Digital transformation is picking up speed. It's driving businesses to rethink their traditional imperatives and bringing a new focus on customer engagement and disruptive business models.
As companies emphasize new priorities, they need to optimize inefficient processes and reduce burdensome costs that are a drag on their business. For IT, that requires some tough choices. On the one hand, enterprises are looking to their IT departments to drive business growth and transformation. But at the same time, IT budgets are not keeping pace with growth and transformation initiatives. Legacy IT budget "entitlements" have to be rethought or companies run the risk of maintaining the status quo at the expense of the future.
Gartner predicts that by the end of 2018, at least 75 percent of enterprises can reduce their annual infrastructure and operations run costs by 25 percent or more, through carefully scrutinizing every asset.
This is a great start, but cost optimization is not just about reducing expenses; organizations need smart new strategies that can help them eliminate waste and improve efficiency.
Align Costs to Priorities with Bimodal IT
IT organizations are constantly pulled into varied projects, with different timelines, different skill demands and high expectations from their business stakeholders. As they construct the strategy for these many priorities, Gartner suggests aligning cost optimization initiatives to their IT project strategy.
IT leaders cannot have the same cost measurement and cost containment strategies for projects involving new technologies and new skill sets compared to the foundational projects that help keep the lights on. A smarter approach is a bimodal cost optimization strategy that separates business objectives, lets IT clearly differentiate projects and defines different methods to manage and monitor its costs.
For example, you'll want to consider run- and grow-based IT, or Mode 1, projects, differently than you would transformational Mode 2 projects. For Mode 1 projects, the most important factors for cost optimization are the IT-as-a-percentage-of-revenue ratio and IT-as-a-percentage-of-OpEx ratio.
Explore how you can reduce Mode 1 IT costs to invest in Mode 2 transformational initiatives through technical and process initiatives such as:
- Standardization of processes and technology
- Improved training and newer technical acquisitions
You can also focus on reducing IT spending as a percentage of OpEx with initiatives such as waste reduction through more agile development methodologies and better resource sharing.
Consolidate, Standardize, and Rationalize to Save
Best practices in consolidation, standardization and rationalization can also help you optimize IT costs.
According to Gartner's Top 10 IT cost optimization ideas, centralization and consolidation of IT systems remains one of the primary means of reducing non-value-added IT costs. If you do it effectively, these approaches can help you remove redundancy in areas such as infrastructure, applications and other cost centers.
Rationalizing and standardizing applications can also help you save big. The maintenance and operation of the existing application portfolio represents a significant part of your IT budget — often 15 percent or more. Rationalizing applications provides a major opportunity for cost savings, and it also goes hand in hand with efforts to standardize and simplify your overall business processes.
These optimization initiatives are key to enhancing and maximizing value from your existing systems of record and Mode 1 projects. By saving money on traditional IT programs, you'll be able to free up resources to invest in more transformational Mode 2 projects.
Get the Upper Hand in Negotiating
Best-price negotiation is also an effective way to bring IT costs in line. If you're like most IT groups, your budget is probably flat, or perhaps even shrinking, so you have fewer people and resources and are expected to deliver on higher expectations. The right vendor negotiation strategy can help you maximize your leverage.
Sometimes simply timing negotiations is effective — such as working with a vendor at the end of a quarter or fiscal year. Additional tips include:
- Get the right person (or people) involved, bringing technical skills and business knowledge to the table.
- Employ fear, uncertainty and doubt (FUD), making the vendor aware that you know you have options and aren't afraid to shop around.
- Bring the account manager on board and use them as an ally.
- Know and understand your support options, including third-party service providers and modified agreements.
- Shop around when working with resellers to get a better deal
As the pace of our digital economy accelerates, the pressure on IT to do more with less will almost certainly grow. By developing a proactive strategy to optimize your costs, you'll be able to get ahead of the curve and focus on helping your business achieve its own unique form of digital transformation.
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David Rowe, SVP & CMO
Mr. Rowe is a 29-year veteran of the enterprise software industry with proven experience formulating, building and marketing technology solutions for both large international software firms and high-growth technology start-ups. He has been a featured speaker at technology and marketing conferences and was named as one of the Top Chief Marketing Officers of 2010 by the CMO Institute. Mr. Rowe oversees all global marketing for Rimini Street.