Efficiency and Cost Reduction

As a follow-on to the blog discussion on efficiency and cost reduction, this page will provide structured access to the blog recommendations as well as further information on key aspects of how to plan and execute robust efficiency and cost reduction programs.

Background: 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? In past posts, I have covered 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.

High Level Approach: 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?rFirst, 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.  Use information from the areas listed below from my previous posts to enable you to build a comprehensive and effective list of initiatives so you can achieve that target. The areas to source your list your initiatives include:

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 (these cuts may not meet the savings target); 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.

I am considering providing additional cost reduction details and templates here on this page, let me know if there are elements in particular that you think should be included.

Best, Jim

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