BlogDriving Business Strategy with IT Cost Optimization Part 6: Cost Optimization Should be an Operating Strategy

Driving Business Strategy with IT Cost Optimization Part 6: Cost Optimization Should be an Operating Strategy

August 2, 2018, Expense Management

Many organizations exist in a perennial state of reactive cost reductions. However, IT leaders can transform their organizations by incorporating cost optimization into their strategy. It begins with ownership. Leaders must institutionalize accountability through continuous improvement initiatives, and to make it work requires a cultural transformation.

For the specific actions needed to pull off such a transformation, be sure to read the previous publications of this blog series (one, two, three, four, and five).

In this blog, we will further discuss how to transform IT operations from a series of discrete and disruptive cost reductions into a continual accumulation of incremental improvements. These recommendations build upon the following principle outlined in the “IT Cost Optimization Principles” whitepaper by Gartner analysts Ken McGee and Jim McGittigan:

IT Cost-Cutting is NOT IT Cost Optimization. 

Why Cost Management Should Never Be The #1 Priority 

IT leaders should never be myopically focused on managing costs because it becomes a distraction from their primary objective: effectively maintaining systems and innovating new solutions that add value to the business. However, when CIOs are forced to react to external mandates to reduce costs, they quickly find themselves making decisions that conflict with their primary mission. Effective cost management is underpinned by systems and processes that facilitate intuitive visibility and automate accountability.

ITIL defines a service as a means to deliver value to customers by facilitating outcomes customers want to achieve, but without the ownership of specific costs and risks. This definition is often incorrectly interpreted as assigning complete fiduciary responsibility upon the IT organization who is responsible for procuring, provisioning and paying suppliers for services such as telecommunications and the ever-growing spectrum of cloud services.

Transform From Cost Reports to Strategic Business Insight

The allocation of charges is often considered a derivative event. However, when the framework is reversed, the cultural shift from “client versus IT” should begin by providing effective and intuitive cost transparency, including details into costs broken down by resource, asset, contract and supplier. In order to solve problems, collaboratively make decisions and optimize technology investments, cost center managers need to have intuitive insight to answer the fundamental “five Ws and How:”

  1. What services are deployed?
  2. Where is each service installed?
  3. Who is assigned to each service?
  4. When were the timeframes that each service was active relative to each owner?
  5. Why is the service required to support business?
  6. How is the service used to support business objectives?

Complementary features to this fundamental information can include benchmarking actual spend to an established set of progressive targets and tracking the progress and impact relative to each initiative.

Cost Optimization is Predicated on Effective Collaboration

IT managers have control over some aspects of cost optimization independently of customers. They get this by negotiating the best prices on behalf of the expected aggregated use of a particular supplier’s service and identifying opportunities within the IT organization to reduce operating costs. Simply postponing the procurement and/or replacement of services to help immediate cash flow should not be confused with the continual incremental improvements derived from effective cost optimization. Taking a shortsighted approach that only delays an inevitable financial transaction ignores the potential consequences as well as expected benefits that could positively impact business operations.

The most impactful cost savings opportunities require collaboration with client users. These include successfully implementing cost-saving technologies, innovating process improvements and automating workflow methods (which can also require some organizational changes).

Lean Can Provide Proven Guidelines to Institutionalize Cost Optimization 

In the fifth post of this blog series, I discussed leveraging Lean methodologies to help enable cost optimization activities. Leveraging Lean techniques can help shift your organization way from making abrupt changes to implementing continuous incremental improvements.

The basic principles to achieving incremental improvements via Lean revolve around a continuous six-step process:

  1. Identify Value for the Customer – The Key Performance Indicators (KPIs) used by the IT organization should be in alignment with the intended outcomes of their clients and not just focused on system performance.
  2. Respect and Engage People – This is especially true given the need for continual collaboration with your customers.
  3. Improve Value Stream and Eliminate Waste (where waste is defined as any activity that does not deliver value) – IT organizations need to identify which activities enable transformation versus overhead mandated by compliance or other business requirements.
  4. Maintain Flow – The delivery of services needs to be aligned with the need and capacity of clients to effectively leverage them in order to avoid disruptions.
  5. Pull Through the System – Delivery should be aligned to what clients need and when they need it rather than pushed through by IT without regard to when and how output will be consumed.
  6. Strive for Perfection (but never allow perfection to prevent progress) – Collaborate with clients to understand how they can realize incremental benefits sooner.

Improvements in the world of Lean are enabled by Kaizen events, a long-term approach to work that systematically seeks to achieve small, incremental changes in processes to improve efficiency and quality. IT organizations that embrace cost optimization quickly realize that the accumulative gains achieved by incremental improvements are far more effective and sustainable than reacting to disruptive cost reduction mandates.

Thank you for reading our blog series on IT cost optimization and make sure to join us for next week’s finale, where we will discuss how to become an “IT Servant Leader.” We wrap up with how to apply Lean and Scrum best practices to transform your organization the final installation of this blog series. Read it here.

Larry Foster of Calero