Savvy savers: CIOs must embrace cost optimization rather than slash-and-burn cost cutting

There is a difference between cost optimization and cost cutting. Gartner defines cost optimization as “a business-focused, continuous discipline to drive spending and cost reduction while maximizing business value.” Cost cutting is typically one-off exercises, while optimization is a journey rather than a destination: it’s never “complete,” but is a continuous exercise that you must implement on an ongoing basis.

In today’s rapidly changing global business environment, cost can be a strategic differentiator. As enterprises adjust to a new normal, there is an urgent need to manage costs better. Enterprises have always placed pressure on CIOs to reduce IT costs, typically to help mitigate their overall impact on business performance and revenues.

Traditionally, this has meant cost cutting, simply chopping budgets that might otherwise have delivered valuable projects or reducing spend on certain projects and tools to the overall detriment of the company. It’s an approach that has often meant CIOs feeling forced into dealing with financial pressures by simply cutting expenditures without fully understanding the potential consequences of these actions.

What do enterprises need to do?

A change of perspective is required. Enterprises need to make IT cost optimization part of an overall business strategy. They should design an ongoing series of disruptive activities that can be implemented within the organization that quickly resolve budgetary constraints and issues, while contributing positively to operating needs and business growth aspirations. There are major issues to address: it’s been estimated that wasted cloud spend alone will exceed $17.6 billion in 2020. The Flexera 2020 State of Tech Spend Survey found that enterprises are wasting around 12% of annual IT spend. These numbers need to be brought back down to earth.

How can enterprises do it?

Design and deploy a cost-optimization strategy, one that disregards the idea of finding a single solution or silver bullet that might radically change the cost structures of your organization. This is not a problem you can solve in one go: you must plan to reach your cost goals via a mix of multiple, continuous actions that deliver ongoing outcomes.

You can begin by aligning IT service delivery and support around a stakeholder-first philosophy and develop a trusted relationship between IT service deliverers and end users. It can drive adoption of new digital tools or services and ensure a better return on investment (ROI).

Transparency is crucial, too, across the whole enterprise IT management lifecycle. This helps departmental managers decide upon agreed levels of technology investments and ensures that IT does not happen in a vacuum. Removing silos is important in all areas of a business, and in terms of budgets and spend, top-down, all-encompassing visibility really helps. Again, it is about cost optimization, not cost cutting.

The role of the IT department evolves to assist cost optimization, too. IT departments need to help cost center managers in business units to agree appropriate levels of technology investments by giving them expert insight and helping them understand all the various factors that affect costs. Your IT department should in this instance become effectively an internal consultancy function that works on behalf of your business objectives.

Another part of your cost optimization strategy should be working with vendors on pricing and terms. Beware of vendor lock-in and contracts that might have high exit costs and long terms – keep your options open. We provide our customers with a professional services catalog that lets them pick and choose products and services according to their requirements and doesn’t limit options.

In the aftermath of the COVID-19 emergency, Deloitte emphasizes the need for Strategic Cost Optimization (SCO) for businesses to adapt: this involves “Process optimization through streamlining and reducing inefficiencies, workforce optimization through organization restructuring, increasing span of controls and de-layering, technology optimization through automation, integration and infrastructure modernization, and physical infrastructure optimization through stacking and computerization.”

Cost optimization can complement transformation

Enterprises that utilize IT cost optimization effectively use it to complement business strategy, digital transformation and desired end goals, not to react to them. The shift from a scattergun series of one-off disruptive reactions to an agile and flexible methodology that resolves budgetary issues without undue fuss or disruption is essential in today’s post-COVID-19 world.

This shift from a cost-cutting mindset to a transformative cost-optimization model can help you reduce operating complexities and power growth. It helps to consider IT financial management as equally important as all other IT responsibilities – for example your cybersecurity is an essential strategic function, and you wouldn’t go at that piecemeal, so treat cost the same way. It will deliver results.

According to McKinsey, “Achieving rapid cost optimization has never been more promising, thanks to advancements in such technologies as automation, smart workflows, AI and data visualization. And perhaps never has it been more urgent.”

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Sahem Azzam
Sahem Azzam

Sahem Azzam is Senior Vice President, Middle East, Africa and Turkey, leading the Orange Business team operating across the region comprising 60+ countries from the regional headquarters and Innovation Hub in Dubai, supported by offices in Egypt, Morocco, Nigeria, Saudi Arabia and the Arabian Gulf, South Africa and Turkey. He has a special interest and expertise in infrastructure services, IoT, Big Data, Smart Cities, Blockchain and IT service management.