Cost-cutting has become inevitable for many businesses in today’s challenging business environment. CFOs, who optimize costs and make sure expenditure does not outpace revenue, give their enterprises an edge. But many CFOs make mistakes that compromise the ability of their enterprises to fund digital growth and reduce expenses. Here are four cost-optimisation mistakes CFOs should avoid in 2022.

1. Not seeing the big picture

Many CFOs do linear thinking and raise their cost-cutting bar too high. They make blanket cuts and set unrealistic targets, oblivious to the broader implications of their measures. Overambitious cost-cutting targets often stifle growth.

Gartner estimates only 43% of enterprises meet their cost-cutting targets in the first year. A majority of the enterprises do not achieve the objectives of the cost-cutting exercise, but they still go through considerable disruption.

To overcome such instances, CFOs:

• Resist the temptation to make across-the-board cuts in visible areas such as salaries and input costs. Often, cost-cutting takes place under pressure. CFOs target whatever is visible first. Such knee-jerk actions under-fund critical areas, even as inefficiencies linger. For instance, many CFOs downsize staff, as the salary bill is a visible big-ticket expense. Reducing the headcount may indeed improve the bottom line in the short term. But it may also lead to delayed ticket resolution or longer work execution timelines. The poor customer experience may cause more significant harm to the enterprise in the long run.
• Consider the broader implications and not only the ROI when cutting services. For instance, the allocation for network security rarely delivers any direct ROI. But under-funding security is disastrous in today’s digital ecosystem. Cyber-criminals trace out vulnerable networks and attack at will.
• Focus the cost-cutting initiatives on areas that no longer fit the post-pandemic world. For instance, it may be better to let go of some office space rather than deny funds to upgrade the network security infrastructure.
• Identify unnecessary red tape procedures that slow down the organization. Eliminate costs associated with such red tape.

Successful CFOs apply a value-based framework to cut costs. They engage with business leaders to identify the utility and business impact of items marked for cost-cutting.

2. Ignoring out-of-sight expenses

Many CFOs remain oblivious to costs or expenses that stay under the hood and are not visible in plain sight. For instance, many large enterprises have unnecessary servers running. The IT team may have set up such servers for some specific purpose that ended long ago. But without an IT audit or consolidation exercise since then, the wastage remains invisible.

One of the biggest resource-guzzlers that remains invisible is cloud services. Businesses subscribe to cloud services to cut costs. But indiscriminate subscriptions and neglect to manage such services lead to considerable wastage. The best CFOs keep a tight leash on the enterprise cloud spend. They collaborate with the CIO, and other technical and business heads to:

• Track and shed idle, aging, or inactive instances that give low or zero returns.
• Estimate the correct cloud instances and size. Improperly sized cloud instances wreak havoc on the budget and impact performance. Optimizing the scheduling of resources reduces costs by as much as 50%.
• Adopt a multi-cloud strategy to choose the most beneficial options.

3. Not sustaining the behavior change

The benefits of cost-optimization are realized only with sustained savings. Saving costs on a one-off project may impact the bottom line of the immediate period. But such savings are rarely sustained for the long term. Gartner estimates only 11% of enterprises maintain cost savings for three consecutive years.

The best CFOs:

• Identify non-standard processes and strive to streamline the same by eliminating unnecessary parts.
• Eliminate costs that do not deliver positive returns and reallocate the resource for more value-adding tasks. For instance, they identify and cut manual processes and instead invest in alternatives such as automation. The efficiency benefits and faster time-to-market payback for such investments many times over.
• Identify the long-term savings and implications of technology change. For instance, a new integrated cloud-based document depository may not show a direct ROI benefit. Work may very well go on using the incumbent systems. But the seamless collaboration facilitated by the new investment may herald a positive work culture. The investment may deliver substantial productivity gains and enable businesses to seize opportunities.

4. Choking innovation

Enterprises seeking recovery from the pandemic related disruption need rapid digital transformation. The success of such endeavors depends on sustained investments. CFOs remain under pressure to invest in digitalisation while simultaneously rightsizing spending. Many CFOs pull the plug on digital transformation initiatives that do not yield immediate returns. Such indiscriminate cost-cutting may deliver short-term savings. But the savings may come at the cost of long-term damage to the enterprise’s vitality. Reduced budgets often choke innovation or delay digital adoption.

Successful CFOs:

• Spend money to save money. Forward-looking CIOs keep aside a part of the budget for digital transformation growth. Innovation, which delivers a competitive advantage, does not happen without risky investments. Very few enterprises cut their way to long-term sustainable development.
• Commit to a course of action and spend money on such an approach. Many enterprises that understand the importance of digital transformation still make half-hearted investments. They procrastinate, delay payments, or do not commit to the project entirely. Making tentative investments delays time to market and causes the business to lose its first-mover advantage. In such a scenario, the project cannot realize the desired ROI. The investment may go down the drain.
• Spend on suitable projects. Misaligned spending is often the most significant wasteful expenditure. When there is a lack of clarity, enterprises may choose not to spend the money and lose the opportunity. Many enterprises have been underspending on digital, even when they have the budget. For instance, only 9% of enterprises create enough capacity to take on the growth opportunities they pursue. The onus is on the CFO, CIO, and business heads to collaborate and identify priority areas for digital spending.
• Get the maximum value out of contracts with third-party service providers. Gartner estimates two in every five IT leaders regret technology purchases. The primary cause of regret is unfavorable terms or overpriced fees. Getting maximum value from contracts needs a collaborative teamwork approach. In this instance, the CFO, CIO, and business heads have to join hands to negotiate with the vendor.

Successful CFOs take calculated risks. They cost-cutting areas but also continue to invest in digital transformation. They focus their investments on areas that deliver maximum value and serve customer needs well.

Here are seven cost-optimisation tips to make your IT infrastructure hyper-efficient.