The COVID-19 crisis has caused enterprises to reset their work, workforce, relationships, and business ecosystem. For many, the pandemic has forced them to forget about their carefully formulated strategies and quickly reconfigure their businesses and operating models to match new requirements.
As enterprises move further into the Renew Phase, one of the aspects they need to assess is their spending. Especially in IT spending.
While Gartner predicts worldwide IT spending to decline by 7.3%, enterprises cannot afford to not become more digital. This is because now-outdated processes will only further disrupt their primary revenue streams.
Therefore, it is important that enterprises embrace smart IT spending.
Smart IT spending is a discipline that prevents enterprises from cutting costs during the recession and spending generously during prosperity.
This is a tricky balance as it requires enterprises to establish IT financial maturity as well as best understand the impact of their IT-related decisions on the business as a whole.
However, here are three important strategies that can help strike this balance and ensure growth even during these testing times.
Understand the Difference Between IT Cost Cutting and IT Cost Optimization
While the terms cost-cutting and cost optimization are used interchangeably, they are actually different. Each action has its own impacts, benefits, and limitations.
IT Cost Cutting
IT cost-cutting is a one-time step to reduce the immediate costs incurred by enterprises. Enterprises identify a precise amount – not a percentage – of money they need to save and a date by which savings should be completed.
In most cases, the first IT cost-cutting decision companies take is reducing personnel costs. This is especially true for IT organizations as most are top-heavy with personnel. Other tactics include reducing hardware costs by moving data to the cloud and restructuring debt.
IT Cost Optimization
IT cost optimization is a business-focused discipline that drives spending and reduces costs while also maximizing business value. Some of the activities included in this include:
- Better coordination with providers, alignment with contracts, and management of internal changes to reduce the potential of error
- Standardizing, simplifying, integrating, and rationalizing applications, services, and processes to automate and centralize costs and assets
- Automating the processes included in an asset’s lifecycle, focusing on expediting requests and processing exceptions, and managing more with fewer people hours
As cost optimization isn’t a one-time activity, it delivers long-term results that have a positive impact on your IT budget.
Understand the ROI on IT Investments
According to Gartner, one out of three IT organizations may be struggling to achieve IT financial maturity or have no plans to do so at all. As a result, they may not be able to effectively convey the value of IT for the enterprise.
This, in turn, prevents stakeholders from clearly comprehending the return on IT investments.
As part of smart IT spending, enterprises need to understand the ROI of their IT projects. Their top five goals of any technology investment should be –
- Saving money by eliminating redundancies
- Empowering employee productivity via innovative solutions
- Countering security vulnerabilities that can impact enterprises, customers, partners, and end-users
- Enhancing tech efficiencies through automating processes
- Improving revenue streams by extending the reach of services or products
Coming to the actual calculation of IT ROI, this can be a challenge since the time scale for calculations may vary. For instance, three years is common for hardware investments since the technology may be obsolete after that time. On the other hand, the software can be used for five years or more.
Another factor that companies should consider in the calculation is consistency. ROI calculations should be applied across all IT investments in a consistent matter. Consistency also covers assumptions used during calculations such as inflation and taxation.
Further making ROI of IT investments complex is the decision between over-precision and overly rounded figures. Figures rounded to two or more zeroes are deemed fairly inaccurate by users. Similarly, enterprises are wary of spurious accuracy.
Establish Links between IT Finance and Business Value
To make smarter IT spending decisions, it is imperative to bridge the gap between IT finance and the C-suite.
Businesses may view IT costs as a hard-to-define overhead. This is because of the lack of transparency into these costs.
As a result, IT is under pressure to deliver more for less and reconcile cost reduction targets with business demands.
With a change, IT value will remain unclear and costs will remain high.
CIOs, CFOs, and the CEO need to be aligned around the expectations and desired capabilities of IT and what it can deliver. This ensures well-defined expectations and adds clarity to the costs of IT. This is especially true when defensible data is provided to back IT’s arguments.
Several frameworks can help in this regard. For instance, ITIL has proven to improve alignment between IT and business objectives. This is because it promotes a holistic view of delivering products and services, and blurs the lines of business and IT.
How Smart are Your Enterprise’s IT Spending Practices?
These are my thoughts on smart spending to get the most from IT investments. If you have more ideas you would like to share, I would love to hear them in the comments.
If you would like to assess your own IT investments, especially with 2021 finally here, my team of consultants and I can help. So, send through your queries so we can address your pain points and resolve them.