As a technologist responsible for IT cost management, you are probably finding that it is getting harder to keep costs under control and more importantly, you are being constantly challenged by the business and customers to validate your costs. You probably are also finding that traditional levers of cost control like offshoring and vendor negotiations for pricing are either not feasible due to factors not in your control or they are not yielding the required outcomes.
Successful CIOs and technology executives understand the criticality of often-overlooked factors that impact technology costs and have implemented integrated approaches that have helped them overcome these challenges to successfully reduce costs. You could also adopt such approaches to manage IT costs and improve your credibility with your customers and business stakeholders. These approaches would typically involve a combination of commercial and technical solutions for addressing technology cost related issues.
The Challenge
“Why do IT systems costs so much?!”
“How do I know if we are not overpaying for systems?”
“We seem to have more IT than what we need!!”
“I do not understand what these IT costs are for!”
Common questions and expressions these might be, even seasoned professionals like yourself could sometimes struggle to provide credible responses to these, damaging your personal reputation. The inability to manage costs could also impact on your organisation’s ability to provide higher quality services, as you cannot justify additional technology investments to improve services, without justifying existing. There are several technical, commercial and organisational factors that impact technology costs and in the maze of all these factors, you can end up losing your ability to control costs.
While common factors like high labour costs, need for niche skills and high licensing costs play a significant role in higher costs, other factors which are not often considered, yet critical include,
– Poorly performing or un-optimised infrastructure and software, that have a domino effect on hardware costs, licensing costs and labour costs
– Lack of clarity on metrics that impact costs and cost allocations
– The inability to benchmark costs from vendors to check if they are overcharging
– Lack of awareness on how much industry peers are spending on technology
– Finally, the absence of insights that demonstrate true value of IT investments
Solution approach
To address these issues, you could adopt an integrated plan to manage technology costs, which would follow a four-pronged approach that includes optimising system performance, standardising cost metrics, benchmarking costs and the use of IT financial management and analytics tools. While you could do all these as disparate activities, having an integrated program of works that orchestrates the outcomes from these activities will have a positive impact on overall benefits.
Optimising system performance: When it comes to infrastructure sizing, the overriding principle in the industry has been that of ‘better safe than sorry’, resulting in generally oversized infrastructure that not only costs too much, but also has a domino effect on software licence and labour costs. Also, when there are performance issues with systems, the quick fix reaction is to increase infrastructure capacity to improve performance rather than finding the root cause of issues, resulting in exacerbation of technology cost challenges that you already face.
An early step to reducing technology costs would be for you to proactively manage system performance across applications and infrastructure to ensure underutilised infrastructure can be identified and decommissioned or consolidated to reduce costs. Needless to say, such an exercise should be accompanied by careful analysis to ensure there are no operational issues as a result of the consolidation or decommissioning. This first step will form a strong basis for cost reduction that you could achieve through other means mentioned below.
Standardising cost metrics: Most technology managers would agree that, line items on vendor invoices and quotes are not only confusing but also tend to be full of vendor specific, product jargon. This significantly reduces the ability to understand costs within the organisation, barring a few people with specific knowledge of the vendor products. The problem gets compounded when organisations have to deal with multiple vendors, providing multiple invoices for products and services. They end up having to perform inefficient manual verification and reconciliation processes to deal with these complex situations.
A simple way to address this issue, is for your organisation to adopt a framework like Technology Business Management (TBM) taxonomy, which will ensure consistency in the way technology costs are treated across your vendors and also within your organisation, e.g. between IT and Finance. TBM’s taxonomy provides standardised ways to describe cost inputs including technology towers, applications and business services. Once standardised, the entire organisation and your technology supply chain could use the same language to discuss technology costs, greatly improving transparency and hence the ability to manage and reduce them.
Implementing IT financial management and cost analytics tools:Technologists have long advocated the use of smart data processing and business intelligence tools for improving business efficiencies and outcomes. However, in their own backyard, technology P&Ls still tend to be managed using excel sheets, manual data collation and manual reporting. Based on the size of the technology organisation, this could involve highly inefficient processes and several labour resources, further increasing technology costs.
By implementing IT finance management and smart analytics tools, you could automate the manual effort involved in technology cost analysis, workflows and reporting. These tools could also give the business direct access to details of relevant cost inputs for their areas, which have been standardised using a TBM like standard. This would not only add efficiency to the cost management processes, it will also go a long way in improving transparency, justifying technology costs and providing confidence to the business that you are able to control the business of technology management.
As a better practice, implementation of these tools should be integrated with and follow standardisation of cost metrics, to ensure ongoing consistency in cost analysis and reporting.
Benchmarking costs: In a highly competitive and cost-conscious environment, a question that gets asked repeatedly is, ‘how does our technology spend compare to that of our competitors’?’. A simple benchmarking exercise could help validate the technology spend by your organisation by comparing it to the spending by industry peers and other similar organisations.
Benchmarking could be done across multiple levels, from the basic elemental level (compute, storage etc.), to tower level (end user computing, network etc.) and up to business services level (CRM contact centre services etc). Benchmarking technology related costs will help your organisation identify areas where your costs are higher than industry averages and it gives you the ability to reduce costs in those specific areas.
As a better practice, you should perform cost benchmarking after systems have been optimised for performance and the cost elements have been standardised. This will ensure any comparison of your costs to the market costs is done on systems that are optimised and is based on similar metrics. Given the constant change in technology costs, it is also a good practice for you to perform benchmarking on a regular basis than it being a once off exercise. Benchmarking could also be integrated into the IT Finance Management and Analytics to aid in cost justification using a consistent interface.
In summary…
As a professional involved in cost management, you need to be aware of the often-overlooked levers for improving technology cost management and reductions. An integrated approach that combines the outcomes from these hidden levers will help improve the overall outcomes from the activities.
While the integrated approach to cost management may not guarantee reduction in your technology costs, it will ensure all avenues for technology cost reduction are explored and exploited. Also, it gives you and your business stakeholders confidence that technology costs are being managed appropriately.