Not too long ago, I took my kids to Barnes and Noble. My son came up to me with a book he wanted and said, “Dad, we need to get this. It’s on sale. We’ll save 20 percent.” While I congratulated him on his grasp of the principles of consumer spending, I had to point out that if we didn’t buy the book, we’d save 100 percent of the cost.
When it comes to cutting IT spending, you can waste a lot of time in similar discussions. Even worse, you can make decisions that you think will save you money but end up costing you. Of course, part of the problem is defining exactly what you need to do. In this column, we’ll look at a couple of the mistakes you can make when looking for savings in your IT budgets.
Mistake #1: Not accounting for all the costs of a decision
Since so much IT spending is driven by hardware purchases, it’s not surprising that IT managers often target buying decisions when looking for places to cut. For example, several TechRepublic members have posted comments to different articles in our Doing More with Less series recommending that organizations consider using refurbished computer hardware instead of new equipment.
This is a good suggestion, and TechRepublic will be talking more about it in the coming weeks. However, choosing to buy used equipment can illustrate one of the mistakes of budget cutting: not anticipating all the costs associated with a decision.
To see what I mean, let’s take an example. Suppose you’re tasked with buying new monitors for the designers in your Marketing group. If you buy the same new monitors you’ve standardized on during the past year, you’d pay $550 a piece. Looking to save money, what if you found that you could buy refurbished monitors with the same size and resolution for only $375 a piece. Wouldn’t that be a no-brainer?
Well, not necessarily.
When comparing new versus refurbished equipment, you can’t look only at the sticker price. After you buy the monitors, you have to install and support them. The odds are that, all other things being equal, used equipment will have to repaired more often than new equipment. In fact, most new equipment carries a longer, more comprehensive warranty than comparable used equipment.
If you’ve ever had to calculate the cost of each end-user visit by a support technician, you know that it wouldn’t take too many service calls to eat up any savings initially promised by using refurbished hardware.
This doesn’t mean that buying used or refurbished equipment is always a bad decision–not at all. Recently, the Wall Street Journal and other publications have pointed out that the collapse of many dot-com firms has put a good deal of barely used or even still-in-the-box servers onto the market. Such hardware can be an excellent buy, in the right circumstances.
All I’m saying is that you need to factor in the cost of support into your calculations.
To take another factor, consider the cost of buying different PCs than the model your department standardized on. Even if the two PC manufacturers have similar defect rates, there are costs of having to support multiple PC brands in a single organization. You have to carry multiple cords, docking stations, and peripherals, for one thing. For another, it’s more difficult to deploy new software and do upgrades with multiple desktop PCs.
Just because these costs are harder to quantify than a purchase price doesn’t make them any less real. Before you allow someone to tell you about an alleged savings, make sure you’ve checked into the cost assumptions that support that change.
Even if you understand all the costs associated with your purchase decisions, don’t assume that your Accounting or Finance people do. After all, they can hardly be expected to have as good a handle on, say, support and warranty costs as you do. Part of your job as an IT manager is to educate your accountants so that they understand the implications of these types of tradeoffs.
Mistake #2: Not knowing the time frame
Another mistake IT managers make when making budget cuts is not understanding the time frame for the savings. In other words, are you trying to find savings for the next quarter, or the next year? It makes a difference.
Take the example of the monitors we were discussing earlier. Suppose for the sake of argument that you could demonstrate that purchasing the refurbed monitors saved you $140 the first year, but cost the company $175 in year two, and potentially $300 in year three.
The long-term view would say that the new monitors were a better deal than the refurbished units since the support costs will eventually outweigh the purchase price. So you’re back to buying the new monitors, right?
Well, not exactly.
While that might be the best long-term decision for your organization, there are times when you’re going to be asked to make cuts that have an immediate impact. In that scenario, you might actually have to make decisions that save you money in year one, but cost you money in year two.
In the long run, of course, that’s foolish. But as John Maynard Keynes once said, “In the long run, we’re all dead.” In other words, sometimes you have to make short-term decisions to make sure you’re around to have a long-term view.
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