IT is in a growth trajectory. But costs often outpace revenue in today’s challenging economy. CFOs of top-performing enterprises seek IT cost-cutting, even as they support new technology and growth initiatives.

Doing more with less gives the enterprise a definite edge. But reactive cost-cutting mistakes may derail profitable growth. Here are the top IT cost-cutting mistakes to avoid.

Mistake #1: Making Cuts Based on ROI

Today’s CFO’s and C-suite executives seek to quantify everything. They commit resources only when they perceive a positive ROI. The sense of urgency in a fast-paced business environment makes them oblivious to any other consideration.

Several IT functions such as security, disaster recovery, and compliance offer zero ROI. The conventional view holds the entire IT as a cost-centre. CIO’s on a cost-cutting spree target these functions. If nothing else, they do not release funds for upgrades. This is a big mistake, for security breaches leading to loss of sensitive data, can spell the doom of the enterprise.

Do not consider the cost in absolute terms. Consider the value on offer. Apply a value-based framework to cost-cutting decisions. Position each business area according to its performance across various dimensions. 

Mistake #2: Firing Staff Indiscriminately

Many CFOs, staring at losses, make across-the-board cuts. Such cuts could sap the quality of assets or strategic relationship of the enterprise. The cost of maintaining a resource, even if high, might sustain a major competitive advantage.

The best example is firing staff when faced with losses. Salaries and employee benefits are the most visible expenditure heads in any enterprise and add up to a sizable sum.

There is a business case for letting deadwood go. Emerging technologies make some positions redundant, anyway. But issuing pink slips is short-term savings at the cost of long-term system stability.

Losing an employee is the loss of his skills and accumulated knowledge. Incumbent employees are familiar with customer nuances. While HR may hire new hands, the enterprise pays a heavy cost as they go through the learning curve.

Some enterprises equate automation with lay-offs. Automation increases the speed of operations and improves employee productivity. Move staff into higher-value tasks instead of lay-offs.

Mistake #3: Automating Blindly

Prima-facie, automation delivers big efficiency improvements. It streamlines workflows and simplifies convoluted processes. It cuts support costs, spares valuable human resources for higher-value tasks, and speeds up the time to market.

But automating all workflows is a mistake.

Manual workflows and approvals still work best for creative elements such as UX. Artificial Intelligence has not yet advanced to capture human emotions and cultural nuances well.

Most business-critical processes comprise medium to long workflows. The investment to automate short or non-critical workflows may not be worth the investment or the upfront effort.

Test the workflow, its complexity and importance to core business function. Consider the costs required to carry out the automation project, and the net projected benefits. Include intangible benefits such as customer satisfaction. Commit to the automation exercise only if the benefits exceed investment.

Mistake #4: The Cloud as a Magic Bullet to IT Cost Cutting

The cloud delivers on cost savings. But enterprises hoping to generate savings just by migrating their assets to the cloud face delusion.

The ability to cut costs through the cloud depends on

• the deployment type,
• application design and variability,
• security and compliance features,
• the extent of resource optimization.

Achieving these requires considerable technical expertise. The gains realise only in certain situations, anyway.

The cloud changes the cost model from CapEx (capital) to OpEx (operational). An OpEx costing model allows attributing costs to specific functions. But the net costs may work out more in the long run.

Considering the cloud as a magic bullet to cut cost, without proper planning, is a big mistake. In a recent study, 74% of respondents moved their cloud-based app back on-premises, as they didn’t achieve the expected benefits.

Mistake #5: Relying on Cheap Hardware

IT teams face pressure to support and maintain the corporate network with lesser resources. The IT heads apply similar pressure to their suppliers.

Putting pressure to cut costs leads to cutting corners. Rather, optimize existing technologies. Refurbish and refresh devices later in their life cycles.

Many enterprises cut corners on hardware. They look at the price, disregarding quality. The cloud lessens dependence on on-premises hardware. But the enterprise still requires hardware to access the network and for end-user systems. Cheap low-quality equipment often fails at critical times.

Another popular cost-cutting measure is implementing BYOD (Bring-Your-Own-Device.) BYOD transfers the hardware cost to the end-user, but it leads to loss of control and compromises data security. Often, the cost of data and device security outweigh the savings from BYOD.

Mistake #6: Not Developing New Software

Many enterprises put off buying new software, or upgrade incumbent versions, to save money. Keeping ancient hardware and software increases security risk and degrades productivity. It also lowers employee productivity.

Consider the case of a company who cancelled a planned ERP system upgrade to save $100,000 in one-time costs. The company sacrificed several new functionality and automation. The cancelled suite would have allowed the company to save over $250,000 a year in payroll costs alone, over the next five years!

On a related note, many enterprises do not update software. They buy software and forget updating it. End-users need training on the features and functionality of the software, to use it well. The code needs periodic updates to remove vulnerabilities, and co-opt new features.

Mistake #7: Developing Software In-House

Many enterprises try to save money by developing software in-house. This is a good idea if the talent is available in-house. But often the project ends in a disaster.

Consider the case of Federated Sample. The company developed an in-house solution to move its Big Data warehouse from on-premise Microsoft SQL Server to the Amazon cloud. Lack of ability in tackling schema changes resulted in the scripts on the data syncs breaking. The in-house staff had to babysit through the migration process. The company eventually brought an off-the-shelf program that paid for itself in one month.

Many enterprises download unsecured, unauthorized free software. While free software has its benefits, it poses a big risk for the enterprise. The hidden annual costs associated with the upkeep of such software add up to a sizable sum.

The investment to hire professionals for software development is worth it. Professional developers deliver the best of both worlds. They enable the free license and flexibility of open source, without the security risks.

Cost-cutting is inevitable in a competitive business environment. The onus is on the top managers to understand the implications of such cost-cutting exercises and make trade-offs.