How to approach cost reduction

Given the current economic climate, IT shops everywhere are under pressure to reduce their costs. And often this has been the case for several years running. So where do you turn for either new areas, or better approaches that do not cut critical function or value? Over the next two weeks, I will cover both short term tactics and long term initiatives to get your costs down and deliver more value to your company. And if you happen to be the rare IT shop where cost reduction is not a primary goal, count your blessings, but be sure to apply these approaches in the background anyway, as it will enable you to build a stronger and more valuable shop.

Assuming that you have been given a task for either this year or next year’s budget to achieve cost reductions, what should your high level approach be? First, ensure you understand the business drivers for the cost reduction — are you losing market share? Are your overall corporate efficiency ratios too high? especially versus the competition? Is the view in the business that IT costs too much? Does not deliver value for the cost? Or, are there quarterly projections that must be met to satisfy the Street?
It is critical to understand the drivers of the request as your response should vary. For example, a focus on overall efficiency ratios would imply you require a long term plan and you should be working closely with business operations teams to jointly drive down total cost. Or, a focus on meeting near term targets indicates you will have concrete savings goals that must be met, but that it may be possible to simply defer critical spend into later quarters where revenues are higher. And if there are questions on IT value, then you must assume you have work to do with your business partners to communicate and demonstrate the value your team is bringing to the business.
Assuming you have ascertained the underlying drivers and you have cost reduction requirements that are enduring, what is the best overall approach?
First, it is critical to engage your team and ensure they are brought into full knowledge of the challenge. I strongly recommend against arbitrary or parceled out reductions. The opportunity to achieve savings varies widely within each group and assigning across the board targets will actually hurt some teams and will not put enough pressure on others. Even worse, next year, the lesson is that everyone will now sand bag on their budget because they will assume they will get an arbitrary cut. Instead, set an overall goal for the team and begin a bottoms up list of initiatives to achieve the savings. My next series of blogs will cover how you build a comprehensive and effective list of initiatives so you can achieve that target.
Once you have a draft of how to achieve the target, I recommend you always go back to the business with options. Typically you want to provide at least three: a series of minimal cuts that are very doable and have minimal business impact; second, a set of moderate cuts that meet the target and have some level of business impact; and lastly, going beyond, but where major business decisions must be made to confirm the level of impact is acceptable. By going back to the business with options, and your recommendation of course, you will enable the business to be in control and view you and IT as a partner in jointly solving the business imperative.

Over the next week we will cover how to get a comprehensive and doable set of initiatives that have both short term impact and long term benefits.

That is all for now, let me know your thoughts on the approach and how the cost environment is out their today.

Best, Jim

About Jim D

Jim has worked in the IT field for over 25 years and as a senior leader for over 15 years. He has successfully turned around a number of IT shops to become high performing teams and a competitive advantage for their companies.
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5 Responses to How to approach cost reduction

  1. Kevin M says:

    Jim,

    This is awesome stuff. The opportunity to continue learning from you is very much appreciated.

    Kev

  2. Amit D says:

    Jim.
    As always, it is an extremely well written article!
    I totally agree with your recommendation on the importance of understanding the motivational drivers for cost reductions first before identifying the remedy and strategizing the approach to meet the goal.
    Moreover, as IT leaders, we must be cognizant of the fact that there are “stated” objectives and then there are few “un-stated” elements associated with those desired goals which can be of tremendous value (can be anything like easier usability or improved customer experience or reducing effort/time or offering better business intelligence etc…) to the stakeholders. Most of the times, these additional tangible or intangible elements can be baked in as part of the solution through better design/planning than any increased cost.
    So, when IT leaders showcase various solution options to business highlighting its return and potential degree of impact, they must also demonstrate how IT these additional “un-stated” needs were thought through by IT and factored in the solution to provide higher value.
    Getting results that consistently aims to exceed expectations against desired objectives and closely experiencing the process, culture and philosophy how such results are generated by IT plays an instrumental role to build trust, credibility and credentials.
    This enhanced involvement from IT to achieve business value will most certainly bring business more close to IT and foster stronger partnership.
    Best Regards,
    Amit

    • Jim D says:

      Amit, thanks and I think you make an excellent extension with the points about ‘unstated’ objectives. Often there are other goals that the business would want to achieve through such an exercise, such as greater focus of all corporate resources on products or business that are doing better, or improving time to market.

      Thanks for the good extension.

      Jim

  3. Ben R says:

    Jim

    I just started reading your blog so you should see some comments from me to some of your older posts.

    I enjoyed this post very much. I especially like how you reinforced the idea of cost savings as part of the goals for an IT organization and how that cost savings has to be tied to the audience that is requesting the cost savings. I think sometimes when IT managers hear cost savings they think reduction in staff or layoffs but in reality an IT manager needs to understand as you mentioned who is asking for a reduction in expenses and predict why they might be asking for these reductions.

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