Steering clear of the common pitfalls of IT cost-out projects

All around us, organisations are reassessing their IT budgets and launching IT cost-out projects. If these projects are started in a rush or are uncoordinated, they can sometimes lead to short-term wins in the case of budget reductions, but they will probably not deliver long-term benefits for your business.

In this article, we will uncover three common pitfalls that organisations often encounter when carrying out IT cost-out projects and provide actionable advice to guide you towards sustainable success.

Pitfall 1: Relying too heavily on peer benchmarks

Have you ever received a memo from your CFO citing a recent high-level benchmark study by a renowned consultancy firm that suggests significant IT cost reductions?

“According to peer benchmarks, you should be able to reduce your overall IT spend by 17-23% – but let’s be conservative and aim for initially just 10% this year,” the CFO states.

However, blindly following these peer benchmarks without considering the actual short-term cost reduction potential in each IT cost category (what we would call “addressable spend”) can lead to misguided decisions.

In a recent client case, we discovered that 80% of the total IT spend was concentrated in just five out of seven spend categories. Unfortunately, due to long-term contractual commitments, the short-term addressable spend in these categories was minimal. As a result, the “just 10%” cost savings of the total IT budget were to be found in the last two categories, which accounted for 20% of the total spend. And so, to achieve the overall cost reduction targets, these two categories had to be reduced by 50%. 

This necessitated cutting the project portfolio of committed IT projects, impacting the business unit leaders who relied on these projects to bring about project improvement to achieve the financial targets for the coming year.

Pitfall 2: Conducting finance-driven savings with limited organisational anchoring

How often have you heard the phrase: “Procurement people are only looking for savings”?

To avoid this misconception, aligning all stakeholders around your organisation’s overall objectives is crucial: the CFO function, business unit representatives, the global IT organisation, the vendor management function and the Procurement department.

Procurement professionals can be strategic partners, contributing to financial sustainability and long-term success. To be successful, the objectives must be defined in collaboration with the key stakeholders to achieve “smart savings” rather than the “10% haircut” approach.

Procurement professionals can bring significant value to the table in areas such as:

• Strategic supplier management: Procurement professionals excel at identifying strategic suppliers and negotiating favourable contracts that provide substantial cost savings.
• Supplier performance excellence: They consistently assess supplier performance to ensure that they meet agreed service levels and cost targets, which is essential for achieving operational efficiency.
• Cost transparency and benchmarking: Procurement establishes transparent cost insight across all IT categories and benchmarks IT costs against industry standards to maintain competitiveness.
• Innovative collaboration: Collaboration with suppliers is key to identifying areas where innovation can lead to significant cost savings, fostering a culture of continuous improvement.
• Technology assessment: By evaluating emerging technologies and trends, procurement can identify cost optimisation opportunities through the adoption of innovative and cost-effective IT solutions.
• Risk mitigation: Procurement also plays a vital role in risk management, focusing on mitigating the risks associated with cost-out projects and preventing potential cost overruns and disruptions.
• Change integration: During the implementation of cost-out initiatives, procurement supports change management to ensure that changes are smoothly integrated into the organisation.

Sometimes, IT costs can spiral out of control, which impacts the bottom line and hinders growth. The good news is that strategic IT cost optimisation can help your organisation cut unnecessary expenses, drive efficiency and improve competitiveness. 

Effectively managing IT costs involves more than just budget control; it is about aligning your IT investments with business objectives.

Pitfall 3: Forgetting the power of habit

At some point, you will have done everything you can to put all the cost-saving mechanisms in place: you have carried out the category spend analysis, and you have negotiated the global framework agreements for the top spend categories. But still, the impact is next to nothing. Why is that, you might ask?

When implementing cost-saving mechanisms, you should not underestimate the challenge of changing ingrained habits. 

To achieve the desired savings in the IT budget, you need to make the savings tangible – so, you need to revisit the internal governance for each category and actively work with the entire organisational change management toolbox to change the “maverick spending” habits of end users. If you do not, any changes implemented may have limited results, as everyone will just continue to do what is easiest and most familiar to them: call the usual suspects to procure everything from phones to consultancy services.

To realise the savings, the organisation needs to actively manage internal habits and ensure that cost-saving measures become embedded in the organisation’s culture.

Want to save up to 15% of your IT costs? 

Are you ready to unlock potential savings of up to 15% of your overall spending? 

If you are not sure where to start, here are some common challenges that organisations face:

• Complex contracts: Navigating the labyrinth of IT vendor contracts can be daunting.
• Legacy systems: Maintaining outdated technology can drain resources.
• Lack of a comprehensive IT spending overview: Incomplete insights into IT spending.
• Rising licence costs: Software licensing can be a budget buster.
• Lack of internal procurement governance: Insufficient internal policies on spending and ineffective demand management.

The good news is that major cost drivers in IT are consistent across clients, and so are the levers that can be applied to achieve sustainable savings.