IT Cost Reduction- Fantasy vs. Reality

Joel Friedman

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Businesses today are reducing headcount and closing offices in an attempt to lower expenses.  The Business Leaders within many of these companies have an expectation that their IT Costs should be reduced at or above the same proportion as the rest of the business.  Meaning, that if the business is reduced by 30%, it only makes sense that I.T. cost should decrease 30%.   This logic is terribly flawed and it is the responsibility of Technology Leader to effectively explain why and guide the conversation to what can be realistically accomplished.

Allow me to take us back several years.  Companies were growing by leaps and bounds.  During this time, I.T .Organizations grew, but not at a proportional rate to the business.  In the case of the company I worked with, the business grew at rate of 30%, but I.T. only grew at 10%.  This was a good thing and demonstrates the efficiencies that were gained through I.T. initiatives.    However, keep in mind in this example that I.T. was able to accommodate a 30% growth in the business by adding only 10% cost .

This is where the problem today lies with the expectation of I.T .to reduce their cost at the same rate as the business reduction.  It is unrealistic to expect technology cost to decrease at the same rate as the business because it did not grow at the same rate.   In this scenario, the more realistic expectation should be that a 30% reduction in business cost should result in a 10% decrease in I.T. cost.

Committed Fixed Cost Barriers to Reducing IT Costs

Another problem that Technology Leaders face when attempting to lower cost during this economic downturn is lack of downward flexibility in existing infrastructure.  Let me take you back again several years when the business was rapidly expanding.  I.T. Organizations were successful in implementing upwardly scalable Infrastructure and Applications and were prepared to grow with minimal incremental cost.  As an example, the company that I worked with grew the messaging system to accommodate upwards of 15,000 users at minimal cost per user.

However, most of the costs incurred to grow the infrastructure and application environment was fixed cost and is not easily reduced during a downturn in business.  Hardware and software was purchased, data centers were expanded, etc.  As an example, the company that I worked with grew the messaging system capacity by nearly 30%.  We purchased/leased enough hardware/software licenses to accommodate 15,000 users (which at the time accommodated the expected growth).  What happens when you now only need a messaging system that accommodates 7,500 users?  Is it a realistic expectation that you can now reduce your messaging cost by 50%?  Not likely.

Let me illustrate this another way, a bus has the capacity to carry 150 passengers.   Whether it carries 1 passenger or all 150 passengers, the operating expense of the bus is relatively the same.   The bus driver and maintenance for miles driven are fixed costs and are not changed with reduced passengers.  Really the only opportunity for savings is that the bus may require less fuel to carry less of a load.

The fixed costs associated with building out the infrastructure and application environment during the growth period are not eliminated as quickly as the downturn in business.

Going forward to combat this issue and reduce fixed costs, more and more companies are moving to a “variable” costing model that incorporates managed services, pay for use, and subscription pricing.  This allows for more agility when dealing with upward and downward growth.  Like all alternatives, there are pro’s and con’s associated with moving to a variable approach to IT cost.  I plan to discuss variable cost alternatives in the near future.

To proactively prevent flawed logic and assumptions when it comes to IT Cost Reduction, Technology Leaders must frequently communicate IT financials to the business in an open, honest and transparent manner.  The business must be given the opportunity to understand the cost drivers of IT and ramifications of the choices that they are making when investing in technology.

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