term cost optimisation.  

 “You can’t change what you don’t understand”  –   Orson Scott Card  (Author) 

Cost optimisation depends upon insights and knowledge.  Without knowing and understanding what drives costs, CIOs are unable to make informed decisions resulting in long term failure.   

To achieve sustainable and long term cost optimisation IT leaders need to have complete visibility of their IT landscape.  This includes knowing the pieces of technology owned, how they deliver the business services and capabilities and how much they are used. 

This visibility can reveal any overcapacity, inefficiencies and wastage in the existing architecture.  This transparency is insightful and can deliver both short and long term savings intelligently.  In one real life example an organisation conducted a detailed analysis of their estate and found many instances where one physical server was hosting one virtual machine this resulted in a long term plan to rationalise their server estate.   

However, whilst IT can use this information internally, operating in ‘splendid isolation’ will not lead to a successful a long term cost optimisation strategy.  For cost optimisation to be successful and sustainable there needs to be buy-in from other stakeholders.  

By adding financial information to the operational view allows IT to articulate the savings that it can generate from pursing a cost optimisation strategy.  Talking cash helps break down the barriers between IT and the business.  This will allow IT to show their stakeholders the cost of each service and hence the cost of each supported business outcome.  

Providing a Bill of IT with well-defined services opens a transparent communication line between IT and the business.  The information in the Bill of IT is actionable and the business can clearly see the relationship between business consumption, business demand and IT costs.  Without this visibility, intelligent and thought out actions cannot be taken. 

Once customers know what they are paying for they can make informed decisions.  For example, a gold tier of service is not always required. Professor Holle Schwartz Temple, from the University of Hawaii,  uses the expression, “Good Enough Is the New Perfect”, for those pursuing a work/ life balance.  

This concept also applies to IT services. A detailed chargeback or showback statement will help consumers answer the question, “Do I really need the gold tier of service, or is silver good enough?”. Personal experience has confirmed that most IT users do not know what level of service they are paying for and when revealed they are surprised and look at downgrading where appropriate. This can result in significant cost savings for IT and the business.  Changing the base of how IT services are delivered can take a long time but without that visibility, a longer-term strategy cannot be implemented. 

Go Long… 

As already mentioned there is an expectation that these optimisation initiatives will deliver a change in the cost structure of an enterprise in a short time to meet shareholder and corporate objectives.  Embedding a cost optimisation culture does not happen overnight, it takes time.  IT leaders who fail to make the case for time will ultimately fail in deliver any meaningful long term sustainable cost savings. 

Once CIOs understand what drives their costs, they need to look at their entire cost base and devise a strategy to identify sustainable cost savings. This will reveal of number of opportunities including: 

• Consolidation of suppliers 

• Improved contract and inventory management 

• Procurement effectiveness assessments 

• Zero Based Budgeting 

These activities will take time to complete.  They may require training.  There may be external factors to consider.  However, by identifying these longer-term objectives each can be individually assessed and estimated for their own implementation risk and success.  Once prioritised, the IT leadership team will need communication and change management plans to support the initiative along with progress tracking and benefits realisation. 

For a cost optimisation initiative to be successful, cost have to be kept out once removed.  Therefore, there needs to be a cost-conscious culture.  Cost-conscious behaviour can be embedded into performance management by the CIO to ensure a healthy focus on a continuous performance improvement culture going forward.  Once the savings have been banked, the rebased cost line should become the new norm.  Continuing good cost behaviour is not an unreasonable expectation. 

Challenging the everyday short termism requires a significant cultural change.  CIOs need to create on-going optimisation programmes to keep costs out.  They need to lead by example, by taking simple and visible actions to maintain the momentum and reinforce that a new cost culture is being created.  This requires leadership, ambition and collaboration.   

Conclusion 

There are many reasons why cost optimisation strategies fail in the long run and many actions CIOs can take to prevent this.  

A Total Cost of Ownership analysis and a Bill of IT provides visibility on the total IT landscape and what is being used.  Without these insights, intelligent and sustainable course of action can’t be undertaken. 

The fear of not delivering savings in a short space of time can cloud decision making resulting in poor choices.  IT leaders need to define their lower cost operating model and what needs to be done to achieve this.  The threat of failure looms unless actions are, ambitious and bold to create a culture of cost-consciousness. 

Sources: 

1 Rethinking Cost Structures, KPMG International / The Economist Intelligence Unit, 2006