Why continuous IT cost optimization is essential

After years of tactical cost-cutting, many organizations now face the challenge of continuous IT cost optimization after the realization that optimization practices are never finished, according to Gartner.

According to a worldwide survey of 2,053 CIOs, 65 percent of those surveyed stated that the main barrier preventing organizations from achieving continuous optimization of IT costs was related to mindset (that is, the ability for all resources to work together in the same direction with the same goal). CIOs felt that, if organizations were properly motivated and moving to achieve the same goal, they would make a greater impact on savings.

“Organizations don’t often achieve the desired results from their optimization initiatives, and costs end up returning into the business,” said Sanil Solanki, research director at Gartner. “CIOs should consider incorporating five key principles into their organization’s cost optimization practices to form a basis for continual optimization. These principles are geared toward avoiding the danger of tactical cost initiatives, which may seem to generate savings in the short term, but can mean costs returning into the business in the long term.”

To continually optimize IT costs and avoid dangers that can be created from tactical cost-cutting, CIOs should incorporate the following five key principles into their cost optimization initiatives to ensure ongoing success of the business.

Transparency: Higher maturity IT transparency practices are seen as a prerequisite for better supply and demand decisions, and they enable many enterprises to optimize costs and cut costs the right way, while preserving what is most important to the enterprise. IT business services must be defined and validated by the business for IT transparency and cost optimization to occur. The effectiveness of transparency needs to be considered through defining the business outcomes. This is not possible until IT and the business have agreed explicitly on what IT provides the business and what the business needs from IT.

With transparency, additional benefits can include better demand management, identification of business value, the ability to run IT like a business, better IT estimation capabilities and overall better marketing of the IT capability in general. Without transparency, the worst fears of enterprise stakeholders are often validated. With transparency, the IT organization can change its desired role in the business and enter into different value discussions that balance costs with benefits of IT-enabled endeavors and services.

Agility: One of the most significant factors on the path to continuous optimization depends on the ability of the organization to become more rapidly adaptable to internal goals and external conditions. The challenge of optimizing IT costs isn’t just about trying to reduce the unit cost of IT, but trying to keep a balance between lower unit costs and sourcing IT in a flexible way so that the organization is able to remove or add resources/costs in response to any changes, from both internal and external factors.

A common problem occurs when an organization has been significantly reducing its costs, but then finds itself in a position where the majority of its costs are fixed and on long-term contracts with vendors and service providers. The organization is then unable to reduce or remove further costs if the demand for IT reduces, unless it pays significant penalties to exit those deals. This can also restrain the ability of the organization to repeatedly increase capacity. Therefore, sourcing IT on a variable basis can form a good platform for continual optimization. By adopting agility as a key principle for optimization, the organization will evaluate initiatives in a way that ranks those initiatives, keeping the costs agile at the top. Once the initiatives are implemented, the focus then moves to demand management — ensuring IT leads the business to consume only what is necessary, and providing options to consume IT in a way that steers the business down a consistent and optimized path.

Accountability: In order for IT to be fully optimized, both the supply and demand side must be reviewed. Too often, organizations see optimization as how to best supply the demand for IT. This can create a culture where IT becomes reactive to the business needs and not proactive enough to be able to influence demand. In order for IT to be continually optimized, leaders must take ownership of the futures of their departments. At a minimum, leaders must engage with the business to manage the capacity, features and functions that IT provides. If IT leaders can better predict, with some degree of certainty, the demands on IT, they will be in a strong position to source IT in the most optimal way. One strategy to make the business more aware of its demand for IT is to use techniques such as chargeback and showback.

Simplification: In terms of cost optimization, simplification is about reducing complexity in order to reduce costs. IT systems are inherently complex, but a lack of standard platforms, inconsistent business processes, and poorly defined IT services and service levels are more likely to drive up IT costs.

To be sure, there are factors other than complexity that drive high IT costs (for example, quality of IT staff, quality of leadership and geographic location). However, complexity does impose an unnecessary surcharge, and Gartner estimates that surcharge can be as much as 25 percent on a unit cost basis. That means the same IT unit of work could cost up to 25 percent more in a highly complex environment than it would in a streamlined environment.

However, the goal should never be to simplify at the expense of business value. Rather, organizations that are mature in terms of IT cost optimization will have identified and eliminated unnecessary levels of complexity. These unnecessary levels of complexity are areas where complexity adds no value to the enterprise.

Discipline: Organizations that are able to demonstrate continuous improvement and deliver on the initiatives planned see cost optimization as a discipline and not as a one-off or discrete project. The principle of discipline ensures that cost optimization has an accountable owner and is led from the top (normally by the CIO). It is essential to proactively manage cost optimization and think of longer-term cost targets, with dashboards and metrics to measure improvement, instead of waiting for targets to be handed down from the top management. Organizations that do this well often create a team including professionals from outside of IT to ensure optimization solutions consider business outcomes and constraints rather than purely technical specifications.