IT cost cutting: Five ways to ensure you don't pay too high a price

Short-term IT cost cutting has a nasty habit of making companies pay more than they bargained for.

IT is hung up on cost cutting but tactical measures that seem to offer immediate savings often end up costing the business in the long term.

That pattern is widespread across industry because of the fragmented way organisations approach costs internally, which often leaves IT working in isolation, according to Gartner.

In a survey by the analyst firm of more than 2,000 CIOs worldwide, some 65 percent think the main barrier preventing organisations from continuously optimising IT costs is the failure of all parts of the business to work together with shared goals.

The answer, Gartner says, is to adopt a handful of common principles across the business for cost reduction.

Principle 1: Transparency

Transparency of costs is essential if firms are to be able to distinguish areas where savings can be made from areas where cuts might be harmful to the business.

"With transparency, additional benefits can include better demand management, identification of business value, the ability to run IT like a business, better IT estimation capabilities and overall better marketing of the IT capability in general," Gartner said.

Principle 2: Flexibility

According to Gartner, settling on the right level of IT costs isn't just about reductions: it is more about striking a balance between lower unit costs and flexible sourcing.

This philosophy is important in avoiding the common problem where an organisation has cut costs but then finds itself straitjacketed by fixed and long-term contracts that prevent it from making further reductions if demand for IT reduces. The only option is then to pay significant exit penalties.

Flexibility needs to be a guiding principle in ranking initiatives and in ensuring the business consumes only what it needs.

Principle 3: Accountability

IT leaders need to take responsibility for the future direction of their department and avoid the situation where they are purely reactive to business needs and unable to influence demand.

"If IT leaders can better predict, with some degree of certainty, the demands on IT, they will be in a strong position to source IT in the most optimal way," Gartner said.

One strategy is to make an individual business department more aware of demands on IT by using techniques such as chargeback and showback.

Principle 4: Simplification

By reducing complexity, IT can lower costs. Of course, factors other than complexity can be the source of increased expenses - for example, staffing costs and geographic location - but complexity imposes an unnecessary surcharge, according to Gartner.

That surcharge can be as much as 25 percent on a unit cost basis.

"That means the same IT unit of work could cost up to 25 percent more in a highly complex environment than it would in a streamlined environment," Gartner said.

That simplification of systems shouldn't come at the expense of business value. However, unnecessary levels of complexity are areas where it adds no value to the enterprise.

Principle 5: Discipline

Optimising costs should be seen as a discipline rather than a one-off project. That discipline needs an accountable owner and should be led from the top - normally by the CIO.

Organisations need to be thinking about longer-term cost targets, and should measure improvements. Businesses that do these things well often include people from outside IT to take account of business outcomes and constraints rather than just technical specifications.