Thought Leadership
Good Versus Bad IT Spending and Prioritizing Spend reduction Opportunities
Introduction
IT spending is frequently mischaracterized as an expense that should simply be minimized or avoided whenever possible, similar in view to that of office supplies or real estate square footage. In reality, IT spending is often one of the best areas of investment for an organization. Increased IT spending can, for example, significantly enhance employee productivity, provide a better experience for customers, help develop new products, or open new markets.
In many cases, organizations actually spend too little on IT relative to what they hope to accomplish, while simultaneously wasting too much. The dichotomy of needing to spend more while wasting too much is best explained by the concept of good versus bad IT spending.
Good Versus Bad IT Costs
IT costs are driven by many factors. Most IT spending is desirable if it results in larger reductions in expenditures elsewhere or when it produces the desired level of returns or achievement of intended benefits (good spending). Some IT cost factors are relational such as headcount and for all intents and purposes cannot be directly controlled (neutral spending).
However, some IT spending is simply undesirable when the expense is avoidable or could be reduced through greater efficiencies or other change activities (bad spending).
Good Versus Bad IT Savings
Similar to the factors driving IT spending, activities associated with IT spend reduction may also be desirable or undesirable, depending on their effect on the nature and quality of IT service delivery. Some cuts, for example, frequently result in little or no impact on technical capability or delivery quality. In other cases spending reductions may actually result in an equal or greater cost elsewhere. For example, cutting help desk hours can generate more costs associated with lost productivity than it saves. Without awareness, the risk exists that reductions in IT spending will instead result in a reduction of capability and capacity when better opportunities to cut costs remain unrealized.
Prioritizing and Evaluating Spend Reduction Opportunities
Once good saving opportunities are understood and identified, there are a number of factors to consider to help evaluate and prioritize the opportunities. Of obvious concern is whether the level of time and money required to realize savings is worth the investment. This straightforward evaluation is based simply on whether the savings will exceed the required investment as well as any other opportunities that compete for the same time and money.
In many cases however, the specific levels of investment required for any given (or combined) IT efficiency effort are difficult to accurately calculate until the effort is initiated and some progress is made. Similarly, the savings themselves may be difficult to even estimate until some level of assessment or review is performed. Given this reality, it is often helpful to look initially instead at other attributes that indicate general levels of expected investment and return.
In the case of IT savings opportunities, typical dimensions impacting investment and savings levels include implementation complexity, general savings potential, the savings horizon, and whether the savings stem from a single event or delivered continuously, as summarized in the figure.
Implementation Complexity
The complexity of implementing the changes necessary to realize savings represents a significant dimension impacting the decision whether to pursue a particular opportunity to cut IT costs. A simple framework for examining implementation complexity is established by looking at this dimension as three potential levels:
High - The effort will require significant levels of internal resource time, substantial monetary investment, and/or substantial organizational changes to its structure or culture.
Medium - The effort will require some internal resource time, some monetary investment, and/or some level of organizational changes to realize savings.
Low - The effort will require little or no resource time, monetary investment, and low or no levels of impact on the organization’s structure or culture.
Implied in these general levels of complexity are the associated levels of risk that accompany increasing complex initiatives. Potential issues such as sustained sponsorship commitment or continued availability of resources and funding will greatly impact the success of increasingly sophisticated and lengthy efforts and must be weighed accordingly when evaluating opportunities.
Savings Potential
Identifying highly accurate quantitative savings estimates is often almost impossible for IT cost cutting initiatives unless the scope of evaluation is extremely narrow. For example, estimating savings from using one versus two servers for a particular project is fairly straightforward to quantify. However, the savings from consolidating a large on-premise datacenter or multi-cloud environment into fewer numbers of environments is significantly more complex based on a wide range of potential technical limitations that won’t be uncovered until some level of review and effort is underway. In cases such as this, using a scale of ranges is helpful:
Very High - Potential savings greater than $2.5M.
High - Potential savings between $1.5M to $2.5M.
Medium - Potential Savings between $500K to $1.5M.
Low - Potential savings of less than $500K.
The number ranges are generalized and will likely change up or down depending on the size and scale of a given organization’s annual IT budget. However, for any organization, even opportunities with low savings potential may be ideal, or indeed high priority, if they are simple to realize and/or recurring in nature.
Savings Horizon
Of often equal importance to savings potential, is the time frame under which the savings would likely be realized. A simple set of high-level categories for an opportunity’s savings horizon includes:
Longer Term - Savings are likely realized after 18 to 24 months from initiation of the effort.
Mid-Term - Savings are likely realized in 6 to 18 months from initiation of the effort.
Shorter Term - Savings are likely realized in 0 to 6 months from initiation of the effort.
Depending on the goals and objectives of any given organization, savings horizon may be a critical selection factor. For example, many organizations begin to focus heavily on IT efficiency not because IT isn’t delivering its desired value, but because other factors are emerging, such as constrained budgets, falling revenues, or cash flow issues.
Savings Frequency
Another important consideration is whether the savings from a particular opportunity will be continuous or result only in a one-time savings. For example, consolidating several call centers into a single call center might result in a continuous savings of several million per year over the previous approach. However, an invoice audit which finds several thousand in recoverable overpayments will only save the thousands that one time.
Continuous - Savings are realized on a continuous basis
One-Time - Savings are realized as a single event
The frequency of savings represents a vital attribute as even small savings, when continuously realized, may represent an equal or better opportunity than a larger opportunity that may only result in a one-time savings.
Summary
By understanding good versus bad IT costs and IT savings, and using a general framework for evaluating one or a series of potential opportunities, deciding which opportunities to pursue and in what priority is greatly facilitated. As illustrated, the approach can help present to organizational leadership which opportunities to pursue based on a variety of internal needs. If for example the desire is immediate savings, the organization will likely pursue lower level complexity, shorter horizon initiatives even if they deliver lower overall savings.
Not described in this approach is the concept of soft savings, such as the indirect benefits of being able to apply resources and technologies made available through improved efficiency to enhance performance in other areas. In some cases it may be beneficial to highlight any identified soft benefits in addition to desired hard savings to further boost the business case of one or more potential initiatives.
For any given organization, the importance of these and other opportunity attributes vary. The goal is to leverage a straightforward approach for assessing and prioritizing opportunities within a given organization in the absence of hard data or a desire to avoid significant time and investment in detailed analysis and estimation.