Published on September 18, 2024
Cost reduction is not a static process of cutting expenses. It's about enhancing your business’s bottom line.
IT cost reduction strategies are as diverse as the businesses they serve. However, businesses are dynamic entities. An effective cost-reduction methodology is not a one-size-fits-all solution but a dynamic approach that evolves with your business's needs.
Choosing the wrong strategy can cost your business more than you expect to save. If you’re wondering how to reduce IT costs of your business, this guide will walk you through these strategies and explain how to use them best.
You must set a solid foundation for a lean business to reduce IT costs rather than seek quick wins.
About 43% of cost-reduction initiatives fail, and there are multiple reasons. It could be a lack of clear strategy or leadership buy-in. Sometimes, being too ambitious could be the cause. For an organization to become most cost-efficient, it must have a road map.
The majority of the IT cost-reduction strategies bring impact within 6 months. However, the effect on the business’s profit/loss balance sheet is immediate, giving you the reassurance and confidence that your efforts are not in vain and that you can see tangible results quickly.
Post-cut, you must collect data to evaluate the company's health effectively. You can also compare the before and after results to see whether your efforts have worked.
Here are the three main strategies to reduce IT costs of your business:
In the context of cost reduction, elimination is not about drastic measures but removing unnecessary or underperforming assets. To release cash, you must eliminate the IT assets that no longer add value to the business.
The first step is to sift through the company’s IT landscape, which gives you an overview of which assets are eliminable. These could be anything from infrastructure assets application licenses to service levels and end-user computing.
Businesses must never approach cost reduction with an elimination-only mindset.
Application licenses are a significant business expense for an IT company. Eliminating old or unused on-premise or SaaS software can quickly curb the company's expenditures. To reduce IT costs, you should actively manage your application portfolio and remove licenses that no longer serve you.
Evolution is the only constant in IT. With time, end-user assets and hardware become less important. However, they are still one of the significant expenses IT companies bear. You can reduce IT costs by eliminating the hardware you no longer need.
Analyze which hardware is critical to your company’s operations and get rid of the rest. This could include printers, excess company phones, and computers. You can also switch to cloud storage instead of on-site. The key is shifting to a comparatively less expensive and more advanced alternative.
Analyzing the services your company can do without can cut operating costs. This includes IT services and other services like outsourcing and maintenance. Evaluate which services bring the most value.
To make every penny worth it, you must consider the caveats that come with services like cloud computing. These include the need for in-house expertise, licensing agreements, and shadow IT.
The benefits include less need for technical maintenance and human resources. Simply put, you can downgrade service levels by eliminating maintenance costs. You can achieve that by decreasing service instances during holidays and weekends.
Another approach to reducing IT costs is rationalizing infrastructure assets, including understanding the organization's different personnel. As a business scales, its needs change, as does the need for subscriptions. You can rationalize subscriptions by keeping those that add value to your business and eliminating those that don't align with your business needs.
You can also analyze ongoing projects and the IT landscape areas to decide what to eliminate, retain, or reimagine to help the company save money.
You can also curb operating costs by identifying, eliminating, and consolidating unused infrastructure. This could include obsolete communication systems, data centers, and hardware and adopting cloud services, such as IaaS. Simply put, to rationalize, you must asses infrastructure value to make informed decisions.
Your IT cost reduction strategy must include a game plan for the future. You should effectively assess, prioritize, and plan ongoing and upcoming projects. Doing so will help you better budget your projects and allot resources accordingly.
The approach is to review future projects and categorize them as low—and high-value ones. Then, cancel those that don’t offer immediate value and prioritize those that bring the most gains.
Rationalizing personnel can swiftly reduce your company’s operating costs. You can minimize personnel costs through several avenues, such as human resources, business travel, or external training management. Make the entire workforce go remote if that suits your business model. You can also save money by having virtual meetings instead of in-person.
Negotiating SaaS products and other IT supplier contracts reduces an IT business's cost. This strategy also helps optimize services like SaaS and IaaS to better suit company needs.
Renegotiating SaaS contracts can significantly reduce service costs. However, if not actively monitored, cloud budgets can quickly become unmanageable. You can use tools that offer insights like SaaS usage, fees, and renewal dates. You can set vendor price benchmarks or negotiate with lower than the contractual value of users.
Use IT vendor management to identify where you can save money. Such tools help pinpoint the software that brings value or is a burden to the company. Before adding or eliminating the service, IT managers should consider:
Whether or not the employees use it
Whether the new budget covers it
Is there a similar, cheaper product that offers the same results?
After answering these questions, you should renegotiate contracts and costs with manufacturers, software resellers, distributors, and system integrators to boost your IT cost savings.
Target items that immediately reduce IT costs. Cut out the expenses that offer tangible results, preferably within weeks or months. A standout example includes expenses paid monthly or quarterly on a pay-as-you-go basis.
Freezing costs will not have a lasting impact on your budget; they will reappear after some time. Look for costs that you can permanently reduce or eliminate.
First, look for items with a real cash impact on the profit and loss statement. A good example is cost reduction in cloud computing. This will have an actual cash impact compared to on-premises software licenses or owned assets like hardware. You can also save money by leasing or selling back assets.
Ensure you cut deeply enough the first time so you don't have to repeat it. This is specifically true for staff cuts. In this case, ongoing reductions can harm the company’s health and reputation.
5. Carefully inspect accounts
Take time to analyze your business finances carefully. Ensure you have a good understanding of expense-level details. This knowledge will help you make necessary cash reductions that will immediately impact your business.
According to Gartner IT, Key Metrics Data, the average IT company spends 25% of its budget on capital, which can be reduced. Therefore, ensure you address both capex and opex while cutting costs.
There are two types of business IT expenses: fixed and variable. To significantly reduce IT costs, you should target both. Fixed costs include office rent, subscriptions, and payroll, while variable expenses encompass contractors, telecommunications, and consumables. Try to Eliminate fixed costs and reduce and eliminate variable costs where you can.
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Conclusion
Complete visibility and real insight are not just buzzwords; they are the keys to unlocking your business's potential for IT cost reduction. It's about comprehensive understanding and accurate knowledge of your business's IT landscape, including all assets, services, and usage.
This, coupled with a suitable framework, can empower you to confidently tackle the business’s pressing need for IT cost reduction, knowing that you have a clear picture of your IT environment and can make informed decisions.
