Info-Tech identifies three ways to optimize costs: eliminate discretionary IT spending, reduce operational and project spending, or propose digital business initiatives to reduce organizational costs. This research note focuses on the third way and shows how an innovation approach to cost optimization can generate organization-wide cost optimization opportunities that can dwarf any potential IT cost reductions. Using this approach, you can change the cost optimization discussion from one that focuses on IT cost cutting to one that focuses on IT investment.
From Crisis to Recession
For IT leaders, the initial COVID-19 crisis is over. The reports from IT leaders I’ve been working with are that their users are now successfully working remotely from home. An initiative that normally would have taken months to deliver was delivered in days or just a few weeks! With that came a big sigh of relief, pats on the shoulder, and a chance to take a deep breath.
The respite, however, will be short: the next crisis is already looming. We’re inevitably facing a deep global recession. For executives in most industries, there’s a rising expectation that there will soon be a tap on the shoulder and a mandate to slash budgets.
Curiously, as IT leaders, we’re in an unusual and enviable position. The need to rapidly implement remote working has highlighted the importance of IT and accelerated the uptake of new and emerging technologies. Suddenly, everyone is an IT aficionado. At the same time, the success with which IT departments have enabled working from home has raised our profile and made us the heroes of the organization.
This newly won status puts us in a unique position to change the cost optimization discussion from cost cutting to investment. By investing in IT, we can boost the organization’s bottom line by orders of magnitude. Let’s look at how to do this.
Pillars of Cost Optimization
Info-Tech describes four areas of cost optimization in our Cost Management Center:
- Workforce optimization
- Asset optimization
- Vendor cost management
- Project (re)prioritization
Within each of these areas, there are three different ways that you can optimize costs.
|
Category |
Examples |
|
|---|---|---|
|
1. |
Eliminate Discretionary IT Spending |
Suspend employee events Moratorium on conference attendance |
|
2. |
Reduce Operational and Project Spending |
Reduce support desk hours of operation Pause or eliminate projects Delay software/hardware upgrades Examine headcount optimization Consolidate vendors |
|
3. |
Propose Digital Business Initiatives to |
Video-based client service delivery Secure document and certificate provisioning Workflow automation AI use cases In-office hoteling initiatives |
Typically, departments focus on the first or second category. We aim to reduce costs associated with discretionary IT spending (these are cost reductions that impact just the IT organization), or we aim to reduce operational and project spending (these are cost reductions that will have an impact outside of the IT department). Either way, the cost optimization initiatives are focused on cost reduction.
The problem with these approaches is that, as an IT leader, you’ve probably been making these types of cuts and efficiency improvements for years. You’ve successfully met each new cost optimization drive using these traditional approaches, plus whatever new technological solutions have come along since the last squeeze. However, using these traditional approaches and this type of linear thinking, all we can hope to achieve are incremental improvements.
Here’s the crunch: the COVID-19 recession will, in most cases, generate more pressure than we’ve ever experienced before to make deep and drastic budgetary savings. Given that you’re probably already running a lean operation, you will be faced with a potentially insurmountable challenge. Traditional approaches just aren’t going to bridge the gap between current and targeted post-COVID-19 budgets.
There is, however, a solution. The third category of initiative is qualitatively different from the first two. Instead of focusing on cutting IT costs, it focuses on investing in IT. A dollar invested in IT can lead to savings throughout the organization that are orders of magnitude greater than the initial investment and also far greater than any potential cuts to the IT budget. There’s also another difference. The third option is the only one that can be used to generate revenue improvements rather than just cutting costs. And after all, the reason we use the term “cost optimization” is because a healthy business can benefit just as much from improving revenue as it can from reducing costs.
Just as the third option changes the cost optimization equation, it also requires that we change our thinking around the challenge. The best way to generate new digital business initiatives is to take an innovation approach to cost optimization.
The Innovative Cost Optimization Method
This innovative cost optimization approach is specifically designed to support the use of creative, neuroscience-based techniques to develop and then apply innovative cost optimization ideas.
The following sections briefly describe each of the stages in this method. You are invited to contact the author for additional information on any area.
I. Initiate Project
Innovation requires creativity. Creativity only happens when the brain is in a relaxed state. If you really want to generate new thinking, then you’ll need to create a “safe” space, free of interruptions. An offsite block of uninterrupted time is best.
Carefully consider who you’ll have working on this project. The formation of a team of people with complementary skills and can-do, solution-focused attitudes is critical. Ideally, members should come from both the IT and business arenas: very few cost optimization ideas can be implemented without some impact and buy-in from the business.
You’ll also need a good facilitator who understands how to create a space where critical, problem-focused IT and business professionals can leverage their creativity and imagination to generate fresh ideas.
II. Establish Objectives
In this stage we set boundaries on the scope of the project. Are staff cuts and organizational changes part of the mandate, or are they off limits? Are we looking for any improvements regardless of their payback, or are we just focused on the big ticket items? Is there a time limit for the ROI?
III. Harvest Ideas
This is the stage where you start brainstorming. The term “brainstorming” has become tainted in recent times. Don’t let this put you off. Brainstorming done skillfully can dramatically improve your cost optimization efforts.
One useful model to introduce here (and by no means the only one) is Edward de Bono’s Six Thinking Hats. The brainstorming stage uses the Green Hat thinking style. This is creative thinking. It’s not what we’re trained to do in IT, and it doesn’t come naturally to everyone. As IT professionals, we’re trained to immediately search for the errors and weaknesses in an idea. New people coming into the team at this stage will do just that (so don’t let them). However, your team now knows that it’s safe to just focus on creating new ideas: the logical analysis and error detection will come later, so we can put that aside for now.
The power of such an approach can be astounding. Teams I’ve worked with have generated over five hundred ideas in just half a day. By allowing ourselves the (rare) opportunity to be truly creative, we can generate and develop ideas that would normally be dismissed as faulty, wrong, or unrealistic. In other words, the types of ideas that usually lead to breakthroughs and in some cases revolutionary innovations! These are the ideas we’re looking for to transcend the mundane and to identify new opportunities for cost optimization that haven’t been previously identified.
IV. Classify Ideas
Now you can start to move back into more familiar territory. You will have many ideas to work with. You need to give some order to these ideas before you can evaluate them effectively.
The classification framework has two dimensions. You need to categorize the ideas, and then you need to apply value measures to each idea. The value measures can include factors such as investment required, expected return, return horizon, risk level, etc. The outcomes from Stage II may be useful here.
Group the ideas into your categories and identify your value measures, and then you’re ready to move into the next stage.
V. Filter Ideas
Using the classification framework, you can now start to filter the ideas and select those with the most potential. Consider factors such as sustainability, required skill sets, alignment with the business strategy, etc., and look for ideas that are synergistic. Synergistic ideas provide value that is greater than the sum of the parts – they can be game changers.
Aim to identify 12 to 20 ideas that you can take into the next stage.
VI. Detail Ideas
The next step is to flesh out these 12 to 20 ideas so that you can analyze them in more detail.
For each of these ideas, you need to understand attributes such as the potential benefits and risks, the timelines and resource requirements, and the financial payoff.
Develop a one-page template that can be used to describe the idea and its most important characteristics. Support this with a simple financial analysis. Be careful not to get bogged down here. Try to use just indicative figures that you already have at hand. You’re looking for orders of magnitude to provide comparisons between the various ideas and decide which to take forward.
VII. Develop Plans
You now have your innovative cost optimization projects identified and are ready to develop project plans for each of them. Every organization is different, so apply your standard processes to this, whether they start with a formal opportunity evaluation, business case, or project description, and take it from there.
Because you’ve included business representatives in your team, you already have a level of business support for your initiatives, improving your chances of success.
VIII. Implement and Review
If you truly want to truly move up the maturity curve toward innovator, you won’t apply this process just once. Rather, you will view it as a cycle that can be repeated and that eventually becomes your de facto approach to solving new challenges. Remember, you still have many other ideas that did not get filtered through the first time due to limited bandwidth in implementing new projects. However, it’s likely that many of these other ideas also look promising. Once your current program has built up momentum, review these and select the next set of ideas. Once these have been exhausted, start the process again with a new innovation cycle.
The Benefits
For IT leaders, the COVID-19 crisis is the career opportunity of the decade. We can’t let this opportunity be lost by sitting back and waiting for that tap on the shoulder to cut costs. This is the time to leverage our recently won “poster boy” department status and get on the front foot by showing how IT can be used to make significant organization-wide cost cuts or revenue increases. There’s never been a better opportunity to have your voice heard.
Applying an innovation approach to your cost optimization program will deliver significant financial benefits. Perhaps more importantly, it will also leave your team feeling empowered, motivated, and committed to making your cost optimization program a success.