By Jeanne G. Harris, Allan E. Alter and Michael K. Nieves

Reducing IT costs while improving IT capabilities may appear to be a paradox. But by focusing on fixed IT costs and following a strategy of sustained cost reduction, organizations can invest in new capabilities and innovation and prepare for future growth, even as they tighten their belts.

Reducing IT costs quickly has become a top priority for IT leaders worldwide. Surveys from North America, Europe and Asia tell the same story: The percentage of companies cutting their IT spending has climbed from the teens to over 50 percent since the recession began, and those numbers are expected to grow in the months ahead. Further, the magnitude of the cuts called for can be astonishing—more than 20 percent in some cases.

CIOs, however, find themselves in a quandary. Many have already reduced the inflated budgets that were common in the late 1990s, and have kept costs under control in the years since. Having already accomplished that streamlining, some may now be tempted to attack the discretionary part of their IT budgets, the part devoted to improvements and new projects. But that approach brings into play the other half of the paradox: How do we meet the rising demand from the rest of the organization to use IT to bring about better business performance?

Without a doubt, CIOs have to become experts at doing more with less. And they have to become smarter about just what that “less” is going to look like. How to get started? CIOs must look beyond their discretionary budget and seek significant and sustainable reductions in the much larger category of fixed or non-discretionary IT costs. Two activities are critical to this effort, once an initial round of cuts to redundant or no longer relevant activities are made: First, the cost of IT must be reduced by optimizing existing operations, and second, to achieve the most significant gains, the means by which IT services are delivered have to be restructured. Only then can organizations continue to invest in new capabilities, innovation and growth.

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