“IT cost”. The phrase may make you shudder.
With worldwide IT spending topping $2.5 trillion, you may be surprised to learn that IT department budgets and head counts largely have remained stagnant in recent years, especially for small businesses. According to IT research firm Computer Economics’ IT Spending & Staffing Benchmarks, a venerable annual study first published in 1990, “IT organizations are doing more without commensurate increases in IT spending” for the second straight year.
For 2015 and 2016, the study states, “IT spending per user is significantly lower than the years from 2012-2014.” So what does this mean? Around the globe, IT is doing more with less, or – well, exactly the same.
This same study, based on a survey of more than 200 IT organizations, also finds that “the net number of companies increasing their IT budgets is the lowest since 2013. The expected increase in IT operational budgets is only 2 percent, the lowest it has been since the recovery from the Great Recession.” But despite these numbers, IT is still a very significant cost for every organization. In fact, for smaller companies, it is a heavier burden.
ROI consultancy Alinean Inc. compared the IT spending and performance ratios of publicly traded U.S. companies. What it found was that small companies (with revenue of less than $50 million) and medium-sized companies (with revenue between $50 million and $2 billion) often outspent larger organizations (with revenue of $2 billion or more). The average small company spends 6.9 percent of revenue on IT, mid-sized companies spend 4.1 percent and larger companies actually spend the least, at just 3.2 percent.
The basic point remains: As an SMB, whatever you can do to reduce IT costs—without degrading service quality or security, obviously—is a good thing. So what’s a reasonable cost optimization target?
According to a number of experts, 15 percent is achievable for most IT areas, and an annual 10 percent cut is pretty safe. But the idea isn’t just to slash costs. By eliminating low-value efforts (and their associated expenses), companies free up spending to invest in higher-value activities such as better service, quicker execution and deeper insights.
Moving some IT functions to a managed services provider (MSP) would allow your in-house IT department to investigate new applications and technologies that may have a key impact on business success. A study conducted by CompTIA, a nonprofit association for the IT industry, found that most companies that outsourced some IT to a managed services provider saw significant cost savings. Specifically, they found that 46 percent of managed IT service users cut their annual IT costs by 25 percent or more and 50 percent cut their annual IT costs up to 24 percent.
Here are 12 ideas proven to help with reducing your IT spending. If you’ve already thought about implementing some of these ideas, bravo! You’re probably ahead of the curve, but be sure to check out the other items on our list. Each one of them deserves your consideration.
Get to the cloud.
Granted, the cloud isn’t a cure-all, but the financial predictability of cloud services is undeniable. Provided the functionality of Software as a Service (SaaS) or Infrastructure as a Service (IaaS) satisfies your current and future requirements, leveraging the cloud makes a world of sense.
Renegotiate existing contracts.
“If you don’t ask, the answer is always no,” as the saying goes. Talk to your vendors about cost reductions, discounts, specials and the like. You may be surprised by what they’ll offer. At the very least, you’ll have put your vendors on notice that you’ve become more cost-conscious, a position they should remember in the future.
Consolidate vendors, services and platforms.
Related to renegotiating existing contracts is looking for opportunities to consolidate, with an eye toward spending less overall. By standardizing vendors and technologies, “reducing redundancy means better outcomes, less cost and less security risk,” says David Dalka, founder and managing director of consultancy firm Fearless Revival.
Review the procurement process.
While you’re examining current vendor relationships, it’s equally important to review how and when items are sourced. It matters a great deal whether you’re buying the right things at the right time and at the right price. Is there a new pricing model from existing vendors? Has a new competitor, with more attractive pricing, entered the marketplace? Basically, are you confident that your procurement and sourcing organizations are fully optimized?
Demand quick ROI from IT projects.
Look to be more efficient with your IT investments—specifically by avoiding large, multi-year projects, whenever possible. If an initiative isn’t delivering its expected payback, it’s best to know this quickly and take remedial steps, such as revising the plan or scuttling it. Fewer boondoggles mean more savings (and happier users).
Review automatically funded items.
Just like that gym membership you’ve been meaning to start using, a portion of your IT budget may be going to seldom (if ever) used products or services. Getting a handle on these budget ghosts can be tricky, however, depending on whether IT spending is centrally managed or owned by each line of business. To catch orphan line items, look into so-called zero-based budgeting (ZBB), in which annual allocations or increases aren’t automatically assumed for each line item. (Tip: The first step is a conversation that includes all stakeholders, both inside and outside the IT group. Such pow-wows shouldn’t be held merely to “reduce spending.” Rather, think of them as a great opportunity to understand the service needs, frustrations, and aspirations of IT stakeholders.)
Consider a shared-service organization.
If your company distributes IT services among its business units, creating a single shared-service organization for some or all IT services is worth considering, counsels Gartner, a Stamford, Conn.-based research and advisory firm, in its “Top Recommended IT Cost Optimization Ideas, 2016.” This is Gartner’s No. 1 IT cost-optimization idea, although it notes the benefits aren’t instantaneous. “It can take 18 to 36 months to realize economies of scale, but those savings generally range from 15% to 20% of service costs,” Gartner says.
Barbara Gomolski, managing vice president for IT finance and workforce management at Gartner says, “Organizations make assumptions about how “optimized” they are, and they lack a true baseline of their efficiency.” She reiterates Gartner’s recommendation that companies undertaking cost optimization should invest the time to get a real picture of how efficient they are and validate their assumptions with benchmark data before launching into a cost-cutting effort.
Increase IT financial transparency.
Another of Gartner’s ideas— “one of the most often overlooked ideas to drive cost optimization,” it says— is to increase financial transparency. Not only does this allow per unit costs to be optimized, it lets consumers outside IT see the cost of “both the projects and services IT delivers.”
Simplify the application mix.
By rationalizing and standardizing the application mix, you reduce redundancy and complexity. This can yield substantial returns— considering that maintenance and operations of existing applications may consume up to 15 percent of an IT budget. But just like No. 4 above, this step shouldn’t be positioned as only cost-driven, but instead as an opportunity to improve core business processes.
Use managed services providers (MSPs) to accomplish consolidation and simplification goals.
Consider outsourcing disaster recovery and backup, or using managed services for cybersecurity functions, including support of enterprise-wide mobile access and device and app management. What’s more, an often overlooked benefit of managed services is better scalability and analysis of network and computing utilization.
An MSP can conduct an infrastructure analysis, identifying the following benefits:
- Low or high-level processor utilization
- Over-provisioned VM environment
- Inferior memory utilization of older server consolidations
- Workload balance issues
- Lack of adherence to CPU, memory and disk utilization specifications
- Firmware that falls short of current industry levels
- Lack of consistent fault tolerant systems and requirements review
- Ineffective in-house monitoring and managing of networks
Gartner executive Barbara Gomolski agrees there are advantages to MSPs, including speed of delivery, agility “and, yes, sometimes, cost savings.” But she cautions, again, about the need for a baseline. “Companies really need to know how efficient they are at providing a service before they can determine whether an MSP offering is a better choice,” she says.
Survey users regarding application delivery
Between BYOD (Bring Your Own Device) and cloud services, your users may be longing for new (and perhaps less costly) means of accessing core business applications. Ask them about their needs and ideas, and ask about any IT challenges they face. For instance, would better user training reduce the costs associated with your support organization? This survey’s findings may point the way to optimizations and cost reductions, while improving user satisfaction and business efficiency.
Speaking of training, that’s another area where managed services can help. Training often is included with managed services providers, so new workers are brought onboard without additional expense. Plus, these users will be taught the latest, most up-to-date methods and operational practices.
Develop a process for evaluating cutting-edge technologies and their financial impact
Swinging for the fences with a new technology may make sense if it promises substantial savings versus current, traditional methods. Obviously, new tools and platforms can have a game-changing strategic value, too. It goes without saying you should tread carefully here.
As we’ve seen, IT cost reduction isn’t a one-step process or the result of a single solution. Instead, it involves decisions around vendor relationships, accounting, infrastructure (cloud and managed services), IT initiatives and end users. Your strategic plan will have important implications for IT. So it should be clear, current, and consistent, or no amount of cost optimization will be able to save the day.