Cutting costs to grow the business seems contradictory. But during these tough economic times, the C-suite expects the CIO to perform such magic. Amid the pandemic, several businesses have no choice but to cut costs to survive. This tech blog for IT professionals details ten ways the CIO can cut costs without compromising service.
1. Target discretionary spend
The first and obvious target of cost-cutting is discretionary spending. Capacity addition and upgrades become dispensable when the survival of the enterprise is at stake. In tough times, even employee development activities such as training may take a backseat. It makes little sense to train an employee when the business model itself might be in danger of becoming obsolete.
2. Convert Fixed Costs into Variable Costs
Fixed costs remain constant, regardless of the activity or volume. Examples include office rent, payroll, and subscriptions. Run a tight ship, and cut the flab in fixed costs. For instance, shift to a smaller office, at a less prominent location, considering work from home is here to stay.
Variable costs change with activity or volume. Examples include consumables and contract employees. Convert fixed costs into variable costs, to the extent possible. For instance, outsource tasks instead of hiring new full-time permanent employees. It is easier to attribute variable costs to a revenue source and bill the client accordingly.
3. Focus on Immediate impact
Businesses think of cutting costs when customers do not buy their products or services, or make good payments. A severe cash flow crisis often accompanies the need to cut costs.
Cut costs that result in immediate savings, and where the financial health of the enterprise improves in weeks. Cutting costs where the result becomes apparent only after a few years makes little difference to the immediate sustainability of a business.
Expenses incurred weekly or monthly, or on a “pay as you go” basis are prime candidates for axing, to get immediate results. Some common expenses include office refreshments.
But many CIOs freeze or suspend costs to overcome cash flow issues. While this may help to resolve the immediate cash flow problem, it does little to fix issues that impede profitability. The enterprise at best buys more time to deal with the issue. For the long-term sustainability of the business, focus on eliminating rather than postponing costs.
4. Focus on Capex
All expenses are capital expense (CAPEX) or operational expense (OPEX). Gartner estimates 25% of the average IT budget is CAPEX. Operational expenses are more visible and easier to cut. But the big savings may come from cutting operational expenses, as Capex spending tends to be huge. The CIO may, for instance, cut investment in a new CRM system and make do with the incumbent system, until the financial situation improves.
Cutting Capex instead of Opex ensures the day-to-day operations remain relatively unscathed. It also avoids collateral damage, such as low employee morale, because of layoffs.
5. Invest in Efficiency over Growth
Not all Capex expenses deserve a cut. Spend the development budget to save running costs. For instance, investment in automation cuts payroll costs. The workforce, free from non-productive drags, focuses their energies on tasks that add value. The improved accuracy and faster time improve the competitiveness of the business.
Optimize IT as an agile service. Make the best use of assets. Simplify processes to make IT lean.
Spending more when trying to cut costs is not counter-intuitive. The investment in automation or other lean, agile interventions may pay back for itself in a few months through big savings. The enterprise becomes more capable to withstand present and future shocks.
6. Cut Cash Expenses
The balance sheet contains many line items. Eliminating or reducing some line items such as depreciation or amortization can make a big difference to the balance sheet. But such costs are only notional. Tinkering with the deprecation of IT assets may make the balance sheet look healthier. But it does little to improve profitability or cash flows.
Reduce items that have a real cash impact on the business. For instance, cost savings in cloud services reduce the monthly cash outgo and have a real cash impact.
Work with the finance team to explore each expense line item in detail. Identify specific cash expenses that will make a real impact.
7. Consider Sunk Costs as Irrelevant
Many CIOs continue to pour in money on projects, to save the investments already made. This may be akin to throwing good money after bad if the business model has changed since the time of the investment. The project may have become unsuitable or frivolous in the changed business realities. Sunk costs are irrelevant when trying to save money.
Decisions to abandon investments, however, need careful thought. Consider if the savings in further cash outflow will be more than the benefits if the project continues. For instance, the business may operate safely and effectively during a pandemic, if they have a field management suite enabled. It also equips the enterprise to cope with the effects of supply chain disruption. But upgrading to a new CRM may not make sense when the user base shows an alarming decline.
8. Seek Innovative Business Models
Cost-cutting need not mean letting go of an asset. Innovative business models enable the enterprise to have the cake and also eat it. Many airlines survive the harsh pandemic times by selling their fleet to financiers and leasing it back. Nothing prevents CIOs from adopting the same business model for their enterprise IT assets. They may, for instance, abandon on-premises servers, and subscribe to cloud-based services.
9. Do Not Hesitate
Most CIOs approach cost-cutting tentatively. The result is always inadequate, forcing a second round of cost-cutting soon.
Give no allowance for emotions when cutting costs. If there is no alternative to let an employee go, do not hesitate. Letting a few employees go is better than making the enterprise unsustainable, and eventually letting everyone go.
The enterprise and the surviving team members will recover from the exercise. But repetitive cost-cutting exercises create a climate of fear and uncertainty. This is destructive and dangerous for the health of the enterprise. It lowers morale. The top talent in the team will look elsewhere, even if their jobs are not in danger.
10. Have a Method to the Madness
Cutting costs may be inevitable, but cutting costs indiscriminately, without a plan, often does more harm than good.
Benchmark enterprise IT spending and costs to industry standards. If operational expenses are higher than the industry average, there is room for cost optimization. But if operational expenses are already low, further cuts may affect service quality. Cutting costs beyond a point could lead to a downward spiral of low quality, low staff morale, and degraded customer experience.
CIOs have their tasks cut out to optimize costs in a way that is least damaging to the competitiveness of the enterprise. Some ideas may reduce the IT spend, but might impact the business adversely. A case in point is cutting down on website maintenance or online marketing. The business will perform poorly in online search and visibility, leading to lower online sales.
Set up a cost optimization governance team. Brainstorm and evaluate all ideas proactively. Establish baselines for the cut, and review progress regularly. Spread ownership and responsibility of the exercise to the team members across the enterprise.
As the adage goes, “when the going gets tough, the tough gets going.” CIOs who rationalize costs in a structured and methodological way will weather the storm. Enterprises that spend strategically during a crisis emerge as leaders when normalcy returns.
Check here to learn more about “Top IT Cost Optimization Techniques“.
