By David Spark
“Do more with less” has become the IT department’s least appreciated mantra. Demands on IT are exploding, but spending on IT don’t follow suit. All companies have budgets and often the IT department, which is seen as a cost center (not rightfully), is given the charge to cut back.
The stress to cut costs in IT can cause managers to make a lot of really foolish mistakes which can be far more costly in terms of lost dollars and lost business opportunities. I reached out to dozens of industry experts and asked, “What are the worst IT cost-cutting mistakes?”
1: Focus only on reducing the immediately visible costs.
“IT divisions the world over are getting the same message from top management: find ways to support and maintain the corporate network for less, or we’ll have to cut your budget.
And it’s no wonder, because support and maintenance costs typically claim the largest part of IT’s already burdened purse,” said Barney Taylor (@DiDataInsights), Group Sales Director at Dimension Data.
“IT is then compelled to do what most other departments would do to save money: put pressure on its suppliers to drop their prices. It’s the most obvious way to create savings, because those costs are visible. But while that’s important, it’s usually not enough.”
“A more effective approach would include less apparent strategies like optimizing existing technologies, refreshing devices later in their life cycles, and weighing up support levels against the criticality of the device in maintaining the integrity of the network. The problem is that many organisations are still unclear as to the scope and detail of their estates... and without such information, they’re going in blindfolded.”
2: We need to meet budget NOW! Who cares if it costs a fortune later.
“Too often organizations try to cut immediate costs at the expense of future IT capabilities making it more difficult to achieve their long-term business objectives,” said Jeff Kaplan (@THINKstrategies), Managing Director for THINKstrategies.
This behavior results in a panic with companies “setting arbitrary goals for IT cost-cutting rather than targeted goals,” said Matthew Podowitz (@mpodowitz), Senior Director, Operations and Technology Advisory Services, for Pine Hill Group. “Companies often swing an axe rather than employ a scalpel.”
“Across the board budget cuts, without regard to workload, automation or process improvements will end up costing the company more in the long run,” noted Abdul Jaludi, CEO of TAG-MC.
After one company IT budget cut, Jaludi witnessed employee morale and productivity drop dramatically. Three years later the company had to spend on IT triple the national average just to bring business productivity back to normal.
3: We’re overstaffed and soon we’ll be underskilled.
“Sometimes [companies] cut staff and find out too late they no longer have the skills or accumulated knowledge they need to either maintain or enhance their IT operations,” said THINKstrategies’ Kaplan.
“I've seen companies let go of key personnel – including consultants – well before they were ready. Short-term savings trumped long-term system stability, often resulting in rehiring the same folks at greater cost,” said Phil Simon (@philsimon), technology expert and author of “The Visual Organization.”
Another seemingly less drastic personnel control manifestation is a hiring freeze which forces IT departments to hire contractors.
“I’ve had more than one client where continual hiring freezes resulted in skilled contract staff being at the company for several years,” said Scott Feuless (@ISG_News), Principal Consultant and blogger for Information Services Group (ISG). “These workers would have loved to have been direct employees, but the hiring freezes prevented that, so the company had to pay the staffing company the cost of the employee plus their markup, for years.”
4: We just fired the one guy who can fix this.
In areas such as New Zealand where tech talent is in short supply, laying off IT workers who have very specific skills often results in hiring the same people back as contractors at multiples of their hourly rate, said tech journalist Bill Bennett (@billbennettnz).
As a form of business security “it's quite common [in New Zealand] for people to refuse to train others after they have been laid off,” said Bennett.
“Pay attention to the 'single points of failure' as they collectively relate to the knowledge of the individual(s) who have been let go,” said Tom Hart (@thartCMO), CMO for Eliassen Group. “If you let the wrong person go, that's a problem, because then you have to reinvest to reestablish the knowledge base you lost that was vital to the successful operation of the enterprise.”
5: Keep staff, reduce benefits, in a competitive market.
“Saving money by cutting staff benefits, training, or capping of salaries to save money in ICT is suicide. I’ve seen a few organizations who have done this only to find a mass exodus of skilled staff,” said Ian Apperley (@ianapperley), writer and ICT consultant at whatiswellington. “Cutting costs in this area will increase your risk, lower your speed to market with change, and cost you tens if not hundreds of thousands to repair, and remember it takes years to build that team up again.”
6: Save money on outsourcing, lose it to increased communications.
“Outsourcing projects to cut costs, especially to teams you haven’t worked with before, typically results in translation woes and time lost which, in turn, means more money spent,” said Matthew Zehner (@matthewzehner), founder and CEO of ZehnerGroup,
“We have a number of clients who think they can outsource non-critical skills without understanding how the skills work. The result is they spend more money reverse engineering how things work, and spend more money than they have to solving communications issues instead of process,” said Ray Wang (@rwang0), Principal Analyst and Founder of Constellation Research.
Ben Trowbridge (@Ben_Trowbridge), Founder of Alsbridge, is often brought in to a company to work with an existing outsourced partner that’s not linked to the company’s IT strategy. That results in a lot of wasted money and effort reworking the scope and plans for the project.
“It is easy to compare rates upfront and underestimate project complexities,” said Matthew Schmucker, Vice President of 3C Company. “When it comes time to evaluate implementation strategies and vendor partners, firms must be careful to weigh out the complexities involved with the requirements and be careful to avoid a simple resource rate comparison.”
7: I’ll save money on the cloud. What more do I need to know?
“There is a common misconception that migrating to cloud services will save the ICT organizations a lot of money,” warned blogger Apperley.
Blindly adopting “cloud” with the hopes of cost savings is foolhardy, agreed Forrester’s Lauren Nelson (@lauren_e_nelson). Your ability to cut costs, said Nelson, will be determined by deployment type, application variability, application design, required security and compliance features, and resource optimization.
In addition, noted Apperley, “[The cloud] changes the organization’s cost model from capital to operational and not all organizations like that.”
“Companies get caught short when they have multiple accounts, different application versions, and an aggregated bill that does not provide sufficient information to assign costs,” explained Bernard Golden (@bernardgolden), VP of Strategy for ActiveState and cloud blogger at CIO.com.
“Thinking that ‘cloud’ is a magic bullet to cutting cost, combined with poor planning up front, will result in increased costs across the board,” said Apperley.
8: We’ll buy the tools, but save money by not training.
“In my 20 years of consulting and teaching I have observed hundreds of companies who purchase software and then forget or refuse to properly train their staff on it,” said Steve Prentice (@stevenprentice) Senior Writer at CloudTweaks. “I have worked with executives who are too embarrassed to admit to their staff members that they do not know how to use Excel for tasks such as filtering or entering simple formulas, and I have seen thousands of employees use time-consuming workarounds, including re-keying and copying/pasting, due to a lack of awareness of a better way.’
“The modern extension of this is the ban imposed by many organizations on staff access to social media…in the name of ‘employee productivity,’” said Prentice. “Companies that cut costs by cutting off access to today's tools guarantee a halt to their own progress.”
9: Automate tasks, fire an employee.
A common cost-cutting mistake is the theory that purchasing automation software will allow you to lay off your staff. That’s actually the opposite of what you should do. Instead of firing IT staff, move them into higher value activities.
“[Automation] increases the speed at which you can operate, thus allowing you to hopefully push more work through the IT,” said Michael Ducy (@mfdii), Partner Architect at Chef. “The real value to the business is that they can get more valuable projects done faster, allowing the business to recognize the value, or even revenue, faster.”
10: Everyone split up and automate.
On its face, automation of manual tasks appears to be a sound cost cutting and process improvement measure.
TAG-MC’s Jaludi worked at one organization where each department was given the mandate to automate.
“As a result [of the mandate], every IT department created their own process improvement team, which was doing exactly what the other teams were,” explained Jaludi.
The automation effort created far more work, got inexperienced employees unnecessarily involved in process, and cost a lot more money, said Jaludi who recommends companies simply hire one experienced team to do the work.
11: We’ll save money by not upgrading software.
“Keeping ancient hardware with ancient software places a company at more risk of a security breach and viruses,” warned NCC Data’s Boozer. “It can also lead to employee tension as it's unproductive and frustrating to not be provided with better tools.”
“A company I worked with at one point made the decision to cancel a planned ERP system upgrade in order to save $100,000 in one-time costs,” said Pine Hill Group’s Podowitz. “In doing so, they lost new functionality that would have automated a number of manual processes that would have allowed the company to save over $250,000 a year in payroll costs for the next five years.”
“That’s ROI waiting to be captured. But often that cost is being born by a CFO or COO, so a systems focused CIO often won’t be aware of it,” explained Lou Brothers (@loubrothers), Senior Manager, Management Consulting Practice for WeiserMazars LLP.
12: We need any server. Find a cheap one on eBay.
“People try to save cash buying used or refurbished equipment randomly online,” said Corey Donovan (@vibrant), COO for Vibrant Technologies. “While there are quality used dealers out there, there are also plenty of junk-traders who wouldn’t know how to test an alarm clock. Servers arrive at your dock completely stripped of rails or missing default interfaces. Systems may come loaded up with 3rd party or damaged components and the only warranty available is a ‘feedback’ system.”
“Choose your sellers wisely,” advised Donovan.
13: There’s no ROI on security, so we can cut it.
“The most common IT victims in budget cuts are risk mitigation aspects of IT and IT disaster recovery,” said Evan McCutchen (@Technology_Adv), CIO for TechnologyAdvice. “Too many times I've seen these initiatives slashed upon budget review, only to haunt executives months later and cost the company many ‘factors of ten’ more than the original budgeted project,”
“I always encourage CIOs to differentiate between investments and cost because from finance perspective they both look like cost and hence can be cut but they have vastly different business implications," advised Chirag Mehta (@chirag_mehta), VP Product Management at SAP and blogger.
14: Do we really need all of these service contracts?
“Just because you have never experienced an IT disaster, does not mean you wait for one to prove the need for disaster planning and business continuity,” said Brian Kelley (@portagecio), CIO for Portage County in Ohio.
“I’ve had clients call me and ask if they can let the support contract go for their firewall, IPS, or switches,” said Matt Sarrel (@msarrel), Executive Director for Sarrel Group, who has consistently watched costly failures happen due to poorly supported devices.
That doesn’t mean you need to keep all your service contracts at their current levels. Pine Hill Group’s Podowitz recommends these three techniques for finding ways to cut down on service contracts:
1: Compare a list of installed and utilized applications to account payable history. You will inevitably find you’re paying maintenance fees on an application that was never installed.
2: Compare fixed-rate to variable costs. Would it have been cheaper to be “pay as you go?”