Sooner or later, your company needs you, as CIO, to find ways to improve profitability. There are three ways to improve profits in a company:
- Increase revenue faster than expense increases.
- Decrease expense while maintaining revenue.
- Improve productivity so people can do more.
CIOs should always include an active cost reduction strategy in their overall game plan for their company. I recommend any CIO to document a defined technology cost reduction strategy as a fundamental element of a strategic IT plan.
Document a strategy
It’s important to establish objectives and to communicate what you plan to do, why, and what the expected results will be. It quantifies your game plan and helps you manage the expectations of all those around you. More importantly, it sets the tone for a proactive IT manager or CIO.
Technology cost saving strategy does not simply mean reducing IT costs. In fact, a great strategy may mean increasing IT expenses in order to implement a technology initiative that reduces expenses in other parts of the company.
The point is that a defined, deliberate focus on technology-related initiatives with cost saving benefits is something that should be included in any IT strategic plan of a company.
Become a fundamental part of the strategy
The ability to reduce costs of the company is a driving force in the development of most IT strategies. Sure, there are strategies that are designed to increase market share, gain a competitive edge, and other such things; but at some point, the CIO needs to become a catalyst and facilitator of initiatives that will reduce expenses of the company.
One of the great things about being a CIO is that you are afforded the opportunity to look at the business more globally and are able to have a meaningful impact on the entire company.
Being in a position of such influence can be a challenging, even intimidating affair for someone with strong technical background but who has minimal business experience.
We are seeing more and more press about the need for IT managers and CIOs to develop their business skills. The need has always been there, but recent economic pressures have highlighted the need more as companies are required to react to extreme pressures placed on their revenues.
When a company is growing like we saw in most of the 1990s, it’s easier to hide or camouflage the problems of the company, especially financial issues that are costing a company thousands of dollars in excess expense.
In a fast growing company, it is easy to ignore focusing on the excess expense issues because revenues are growing faster than the expenses are growing and when the numbers continue to improve, everyone is happy.
Beware the brick wall
At some point, the “fun” ride comes to a screeching halt. Something happens that brings everything to a head and points out the exposure the company has had all along and how much the company’s expenses are really out of line with the revenues of the company. That “brick wall” is usually an issue that causes a negative impact on revenue and suddenly your revenue growth slows considerably or even drops below what it has been. It can be a company issue, an industry situation, or even a global event.
Wall Street expects companies to meet their forecasted financial objectives. When they don’t, the negative impact on the company’s stock price is quick and certain. Years of hard work to increase the value of the company’s stock can be wiped away in an instant.
When a company runs into the “brick wall,” company expenses are highlighted and scrutinized closely. What typically happens is that there is a quick “knee jerk” reaction to the problem and cost cutting requirements are handed out to all departments.
The easy approach—which, unfortunately, too many companies take—is to require every department to cut 5 percent, 10 percent, or whatever number is required to balance and stabilize the “revenue-expense ship.”
The implications of such a “shoot from the hip” reaction can be, and often are, far reaching and only exacerbate the problem.
The CIO on a white horse
In a time when the company should probably be pouring more money into IT to achieve significantly more cost savings in the company, IT gets thrown into the fray with all the other departments of the company and has to cut 10 percent of its budget. Big problem! For some companies, it leads to worse problems.
The fact is that in most cases, investing more into IT will give the company an opportunity to cut far more costs than what they can achieve by a 10 percent IT budget decrease.
Look at a quick example. Let’s say a company of $300,000,000 in revenue spends two percent of revenue for their IT department, or $6,000,000. A 10 percent IT reduction gets the company $600,000 in expense reduction; not a bad improvement to help the company improve its profitability.
If, however, an operational department of the company spends nine percent of revenue and, through automation and other IT-led initiatives, the company is able to reduce this department’s expense by one percent, it gives the company a $3,000,000 expense cut.
Most prudent CFOs and CEOs will go for the bigger opportunities, even spend more in IT to get them there quicker if they have the opportunity.
Capitalize on cost-saving technology initiatives
The CIO who has an ongoing cost reduction strategy embedded within his strategic IT plan is a powerful asset to any company. This type of CIO is possibly the most valuable manager on the senior management team. Why? Because he or she is in the most prevalent position to recognize and facilitate significant change through technology that can impact a company’s ongoing operational expense the most. If the CIO has a strong relationship with the CFO, and he certainly should, it is a powerful force that can prevent much of the “knee jerk” reaction that takes place when financial pressures occur.
The bottom line is that financial pressure is going to occur at some point; it’s just a matter of time. When a CIO/CFO team knows that and is continually focused on where to place technology initiatives that reduce operational expense, he or she puts the company in a much stronger position to weather the surge when financial pressures do occur.
The proactive CIO/CFO team may actually find a way to spend more IT dollars to help the company improve productivity or to reduce costs in operational departments that give the company a much bigger bottom-line financial boost, when needed.
Our job is to interpret business need into workable solutions that technology can solve or improve upon, and it is a great job to have.
Mike Sisco is the CEO of MDE Enterprises , an IT management training and consulting company. For more of Mike’s management insight, take a look at his IT Manager Development Series at www.mde.net/cio.