Cost optimization is a discipline that includes the practices, capabilities and behaviors taken by IT organizations and enterprise to balance the constraints of reducing spending, reducing costs, managing service levels and showing the business value of IT in pursuit of enterprise financial imperatives. These actions can be taken with or without new investments, whether initiated in the short term or long term, or whether initiated during periods of economic downturn or expansion. Now, most of the attention placed on cost optimization is related to the general economic recession; however, these cost optimization Key Issues are also relevant in times of economic expansion, where certain industries or enterprises may be responding to changing market conditions, while other industries or enterprises are prospering. Global economic uncertainty has made rapid cost optimization in all its forms a priority for most enterprises and IT organizations.

Gartner considers cost optimization to be one of the top priorities for IT organizations and enterprises across the globe. The cost optimization agenda spans all Gartner research areas, at both strategic and tactical levels, across all process domains to help clients deal with current economic conditions. It is also aimed at helping enterprises formulate their return-to-growth strategies, as they discover more predictability in their enterprises, in their industries, in their countries and worldwide. Critical elements covered in our cost optimization research include the potential benefits, customer impact, time requirements, degree of organizational risk, degree of technical risk, and investment requirements of specific cost optimization techniques.

Here, we review Key Issues that are representative of questions to be answered in Gartner cost optimization research.

Background and Context: The challenge is not in identifying opportunities for cost optimization, but in determining which areas will quickly yield the highest benefits. Because of the condensed nature of these decisions during an economic downturn, a framework for opportunity management and prioritization is critical to success.

Impact: Identification of potential cost savings opportunities and the ability to prioritize them will test IT governance and IT's alignment with the business. Improper prioritization can mean a degraded ability to respond to market opportunities when a return-to-growth footing is required.

Sample of Published Research:

• "Balancing Short-Term and Long-Term Cost-Optimization Efforts"
• "Cost Cutting: CIOs Can Exploit Asymmetries Between Regions and Industries to Find New Opportunities"
• "Cost Cutting Needs Quick Prioritization of Viable Options"
• "How to Prioritize Green IT Projects in an Economically Constrained World"
• "Cost Cutting in IT to Cope With Economic Slowdown"

Background and Context: Although IT can independently help to reach budget targets in the short term, more long-term savings with larger returns on investment will only come from joint business and IT decisions. For some organizations, evaluation of the application portfolio and of service levels across the enterprise will mean consultation with and approval by the business stakeholders.

Impact: The credibility of IT can be enhanced or diminished based on how cost optimization campaigns are conducted. As current economic conditions lead to strategic business restructuring for many, the focus of cost optimization must be aligned with the strategic objectives of the business.

Sample of Published Research:

• "CEO Concerns 2009: Dealing With the Downturn"
• "Communicating the Value of EA to CFOs"
• "Process Performance Metrics: Guidelines for BPM Success"
• "IT Cost Optimization: How to Anticipate Your Corporate Response to Economic Downturn"
• "Expand Markets yet Reduce Costs With Winning Product Portfolios"

Background and Context: Often the first target of a cost optimization campaign, contract terms and conditions for purchase of hardware, software and IT services are critically important to meet new spending targets. While IT organizations are seeking to reduce external spending, IT vendors are striving to meet their own revenue targets.

Impact: Although IT procurement is a potential source of cost savings, driving too good a deal may imperil some IT vendors that are also experiencing financial difficulty. Pushing too hard for the best deal may mean having to re-source products and services at a future date.

Sample of Published Research:

• "Understand Oracle's Virtualization Policy to Avoid Unexpected Costs"
• "Reduce IT Spending on Software by Negotiating These Contract Clauses"
• "Best Practices for Renegotiating Outsourcing Contracts"
• "How to Get a Great Deal on Your Business Application Software Licenses"
• "What Your Cisco Smartnet Service Discount Should Be and How to Negotiate the Best Deal"

Background and Context: IT organizations that were less optimized prior to the economic downturn will find it easier to reduce costs to meet new enterprise expectations than their counterparts in organizations that recently optimized the IT organization.

Impact: Benefits from the initial reaction to cost optimization typically include a reduction in IT spending, which results in cost avoidance. However, long-term reduction in IT baseline costs often requires new investment and improvement in the maturity of IT disciplines, such as IT performance management, IT chargeback, vendor management, and cost management and benchmarking.

Sample of Published Research:

• "Cost Optimization: Three ITIL Processes Can Play an Important Role"
• "Five Dimensions of Network Design to Improve Performance and Save Money"
• "Backup and Recovery Optimization and Cost Avoidance"
• "'Green' IT: Cut Your Travel Costs and Carbon Footprint With Web Conferencing"
• "Exploring Options for Licensing Microsoft Office SharePoint Server 2007 to Reduce Costs"
• "Save Money Now With Hosted and 'Cloud' Infrastructure"

Background and Context: Gartner's Four Levels of Cost Optimization Framework (see Figure 1) is an organizing principle for how Gartner conducts research on cost optimization. It is also an organizing principle for categorizing cost optimization opportunities. Even with the best organizing principles, many organizations find that they have difficulty prioritizing their vast opportunities for cost optimization, which extend beyond just the IT organization.

Impact: Without a framework and prioritization strategy for cost optimization opportunities, many IT organizations and their enterprises will fall short of their cost optimization goals, cycle through the wrong cost optimization opportunities and even inhibit their ability to fully take advantage of the eventual return-to-growth period of this business cycle.

Sample of Published Research:

• "Is Security a Luxury in a Declining Economy?"
• "Continuously Optimize Your Data Center Capacity Before Building or Buying More"
• "Beyond Survival: Leverage EA Best Practices to Thrive"
• "For IT Cost Optimization, Follow the Money"
• "IT Managers Can Actually Increase Their Current Expenses by Eliminating a Project"

Vertical Industry Emphasis: Depending on the Gartner services membership, extensive industry domain research is available and specific to cost optimization. In relation to Gartner's Four Levels of Cost Optimization Framework in Figure 1, IT procurement and cost savings within IT thresholds tend to be more industry-neutral. As we move up the levels in the framework and into joint business and IT cost savings, and the enabling innovation and business restructuring areas, industry domains become crucial in determining the proper course of action. Gartner is organized to cover these cost optimization Key Issues by industry segment for government, education, retail, manufacturing, banking and finance, insurance and other industries.

Sample of Published Research:

• "Top Industry Predictions 2009: Industries in Recession-Driven Transition"
• "Questions Manufacturers Should Ask to Address Increasing Software Maintenance Costs"
• "Payment Innovation: More Useful, More Client-Centric and Recession-Proof"
• "Delivering on E-Government in a Recession"
• "Getting U.S. Higher Education Through a Bad Economy With E-Learning and Social Software"
• "Success Factors for Retail Time and Labor Management Projects"
• "Consumer Spending Decline and the Impact on Auto Insurance"

Background and Context: In the early stages of a cost optimization campaign, most IT organizations cut where they have the most control — in IT procurement and cost cutting within IT. For additional savings, IT organizations and the business must achieve consensus on how the work must be changed, and service levels adjusted. They must also make decisions about the future viability of programs, deliverables and even business units.

Impact: The biggest opportunities for lower unit costs in IT rest with business decisions about the use of IT. The sustainability of these important decisions will require careful validation.

Sample of Published Research:

• "Update: Cost Optimization Requires Corporate Performance Management"
• "How the CIO Can Increase the Value of the Application Portfolio"
• "Real-Time Decision-Making Applications Can Increase Revenue and Reduce Costs in the Contact Center"
• "Optimize Travel Costs Using Audio, Web and Video Conferencing"
• "Cut Indirect Costs Now With E-Procurement"

Background and Context: Economic downturns often result in a spate of mergers, acquisitions, divestitures, liquidations, shared-service creation and other radical forms of strategic business actions. IT due diligence and quick action to match the urgency of the situation will be necessary to meet the expectations of the enterprise.

Impact: Some organizations will reach a point where cost optimization is not enough to ensure the long-term viability of their enterprises. The challenge of IT alignment will be how IT and its supply chain manage offensive and defensive strategic actions relate to the economic downturn.

Sample of Published Research:

• "Build Your 2009 ECM Project Road Map to Avoid Failure Trend"
• "Data Retention, Archiving and Purging: Important Strategies for Managing ERP Cost and Risk"
• "In Hard Times, Internet Viewed as Necessity"
• "Creating Persuasive Mobile Business Cases in a Recession"
• "Act Now to Gauge and Bolster Enterprise Architecture Viability During the Downturn"

Background and Context: For many enterprises where IT has not been well-aligned with business goals, cost optimization goals will be more difficult to achieve. This economic downturn signals a significant inflection point where IT-aligned enterprises will outpace even the best efforts of those that poorly manage IT.

Impact: Even after economic expansion returns, many enterprises will experience a significant time lag in IT investment and necessary restaffing of IT capabilities. Those organizations doing a poor job of cost optimization will have to devote critical investment funding — not in exploiting a new expansion market, but in fixing their mistakes from unaligned cost optimization.

Sample of Published Research:

• "How the IT Organization Handles the Three Stages of a Downturn"
• "Territory Management Software Helps Sales Grow Revenue"
• "Deploying Sales Force Automation Even in a Down Economy"
• "Cost Optimization in Multichannel Campaign Management"
• "Innovation and Idea Management: Make These Decisions First"

"How the IT Organization Handles the Three Stages of a Downturn" chronicles the three stages of an economic downturn, the economic situation, business conditions, IT budgets and, most importantly, IT actions for each stage of a downturn. Because the cost optimization topic is multidimensional and dynamic, much of Gartner research on cost optimization will be defined by IT action advice for each of these stages and will intersect with the cost optimization Key Issues explored in this research.

The agenda for cost optimization is a continuous and ongoing research effort that encompasses all research areas at Gartner. In addition to the research highlighted here, two special reports are planned within the cost optimization research agenda during 2009. In April, we will produce a collection of research on a sound approach to cost optimization. That research collection will outline processes for identifying, prioritizing and executing cost optimization initiatives. We will follow that with a special report in June on managing in a downturn. This research will look at how organizations need to adapt their IT and business management disciplines during an economic downturn. It will also focus on balancing the need to optimize costs with the need to prepare for the return to growth.

"The Four Levels of Cost Optimization"

"Balancing Short-Term and Long-Term Cost-Optimization Efforts"

"Cost Optimization: Classify Costs to Achieve Sustainable Savings"

"Emergency Cost Optimization: Weigh the Consequences"

"Findings From Client Inquiries: Never Let a Serious Crisis Go to Waste"

"Why Some Offices of the CIO Can Become Bloated"

"IT Services: One of the Highest Opportunities for Savings Given It's One of the Largest Sources of IT Spending"

"IT Chargeback as a Tool for Cost Optimization"

"Case Study: Cutting IT Costs Can Go Too Far"

"Easy Cost Optimization: Why Some Organizations Can Do More Than Others"