Accelerate Growth with Smarter IT Cost Allocation

Cost optimization and reducing cost are two different approaches to cost management. While a better approach is to move from a mindset of cost cutting to one of cost optimization, there are a few key differences between the two:

Implementing budget cuts  

Cost cutting leads enterprises to reduce cost from every part of business (e.g., all budgets will be cut by 15%), often creating a disproportionate impact on capital spending compared to operating spend. Cost optimization focuses on identifying parts of the enterprise that should be cut dramatically and investing in parts that will provide the greatest near-term positive impact (e.g., digital investments).

Creating business value

For cost reduction, the objective is to simply implement budget cuts, generally activities that are easier to defer or cut. This approach does not create business value and results in the enterprise being hampered. Cost optimization focuses on key business processes and capabilities to identify opportunities for cost optimization. Enterprises can often achieve more lasting improvements in cost efficiency (and value) when they “optimize” by business process.

Organizations often cut costs only in times of emergencies and without a clear plan or framework. Worse, leaders optimize costs in silos, isolating adjacent stakeholders who have their own, equally significant objectives.

Cost optimization helps leaders uphold larger business goals by combining practices and experiences of all business units. It lets you prioritize cost optimization opportunities by value, not just the potential to reduce spending.

When faced with challenges, CIOs need to determine how to approach cost-cutting in the least damaging way to the medium- and long-term health of the business.

While Gartner recommends a structured and programmatic approach to cost management, business and market pressure often dictate the pace to be rapid or immediate, more of a “cost-cutting” way.

CIOs facing immediate or short-term pressures still need to take a thoughtful approach to IT costing and cost-cutting, ensuring that they strive to mitigate the risks and minimize the longer-term impact on the organization.

As organizations emerge from the economic headwinds of 2020, organizations are adapting their cost optimization efforts to create efficiencies while enhancing value in the following areas: 

Budgeting and Resource Allocation — How to budget intelligently to maximize staff productivity and modernize functional processes while protecting sources of value

Growth Investments — How to adopt investment and planning processes that accelerate new capabilities to support the broader organization’s growth and digitalization

Cost Cutting — Best practices for generating sustainable cost savings and eliminating spending in areas no longer fit for the post-pandemic world

A $22B global pharmaceutical company spanning seven autonomous verticals recognized the opportunity to optimize spending toward growth and agility. With Gartner support, the client was able to: 

• Created line of sight into $30-75M in cost optimization opportunity

• Accelerated rationalization outcomes across all verticals — a company first

Read the full case study here.