By Samuel Greengard
Over the last decade, global competition, information technology and a lingering recession have forced organizations to focus on cost cutting like never before. However, a new report from Gartner, Five Principles Underpin IT Cost Optimization Success, suggests that the tactical approach many organizations use isn’t adequate. “Simply setting targets such as 5 percent or 10 percent leads to an inconsistent set of IT maintenance contracts and support costs,” points out Sanil Solanki, a research director for Gartner.
The survey of 3,053 global CIOs found that organizations often aren’t in sync and many business leaders, including CIOs, overlook the fact that there’s no end to optimization practices. The biggest obstacle for organizations attempting to achieve continuous optimization, according to 65 percent of respondents, is organizational mindset. Business leaders are unable to work together in pursuit of a mutual goal, respondents indicated.
But the challenges don’t stop there. “Too many organizations achieve cost reductions by signing fixed-price longer term deals that leave no room for further negotiation or optimization with vendors,” Solanki explains. A scattershot approach typically leads to unpredictable results. Frequently, “costs end up returning to the business and CIOs wind up stuck with inconsistent contracts, SLAs and commercial deals,” he says.
The difference between organizations that optimize cost cutting and those that don’t isn’t the level of effort or the number of initiatives taking place, according to the Gartner report. Success typically revolves around five guiding principles that create a long-term focus rather than specific short-term financial targets.
The five principles encompass:
- Transparency. Solanki says that greater transparency translates to better supply and demand decisions. This, in turn, helps organizations optimize costs the right way. By defining business outcomes, an enterprise can better weigh the effectiveness of transparency. However, this approach isn’t possible until IT and the business have explicitly agreed on what IT provides the business and what the business needs from IT. A quantitative assessment that defines consumption, drivers and inhibitors for IT and business services is essential. This leads to better prioritization and consensus about optimization opportunities.
- Agility. Organizations that achieve continuous optimization typically display a high level of agility and adaptability. They also recognize that the goal isn’t to merely lower IT costs but to adopt a more efficient and cost-effective long-term sourcing strategy. In most cases, this means moving away from a focus on contracts that create fixed pricing and moving to a variable model, Gartner notes.
- Accountability. Organizations must review both supply and demand side issues that involve IT resources. According to Solanki, IT often becomes reactive to business requirements because organizations view optimization within the prism of how to best supply the demand for technology. However, this approach creates a “reactive” culture. Instead, leaders must take ownership and use devices such as chargebacks and showbacks to create greater accountability.
- Simplification. Reducing complexity generally leads to cost optimization, Gartner notes. Although IT systems are inherently complex, enterprises can benefit by introducing standard platforms, consistent business processes, and clearly defined IT services and service levels. Gartner’s IT key metrics data indicates that best-in-class performers in this area spend 38 percent less than average performers to deliver similar results.
- Discipline. Gartner stresses that IT cost optimization isn’t a one-and-done initiative and CIOs can’t view it as a series of discreet projects. What’s more, successful cost optimization revolves around CIO ownership and the use of dashboards and metrics to focus on longer-term cost efficiencies. Finally, best practice organizations frequently rely on a cross-functional team to oversee an initiative.
In the end, Solanki says that “transparency and unit price benchmarking keep vendors on their toes and deliver greater value.” Organizations that adopt these principles, he concludes, “are far more likely to achieve long-term efficiencies.”
