It’s often said that “you can’t cut your way to growth,” but you can cut your way to survival. There are many reasons why an organization may need to make immediate spending cuts to survive, from natural disasters and terrorist attacks to a tanking economy or an aggressive new competitor — or a global pandemic.
“COVID-19 has transformed how people are spending their money, and many businesses such as airlines, cruiselines and cinemas simply have no choice but to cut costs,” said Chris Ganly, Senior Director Analyst, Gartner, during his presentation at virtual Gartner Symposium IT/Xpo® 2020.
Difficult times call for difficult actions
“When faced with the challenge of immediate cost savings, CIOs need to determine how to approach cost cutting in the least damaging way to the mid- and long-term health of the business,” said Ganly.
Gartner recommends taking a structured and programmatic approach to cost optimization. Research shows that organizations that continue to invest strategically in tough times are more likely to emerge as leaders. But sometimes, difficult times call for difficult actions.
Cutting or stopping projects or services where costs have already been spent or incurred are of limited value. Cutting things that can’t be restarted, that have already been invested in or are ready to deliver will hurt when the organization is ready to accelerate again.
10 rules for rapid IT cost reduction
Assess your IT cost reduction options with these rules in mind.
No. 1: Target immediate impact
Eliminate, reduce or suspend items that will impact in weeks or months, not in years. Examples include expenses that are incurred and paid monthly or quarterly on a “pay as you go” basis, rather than annually.
No. 2: Reduce, don’t freeze
Focus on costs that can truly be reduced or eliminated, not just frozen for the current period, only to reappear again further down the line.
No. 3: Cash is king
Target those 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.
No. 4: Plan to do it once
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.
No. 5: Carefully inspect accounts
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.
No. 6: Target unspent and uncommitted expenses
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.
No. 7: Address capital
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.
No. 8: Sunk costs are irrelevant
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 saving will be more than the benefit that can and will be delivered by continuing.
No. 9: Address discretionary and nondiscretionary cost
Discretionary spending, such as for new projects, additional capability 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.
No. 10: Tackle both variable and fixed costs
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.