CXO

How to optimize IT costs to fund digital transformation: 3 steps

CIOs should be undertaking IT cost optimization even during times of growth to save money and fund innovative projects, according to Gartner.

A failure to optimize IT costs can put your entire organization at risk, Steve Monahan, vice president at Gartner Consulting, said during a session at the 2018 Gartner Symposium/IT Expo in Orlando on Monday.

Cost optimization is a business-focused, continuous discipline to drive spending and cost reduction while maximizing business value and investment, Monahan said.

IT costs fall into two categories, he explained. One is run the business, which is IT spend to keep the lights on and support current business operations. The other is change the business, or grow and transform: The IT investments that drive business growth and transformation, such as new business models.

SEE: IT leader's guide to achieving digital transformation (Tech Pro Research)

Going into 2019, overall IT spend is on a growth trajectory, Gartner research found. However, IT costs to run the business are also creeping higher, being led by infrastructure and application spend. Global enterprise IT spend is projected to hit $3.9 trillion by 2019, out pacing the rate of inflation, Monahan said.

"This reflects the importance of tech to overall business strategy, but also the increasing cost to support and maintain both legacy and newer tech platforms—tech debt, as some call it," Monahan said.

And as this IT spend pie gets bigger, the portion needed just to run the business is growing larger as well. In 2013 it represented 67% of all IT spend; in 2017, it rose to 71%.

With the run the business spend creeping higher, IT departments risk this crowding out investment dollars without a significant increase to the overall IT budget, Monahan said.

"When market changes and cost pressures come to fore, some organizations may not be able to sustain the level of changing business investment that competitors are doing, or that other stakeholders expect and see as a necessity," Monahan said.

More than 70% of IT spend is on data center and network (33%), and application development and maintenance (40%), Gartner found.

The question is: How can you manage the increase in IT demand, while at the same time freeing up dollars for investment? The answer is IT cost optimization, Monahan said.

Here are three steps to follow to optimize your organization's IT spend, according to Monahan:

SEE: Year-round IT budget template (Tech Pro Research)

1. Be transparent

IT cost optimization must be underpinned by IT cost transparency, Monahan said. This allows stakeholders to see where you're starting from and where you can potentially go through optimization. Making these costs transparent can also serve as a launchpad for joint business and IT initiatives.

"Organizations that have transparency into IT costs can have strategic discussions about the impact of IT cost optimization," Monahan said. Transparency drives accountability, agility (to allocate resources based on the changing nature of IT demand), simplicity, and discipline (to meet the changing operational priorities in your organizations). It also enables organizations to analyze and potentially benchmark their IT spend through different lenses, Monahan said.

Monahan gave the example of a case study of a company where the business viewed IT as a costly department with too many employees. The CIO conducted a deep-dive IT cost review to establish transparency with the business, and used peer benchmarks to size the price. The CIO openly shared the results with the business, and was able to demonstrate areas for optimization around data center tool rationalization and enterprise vendor agreements. As a result, they identified $30 million optimization opportunities in IT that they began executing on immediately. This also established new trust with the business side, Monahan said.

"IT cost transparency helps myth-bust, identify optimization, and make a new relationship with the business," he added.

2. Make it ongoing

IT cost optimization has to be considered ongoing and a management discipline, as opposed to a one-time exercise, to gain maximum value.

The risk of treating it as a one-time event is the same as the risk of making New Year's resolutions, Monahan said: Organizations that act as if optimization is a tactical one-off usually see those costs return over time, whereas those that treat it as a program see sustained IT cost performance.

"Like any other large program that your organization undertakes, IT cost optimization programs require strong methods and approaches, and programmatic best practices," Monahan said.

In another case study, an organization established a run the business cost reduction program, with multi-year targets based on its benchmark gaps with peers. Teams were held accountable for results, and there was a relentless focus on rationalization, automation, standardization, and vendor management discipline. Since 2011, the program reduced the run the business gap to peers from $250 million to $30 million, freeing up funding for innovation and the digital agenda, Monahan said.

3. Fund digital

IT cost optimization should be considered a strategic imperative of the business, and a means to fund your organization's digital agenda, Monahan said.

JPMorgan Chase moved to a "digital everything" investment stance, investing more than $1 billion in digital, Monahan said. The challenge of freeing up those dollars through optimization lies in finding the set of optimization opportunities that are sustainable, but high value and difficult to do, he said.

Ultimately, cost optimization has to become business optimization to get to the digital future of your organization, Monahan said.

Also see

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Image: iStockphoto/AndreyPopov

About Alison DeNisco Rayome

Alison DeNisco Rayome is a Staff Writer for TechRepublic. She covers CXO, cybersecurity, and the convergence of tech and the workplace.

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