August 08, 2022
August 08, 2022
Contributor: Susan Moore
Here’s how to manage the pressure to reduce IT costs in the short term without harming your organization in the mid-to-long term.
Amid inflation and the threat of recession, many organizations face demands for short-term cost reductions, even if they plan to deploy technology in the longer-term to sustainably reduce the cost of doing business and create a competitive advantage. The question for CIOs is how to cut costs while inflicting the least damage on the mid- and long-term health of the business.
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“Gartner recommends that organizations take a structured and programmatic approach to cost management , says Chris Ganly, VP Analyst at Gartner. “Research shows that organizations that continue to invest strategically in tough times are more likely to emerge as leaders. But sometimes, difficult times demand difficult actions.”
Gartner research shows that while most CFOs have been relying on pricing-focused strategies to offset inflation, 39% will zero in on cost cutting if inflation remains persistently high in 4Q22. That will soon turn into explicit demands for rapid cost cutting.
“Despite the urgency and pressure, pause and remember that there’s little value in cutting or stopping projects or services where costs have already been spent or incurred,” says Ganly. “Also, you’ll hurt the organization’s ability to ramp up when conditions improve if you cut in areas where you have already invested or are ready to deliver — and in key initiatives that can’t be easily restarted.”
See the Playbook: Recession Advice for IT
Instead, assess your IT cost reduction options with these rules in mind.
Eliminate, reduce or suspend items that will deliver an impact in weeks or months, not in years. For example, target expenses that are incurred and paid monthly or quarterly on a pay-as-you-go basis, rather than annually.
Focus on costs that can truly be reduced or eliminated. You don’t want simply to freeze costs for the current period only to have them reappear later.
Download now: IT Cost Optimization Framework
Target items that will have a real cash impact on the profit and loss statement rather than noncash items like depreciation or amortization. For example, cost savings in cloud services have a real cash impact, as opposed to reducing on-premises software licenses or owned assets like hardware. Selling and leasing back assets can provide real cash savings as well.
Most organizations don’t cut deeply enough the first time, which means they often need to revisit costs and do it again. This creates a destructive and unproductive cycle of uncertainty, effort and lost productivity. This is particularly relevant for staff cuts, where cycles of ongoing reductions can be especially dangerous.
Work with your finance partner to obtain a solid view of the expense-level detail, such as expense accounts, and key balance sheet accounts, including expense accruals and prepayments. Use this view to identify specific cash reductions that will immediately have an impact.
Unless payments (or commitments) can be recovered or prepayments returned, the most immediate impact will be on unspent or uncommitted payments. Evaluate contracts for renegotiation and termination clauses.
Typically, operating expenditures (opex) are the easiest to impact, but capital expenditures (capex) can also be reduced. Gartner IT Key Metrics Data shows that 25% of the average IT budget is spent on capital, so ensure that the complete range of IT spend is considered for rapid reductions.
When it comes to saving money, it is commonly said that “sunk costs are irrelevant,” meaning that future spend should be considered without relation to past spending or “sunk costs.” From a rapid cost reduction standpoint this is true, but it’s still worth considering whether the savings will be more than the benefits that can and will be delivered by continuing.
Discretionary spending, such as for new projects, additional capabilities or services, is often a seemingly easier place to cut. However, even nondiscretionary “run the business” expenses, such as IT infrastructure and operations, can be cut by reducing usage or service levels.
Fixed costs are expenses that remain constant, regardless of activity or volume, such as office rent, subscriptions and payroll. For fixed costs, focus on elimination. Variable costs change with activity or volume, for example, telecommunications, contractors and consumables. For variable costs, focus on both reduction and elimination.
39% of CFOs polled in May said they would cut costs in 4Q22 if high inflation persisted. The ongoing threat of recession will only add pressure to reduce spending.
Demands for cost reductions may seem urgent, but pause long enough to identify what will deliver impact in the short term and what could damage the business in the longer term.
Following these 10 rules will help you cut IT budgets rapidly and productively.
This article has been updated since its original publication in October 2020 to reflect new events, conditions and research.
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Recommended resources for Gartner clients*:
10 Rules for Rapid IT Spend Reduction
Toolkit: 101 Rapid IT Spend Reduction Ideas
CIO Tactics to Mitigate the Impact of Inflation
*Note that some documents may not be available to all Gartner clients.