Cost-cutting is the norm in today’s recessionary and disruptive business environment. Companies face multiple challenges, such as low demand, wafer-thin margins, and hyper-competition. Amidst such challenges, they need to invest in innovation for competitive differentiation. In such a state of affairs, simple expense-line trimming no longer suffices. Enterprises have to optimise the business value of IT and focus investments in technology that adds business value. Here are the five project cost optimization tips one can follow:

1. Have a method for digitalization

Digitalization is inevitable for any enterprise to thrive in an Industry 4.0 environment. But many enterprises upgrade their digital capabilities indiscriminately.

• Adopt an integrated approach to digitalization. Sync digital transformation plan with business strategy. Prioritize digital interventions to areas that deliver maximum business efficiency and savings.
• Have a clear view of the innovation agenda of the business. Map the good costs and bad costs relative to the strategy. Good costs support the business capabilities needed to further innovation. Bad costs refer to non-essential costs not aligned with the overall business strategy. Cutting such costs does not impede the innovation agenda. An example of good cost is substituting obsolete machinery for efficient ones, to speed up the time to market. An example of bad cost is power consumption in unoccupied office rooms or even the office itself in the age of remote work.
• Leverage emerging technologies, such as the IoT and automation, to build intelligent processes. Investment in automation pays back through process efficiencies in a short while. IoT also offers real-time status and state of enterprise assets, enabling prompt action, such as proactive repairs. Such technologies provide the platform and building blocks of innovation.
• Develop systems that sync with the latest trends, such as outsourcing and work-from-home. For instance, make sure IT governance considers outsourcing and remote work. Tailor security policies likewise. Friction in such systems breeds inefficiencies, adding to costs. It also stands as a barrier to rolling out innovation.
• Ensure digital transformation initiatives have the support of the rank and file. An enthusiastic rank-and-file increases adoption and delivers savings on training costs.

2. Adopt targeted interventions

Optimizing costs requires targeted interventions to eliminate instances where the cost exceeds the value. The exemptions are regulatory mandates and safety.

• Identify and remove wasteful processes proactively. Optimize workflows by adopting lean and agile principles.
• Apply advanced analytics to improve performance, reduce customer churn, and boost marketing. Analytics also identify outliers and inefficiencies. Often, solutions depend on innovation.
• Promote self-service technologies, especially for customer support and HR. The support staff is one of the biggest cost-centers for any enterprise. Self-service not only reduces staffing costs but also improves customer satisfaction. Many customers prefer getting things done on their own rather than waiting for service.
• Eliminate low-value meetings. Use asynchronous communication to the extent possible. Such changes reduce infrastructure costs and improve employee productivity. It gives knowledge workers time to reflect, think, and experiment.

3. Consolidate

The key to cost-optimization is getting the basics right. Simple as it sounds, many enterprises overlook such apparent considerations. Consolidating enterprise resources and events makes the organization efficient, focused, and growth-oriented. It eliminates waste and channels the innovation to growth aspects.

• Consolidate data centers. Identify and eliminate silos to ensure transparency and free flow of information. Investments in simplifying enterprise systems pay back for themselves through efficiency improvements. It promotes faster decision-making and a shorter time to market, making the enterprise more competitive.
• Virtualize servers and databases. Many enterprise servers, especially legacy ones, have low utilization rates. Partition such dedicated servers and host multiple applications. Often, innovation-centric projects require huge computing loads to make them financially unviable. Virtualization and consolidation optimize resources and make costs affordable.
• Use containers. Linux containers with self-contained runtime environments reduce hardware expenditures. Containers also improve the much-needed flexibility to enable innovation.
• Redesign or reorganize the lowest value activities that consume the most effort while giving the least returns. Such activities often correlate to discretionary and non-mission-critical perks and activities.
• Decommission legacy software that is no longer used. Many of these software may still attract annual licensing fees.
  
• Enforce control of “miscellaneous” spending, such as supplies, shadow IT, travel bills, or anything else.
• Promote remote work to save on office space.
  
• Consolidate activities such as event tickets, bonding parties, and more. Eliminating such costs may be counterproductive since such costs exist for a reason. Instead, merge these activities. For instance, merge training days and celebrations as a single event. Cross-schedule the use of outside resources, such as facilities and trainers. Combining events generate cost savings as high as 40% of the combined cost.

4. Improve supply chain and inventory management

Supply chain leaders enjoy 20% to 50% lower supply chain costs compared to average performers. Improving the efficiency of the supply chain leads to a focused and purpose dependent enterprise.

• Re-evaluate pre-pandemic concepts. Lean methods such as Just-in-Time inventory have fallen out of favor owing to the disruptions caused by lockdowns. Yet, the core principles of supply chain optimization through similar interventions hold good.
• Enable real-time tracking of inventory to unlock cost-saving initiatives. For instance, field agent schedulers may assign work orders after ensuring spares availability. Such a move improves first-time fix ratios and spares technicians from making a wasteful trip to client premises to fix equipment. Similarly, real-time inventory tracking triggers re-orders well in advance to avoid stock-out situations.

5. Tackle HR challenges heads-on

Most enterprises have unresolved HR issues. Such issues could lead to significant invisible cash outflows that sap the enterprise’s vitality. It also distracts the enterprise from its core objectives.

• Restructure jobs. Automation and other interventions free up human resources for routine tasks. Entrust higher value tasks to such employees. Free up the time of knowledge workers to enable them to think, reflect, and experiment.
• Empower employees. Make employees responsible for their decisions to reduce supervision costs. Many functional departments spend as high as 20% of their budgets to supervise and coordinate their activities. Innovation thrives in such a culture of trust.
• Reduce turnover. Losing skilled personnel is disruptive. Replacing them is costly. But do not hesitate to terminate underperformers. Innovation needs a high-performance team, committed to the culture of the learning organization.
• Outsource to fill skill gaps. Hiring permanent employees for everything is obsolete and cost-ineffective. Outsourcing makes better financial sense in most situations. In the age of technology fragmentation and constant changes, no enterprise can retain all the required talent on rolls. Success rather depends more on the cultivation of an ecosystem of partners. Strike relationships with expert independent contractors. Leverage their abilities on a contract basis as and when needed. Focus on business outcomes, such as customer satisfaction in such relationships.

Long-term stability is a mirage in today’s fluid business environment. Cost-cutting promotes resilience and adaptability, and offers a platform for innovation to thrive. It also ensures the enterprise has resources to further innovation while waiting for better times.

In the quest for optimizing costs, enterprises make several mistakes as well. Here are four cost optimization mistakes for CFOs to avoid in 2022.