CXO

Identify IT influences in key cost areas to help your clients

How can you help identify the major cost areas for your client in the least amount of time? How can you evaluate your client to find the best ways to reduce costs? Follow these tips.


In terms of your skills as a consultant, it’s hard to beat the ability to locate tangible cost-saving opportunities for a client. Too often, companies simply cut IT department expenses in an effort to save money. With the broad-ranging effect that IT has on most companies, this is a shortsighted solution but one that seems to be the easiest and most understood by CEOs and CFOs.

As a company’s consultant, you're in a unique position to help both to see other possibilities that can have a greater effect on the business. I'll explore where consultants can find the most significant cost reductions for their clients.

What is your client spending?
Assume you have a healthcare services provider with $100 million in revenue. IT spends $3,000,000 (3 percent of revenue) annually in what the company broadly calls IT expenses. The billing department spends $4 million a year or 4 percent.

When the CEO asks for a 10 percent reduction in IT, he gets an expense savings of $300,000 per year from IT—not bad. On the other hand, if IT automated many of the manual processes in the billing department and that effort resulted in a 20 percent reduction in its cost, the CEO might get an $800,000 cost reduction. The effort takes longer but it’s an investment that has much more long-term benefit because it reduces the need for clerical employees that typically have a very high turnover rate. Many CEOs will actually spend more in IT to achieve benefits by automating the business in this way.

What is your IT expense as a percent of revenue?
Part of your role as a consultant who is providing budgetary advice is to know what other companies spend for IT as a percentage of revenue in the company’s industry niche. Depending on the type of company, this number can be from 1 percent to more than 50 percent of a company’s revenue. Determining the percentage is simple: Divide the total IT expense by the total revenue of the portion of the company that the IT department supports. I prefer to monitor this number by month to see the trend. For example, a CIO may spend more dollars every month but the percent of revenue can actually decline if the company’s revenues are growing.

If most companies in a particular industry niche normally run IT expense as 2 to 3 percent of revenue and the company you're working with is at 7 percent, it’s up to you to find out why. Your client may be spending more to make up for past IT mistakes, support significant company growth, and position itself for major initiatives.

Where is the low-hanging fruit?
You can look for cost-saving opportunities in many places. Let’s break it down to the two areas of spending that IT influences: the IT department and departments that are supported by IT.

IT department
Companies vary on which expenses they run through the IT department. Some businesses run all of the telecommunications expense through IT; others expense it to individual departments of the company. I prefer to see it all applied to IT so you can get a true picture of all the technology expenses of the company. The CIO should be able to directly influence the cost of almost all the expenses that are applied to his or her department. The major opportunities for cost reduction occur in:
  1. IT staff
    Normally, the largest portion of the IT budget and the obvious first place to look is the staff. Assess whether appropriate staffing exists to support the current business needs and the projects requiring IT assistance to support the company’s objectives.
  2. Telecommunications costs
    Inspect the data communications costs for competitive pricing and validate that the company is paying for what is actually being used. Companies often fail to cancel circuits and phone lines that are no longer needed. Also look for pager, cell phone, fax, phone cards, and data lines to ensure that they're in use and justified for company payment.
  3. Systems and business applications redundancy
    The number of business applications and computer systems grows over time and many never seem to have an end. The result is that a handful of people continue to use obsolete systems when the same functionality exists with newer, more robust systems in the company. Systems assimilation opportunities lower annual license and maintenance fees and reduce IT support needs. These changes also standardize the company’s approach in handling business functions. Companies that have grown through acquisition of similar companies often have big opportunities in standardizing their business applications and systems.
  4. Standardize equipment and software purchases
    Smaller companies often fail to recognize the economic advantages of buying PCs and equipment from a single source or fail to receive real value in their purchases. I experienced an example of this when I joined a $100 million revenue company. It was buying PCs from a “friend of the family” at what it thought was a great deal. By changing our vendor to Dell, we began purchasing PCs for 15 percent less with a standard software image preloaded, which required significantly less desktop support. This kind of opportunity may not be a tremendous savings but standardizing hardware and software ultimately reduces IT labor and improves service.
  5. Create IT support FAQs
    Give your users an easy place to find solutions to common problems to increase their productivity as well as that of your IT support team.
  6. Restructure remote office processing
    Even in high-volume transaction situations, you can often make a case for creating a data store and forward environment for remote offices when they don’t require total online access to all the company’s data. Instead of paying for constant access to the company’s main network via WAN, you pay for a data synchronization and update process in a batch data link once a night. State Farm and companies with distributed offices have taken advantage of this approach for many years.

IT projects to leverage other departments
Your best bet to discover where the opportunities lie within other departments of the company is to conduct a technology assessment. In so doing, you have an opportunity to learn about the company’s plans, goals, and objectives, and how the departments fit into the company’s strategy.

Virtually every company has a department or two that can lower costs by automating certain processes. The trick is to discover where the real potential is and to have a perspective on the effort and cost to achieve the savings. Experience is invaluable and many times you have it when the company doesn’t.

Any project that offers tangible cost-saving benefits is worthy of consideration. Tangible to me means a payback of 18 months or less. I also try to rank possible initiatives by effort. Most CEOs and CFOs who are in cost-cutting mode are looking for opportunities with quick return and minimal investment.

Places to look
  1. Business automation
    Projects that eliminate clerical staff should be high priorities. Possible initiatives include:
    A. Electronic interfaces to import/export data between application systems and eliminate data entry.
    B. Automation of client monthly payments by implementing automatic credit card payments. You can give the client a small discount for paying by credit card while you reduce the company’s billing, collection, and payment processing expense.
    C. Automation of logical business decision points that eliminate manual review and action.
  2. Paper reduction
    Eliminating paper processes can create more productive access to information and reduce supply expenses. Many solutions are available, including:
    A. Employee add, change, and delete paperwork submission to HR
    B. Electronic employee expense reports
    C. Purchasing requests
    D. IT help desk support requests
    E. Management reports
    F. Contract draft and review process and similar processes
    G. Putting manager policy and procedures on the intranet and eliminating paper updates
    H. Putting the employee handbook on the intranet and eliminating paper copies and updates
    I. Implementing scanning and image retrieval capabilities for selected departments; the technology is much more cost-effective and can literally increase the productivity of a manual, paper-driven department by 20 to 30 percent.
  3. Report distribution
    Tools like OPTIO Software offer many benefits by automating report distribution rather than printing a hard copy and mailing it to managers of the company. These tools eliminate paper, manual collating and packaging efforts, and postage requirements typical in report distribution activities.
  4. Postage reduction
    Inspect where and how the company spends money on postage. Many companies don't take advantage of having a company intranet. Taking greater advantage of the company's existing network infrastructure can facilitate much of the internal communication and report distribution.
  5. Telecommunications cost reduction with the Internet
    WAN expenses can be reduced significantly or even eliminated in many cases by using the Internet to process transactions of the company. The Internet is ideal for low-volume transactions that don't require immediate response times.

Final thought
As you work with a company, there are always leverage opportunities that IT can use to help the company’s financial picture. Keep your eyes and ears wide open and constantly look for the opportunities. They are there; it’s just a matter of finding them.

Mike Sisco is the CEO of MDE Enterprises, an Atlanta-based IT management training and consulting company. For more of Mike’s management insight, take a look at his IT Manager Development Series.

Editor's Picks

Free Newsletters, In your Inbox