Opinion: Avoiding 'crash diet' IT cost cutting

By Grant Barker, Senior Executive, IT Strategy, Accenture

We've become quite used to the notion that if you're looking to lose some weight, its best to avoid the 'crash diet' or 'yo-yo diet', and focus on a sustainable, healthy new lifestyle.

Technically, that's because reducing calories gradually ensures your body's metabolism doesn't slow down, encouraging you to adopt healthy eating habits on a long-term basis.

It's not a long stretch to apply the same thinking to IT cost cutting.

Across Australia and South East Asia, my team is seeing the same pattern repeated of late: organisations are cutting costs, and IT is one of the areas that being asked to contribute.

Urgent action is being taken to reduce internal headcount, dramatically cut back on contractors, renegotiate vendor contracts, review suppliers and reduce prices where possible. Some projects are also being stopped or taken out of the pipeline entirely.

I have never seen companies as determined to get control of their IT spend as today. Unfortunately, I have also never seen so many organisations missing the opportunity to make sustainable spending reductions. As a result, many are actually putting at risk the capabilities needed for growth coming out of the downturn.

Several IT leaders I have spoken to have a feeling of déjà vu and for good reason. They have too often seen cuts to IT made in a 'crash diet' fashion' rather than taking a long-term view of their investments.

IT organisations that outperform their peers - what we like to call 'high performance IT' -  seize these opportunities to make serious change to underpinning IT cost drivers and the IT operating model. At the same time they execute rigorous governance of the IT investment portfolio.

They emerge from the downturn ahead of their peers. For the high performance IT shop, a sensible exercise regime combined with good nutrition and a balanced lifestyle has replaced repeated crash diets.

So what should most IT organisations be doing differently? I would recommend embarking on a three phase journey:

1.  Minimise: Start with identifying areas of clear and immediate cost reduction opportunities. This provides increased room to manoeuvre while boosting the confidence of stakeholders with the prospect of near term cost relief. Ten to twenty per cent of short-term savings can be achieved without damaging capabilities.

2.  Optimise: Next, look to run current operations more efficiently by improving the use of software and hardware assets, divesting non-essential assets and decreasing the average IT unit costs. This should achieve sustainable savings of twenty to thirty per cent.

3.  Redesign: Finally, look to embed structural changes by shifting the focus to an efficient and effective IT operating model. This drives significant improvements in personnel costs, extracting savings through better delivery models, industrialised processes, transformational technologies, and sourcing strategies. This should achieve thirty to forty per cent of sustainable savings.

The journey should take 18-24 months, with the first phase being achieved in three to six months.

The journey isn't easy but it is necessary. To successfully navigate such a journey there are three key elements that need to be put in place: 

1. Team up with business - ninety per cent of discretionary spending is usually on projects designed to deliver new or improved business capabilities. Significant savings potential lies in the manner and level at which services are delivered to the business.
2. Spending transparency - It is important to get clarity on discretionary and non-discretionary spending - discovering both the "official" spend and the "hidden" spend on shadow IT assets. "Hidden" costs are those IT costs that sit outside IT, that are often not even recognised as IT costs in the books (e.g. that team in HR that is doing application support and maintenance to the HR system).
3. Focus on value and strategic alignment - limit your IT investments to those that will yield quantifiable benefits in line with strategic requirements in the near term (no more than three years and most should be aiming for payback in one).

IT organisations have the opportunity to come out of the current downturn much fitter and leaner than they went in. They should also be in a position to set the overall business up for the next stage of growth. New technologies, service models and methods are supporting this. 

High performers are embracing this approach. The most successful did it well before a downturn was even imagined.