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Perspectives

Strategic Cost Optimization: Driving Business Innovation While Reducing IT Costs

2015-06-09


CIOs embrace strategic IT cost optimization initiatives to strike a balance between cutting IT spend and investing long-term in business innovation.

CIOs embrace strategic IT cost optimization initiatives to strike a balance between cutting IT spend and investing long-term in business innovation.


A leading U.S. electric utilities company engaged us to help embrace a robust IT cost optimization methodology. The company's goals were to achieve significant cost savings across infrastructure, process and technology through:

  • Reduced technology, total cost of ownership and improved ROI.

  • Effective sourcing of technology resources.

  • Process and operations maturity.

  • Pool rationalization and end-state planning.

To meet these objectives, we devised a strategic IT cost optimization program that helped save people, tools and technology costs, while improving processes and product quality, as well as enable effective demand management and better skill management.

  • Under people costs, we achieved $5M labor savings via self-optimization, $9M average labor savings per year via selective sourcing and $14M to $19M via full sourcing over a span of five years.

  • We saved $1.6M in software license, $3.4M in labor savings through end‑to‑end integration and automation. We also reduced 20% in overlapping tools.

  • Technology optimization led to $9M estimated savings, 20% reduction in Op‑Ex and approximately 15% to 20% cost savings in 85% of virtualized environments.

  • Process improvements such as improved cost‑capacity balance, improved system availability and productivity and cost avoidance on duplication of tools, data sources and processes were made.

  • Cross training of resources enhanced resource utilization, while selective use of third parties for low‑skilled activities and gradual increase of offshore resources led to cost reduction.

  • Product quality also gained from this project: improvement in client's perception of quality, robust SLAs and OLAs across the organization and reduced time to solve complex issues/problems.

In order to achieve the above impact, we took a strategic cost optimization approach shifting away from pure cost reduction programs and embracing more strategic cost‑saving initiatives. We applied a four‑level framework for prioritizing initiatives that enable IT to better support the business, both today and for the future (as illustrated in Figure 1).

Figure 1

  • Level 1 (Reduce): Cut costs and prioritize spend. While prioritizing short‑term cash savings over long‑term initiatives, decision‑makers must consider the degree of organizational and technical risk, as well as the impact of such myopic thinking on consumers of IT services.

  • Level 2 (Optimize): Remove waste and increase efficiency. The focus should be on eliminating excess waste while improving efficiency of current systems, speed‑to‑market, quality and utilization. Suitable metrics to measure performance—and to indicate the efficiency level of IT initiatives across all areas of the organization—such as speed of IT delivery (i.e., development and implementation time), reduction in transaction time for users and integration of valuable IT assets should be implemented.

  • Level 3 (Rationalize): Seek business relevance, flexibility and agility. Focus on business goals and ensure that IT initiatives are aligned with business objectives and priorities. IT performance metrics should be closely tied to business metrics so that their alignment can be measured appropriately.

  • Level 4 (Transform): Invest more to optimize more. As economic conditions improve, companies can focus their cost optimization efforts on implementing long‑term business and IT process improvements, enabling business growth and innovation and repositioning the business to sustain a competitive advantage.

Interactive

Figure 2

Recognizing that cost optimization teams usually operate on tight timeframes, we have created a framework for prioritizing cost optimization techniques by considering the potential benefits in terms of savings as well as the time requirements, degree of organizational and technical risks, impact on customers and investment required. By evaluating the factors depicted in Figure 1, CIOs can weigh the future strategic value, risks and benefits of cost optimization initiatives.

Three-Step Approach to Strategic IT Cost Optimization

We follow a three-step approach that tailors IT cost optimization to organization-specific optimization goals:

  • IT and business alignment: Our strategic IT cost optimization framework advances the fall of IT budget reduction, coupled with an increased demand for IT services. It also helps to shift expenses from current spend to free‑up capital for investing in future business opportunities. To do this, IT organizations should define IT optimization objectives, identify investment opportunity, prioritize investment portfolio and develop ongoing governance.

  • Opportunity identification: While conducting a thorough IT cost assessment, organizations must identify business challenges through merger, acquisition or divestiture of business operation. Utilization of IT resources and assets must be improved through alternate sourcing, business alignment, vendor renegotiation, consolidation/rationalization, standardization and people alignment.

  • Realization of benefits: Across software, hosting, network, end-user computing and IT overhead management, benefits should be realized in the short and the long‑term.

Our methodology assesses a core set of key organizational objectives (i.e., total cost savings, impact on customers, time requirements, degree of organizational and technical risk and required investment) for various IT cost optimization initiatives. When planned strategically, these objectives can result in a variety of benefits to IT organizations.

Looking Forward

Business uncertainty will continue to impact IT organizations and even a well thought‑out cost savings program can prove ineffective in the long run. However, when cost pressures are intense, businesses must overcome the dual challenge of continuously innovating while reducing spends to outperform the competition.

Overcoming these obstacles requires a strategic cost optimization program to strike a balance between cost reduction initiatives and investments needed to generate process efficiencies, improve quality of service, build a stronger value chain, improve skill management and increase customer satisfaction. Further, cost optimization cannot be a one‑time strategic IT initiative. Instead, it should be a guiding principle for managing IT in the most efficient manner while responding promptly to fluctuations in business conditions.

For a thorough cost optimization evaluation framework and benefits, read our white paper Strategic Cost Optimization: Driving Business Innovation While Reducing IT Costs

Please visit Cognizant Business Consulting's Strategic Services Practice for more information.

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Strategic Cost Optimization: Driving Business Innovation While Reducing IT Costs