The CIO’s cost-optimization playbook: 7 tips for tight times

Cutting costs in IT while still moving forward with digital initiatives is not for the faint of heart. On the heels of transitioning staff to working remotely for the long haul, now many CIOs are being tasked with reducing budgets in an uncertain economy.

“It’s a difficult dance,’’ admits Kristin Myers, who was recently appointed executive vice president, CIO, and dean for information technology at Mount Sinai Health System. “It doesn’t mean while you’re cost cutting you’re not investing in these other areas, like digital.” One of a CIO’s most important tasks is to scrutinize application portfolios, reprioritize initiatives, and make investments in areas that will meet business objectives and add the most value, she says.

Successful organizations frame the cost-cutting discussion differently, agrees James Anderson, vice president of CIO research at Gartner. They don’t just cost cut, but cost optimize, and value optimize, he says. Cost cutting is essentially just meeting a target, Anderson adds.

Cost optimizing is about moving money into the correct buckets to optimize business outcomes. This leads to value optimization, balancing costs, value, and risk across an organization, he explains.

“A good CIO needs to know not only where they can quickly cut costs but also what to proactively invest in to get to different business outcomes,’’ Anderson says. They also plan for multiple scenarios.

The tendency for CIOs facing tight budgets is to immediately target compensation, but Anderson says that “that’s the last piece we want to cut.” Start by looking at your external spend on vendors, most of whom are open to renegotiating contract terms, he advises.

Then be proactive about your internal spend — freeze compensation where you can but focus on property, plant, and equipment, as well maintenance and other services that are non-vendor related, he says.

“The internal part is the most difficult because there are often internal politics at play,’’ Anderson says. Many times, optimizing costs internally is a function of identifying breaks in a process or making things more efficient, which is something most organizations were struggling with even before the pandemic, he says.

“Source different ideas about different process improvements we can make — do you have ‘check the box’ exercises?” Anderson says. “What is the value that that process provides? Each of those business processes are components of a value chain that has results and business outcomes.”

Here’s a look at how CIOs have been dealing with the economic fallout from the pandemic and its impact on IT budgets. 

Make IT more ‘fit’

Shortly after Jacqui Guichelaar joined Cisco as CIO in June 2019, she embarked on a digital transformation journey that has accelerated since the pandemic began. Echoing Anderson, Guichelaar says rather than having cost-cutting objectives, “I believe I have to optimize IT and make the best use of the assets I have and people and capabilities.”

Guichelaar and her team had a strategy session last year that focused on “how do we plan for crop failure, meaning harvest failure,’’ she says. “When you have diminished crops … whatever it is you’re farming your whole business plan is in jeopardy. You could have a hurricane or flood, and as result you can’t deliver on the business plan for that year for that crop.”

That led to Guichelaar’s strategy to transform her team and herself, “and make IT so fit that if something happens, we’re optimized, simplified, and automating everything we can and divesting of things like data centers and apps we don’t need and moving to commodity services that allow us to drive out significant costs.”

Becoming more fit means modernizing platforms and taking out unnecessary costs, she says. “The plan was to take out millions of dollars and free up lots of people and capacity and make sure we’re ready for new business models. Everyone’s looking at that during COVID.”

In addition to transforming IT, Guichelaar also wants to transform the employee experience and allow people to work wherever they are with the best possible tools, as well as investing money to transform the customer experience.

“My view is, if any CIO is looking at cutting costs and only that lens, they’re missing a trick,’’ she says.

There are three divesting programs under way within IT at Cisco. The first is divesting data centers around the world and moving more into SaaS and the cloud. In the past year, of the 22 data centers Cisco has, Guichelaar says they have exited three and are working on a fourth. Her plan is to get to five or six.

“The more and more things we divest the less data center and compute power we need,’’ she says.

IT is also divesting apps the business doesn’t need. “We had a goal of divesting 500 apps and we are exceeding that” at 575 and the number is growing, she says. That also reduces the need for compute power.

Re-examine portfolios

In the past year, Mount Sinai’s Myers has been looking to make application rationalization a part of the healthcare organization’s culture as part of a larger strategy to enhance IT efficiency.

For example, IT has developed a legacy apps decommissioning program and is looking at the entire portfolio and characterizing what systems should be retired and where additional investments should be made to add functionality, Myers says.

“We continually look at where there might be redundant or unnecessary applications,’’ she says, and when IT polls users on how many employees actually use an app, sometimes the responses are small. In that case, “we can go back to the user community and ask if there’s something else we can do or another app with similar functionality so you can decommission it. It’s painstaking work, but important to do,” she says.

IT has a five-year plan for decommissioning various programs, which will create significant savings in software maintenance and hardware costs, she says, adding that this application rationalization effort will reduce the health system’s cybersecurity risk and free up team members “to quite frankly, work on more exciting things.”

Like Myers, Guichelaar says IT conducted a review around how it manages services, costs, and compute power. “What we realized was we had multiple different apps,’’ including four tools just for reporting consumption costs utilization, she says.

“What has happened in big organizations over time is those tools historically were good and gave different lenses of IT,’’ she says. “But the more IT becomes smart you have platforms that go end to end, so we chose one internal tool … and will centralize all monitoring and performance onto that platform.”

As a result, IT shut down three other apps sitting on storage in data centers and saved money on licensing, storage, data center, and server charges, she says.

Also echoing Myers, Guichelaar says that while IT has identified thousands of apps “it’s not an easy thing to do” and requires stakeholder input. “When you try and decommission apps everyone has a reason why they want to keep it and you have to have a good systematic way of partnering with the business,” she says. That way, IT can explain the need to standardize, and while the business may lose a little functionality, “from a strategic perspective, it’s better to rely on one tool so we have visibility across IT.”

This reaps savings in the millions, Guichelaar says, “and why not reinvest that to figure out how to build a future architecture for the business.”

Reduce third-party costs

Re-examining third-party contracts is a crucial step for cost optimization. Guichelaar, for example, is reaping savings by moving from 20 global partners to one. Having one set of service levels ensures Cisco’s employees have laptops right away, configured, and ready to go, she says. “We’ve driven out tens of millions in savings in that transaction alone.”

Moving to a single partner also means that partner gains scale and has skin in the game, she adds. “The ability to automate and provision and move to self-service helps drive down their costs so I save and everyone wins.”

Guichelaar is also looking to reduce third-party costs, which requires having a clear understanding of what contracts IT has so they can be renegotiated, she says. CIOs have to look at terms to see whether there are unused services they are paying for so they can harvest opportunities there, Guichelaar says.

Right now, Guichelaar is also looking at various sourcing options to reduce costs in Cisco’s overall IT portfolio. For example, if a third-party supplier or managed services provider can take over Cisco’s legacy portfolio, Guichelaar can free up IT staff “to do something exciting,” she says.

This requires “rebuilding the budget from the ground up and taking a hard look at every line item in the budget and having a clear understanding of do we really need this, and can we do it in a different way? Those are tactics I’m looking at as CIO.”

“The main thing, obviously, is looking at your biggest spend items and look to renegotiate and reevaluate with key suppliers,’’ concurs Sally Miller, CIO of supply chain North America at DHL. “Maybe take some of those services in house or put them out to bid and see if you can reduce” costs that way.

Learn to say no

Every purchase decision at Oral Roberts University is now being evaluated differently than pre-COVID-19, says Michael Mathews, vice president of technology and innovation. “We used to say it was part of the plan and now we say we no longer have an 18-month strategy … do we really need this, and why do we need this?”

For example, someone recently wanted a new ERP system module, saying it would make their work processes more efficient, Mathews says. His response? “I can’t support that because I have no evidence that adding a new module will make you more efficient and processes across campus have changed, so they may not be applicable any longer.”

He says he has not approved any upgrades to any systems for four months.

But Mathews did bring in a new AI-based system that can take data from the university’s other systems and provide insights on performance in every category — from enrollment to student success in online classes versus hybrid versus traditional, he says.

“So it’s about spending wiser,’’ Mathews says.

Avoid cutting staff

According to all the CIOs interviewed for this article, cutting IT staff is a last resort. “There are plenty of investments we’ll be making in digital and we’re going to be needing people to be retrained and be able to support initiatives,” like robotic process automation, says Myers.

Oral Roberts has instituted a hiring freeze and has not had any layoffs or furloughs but lost four IT staff due to attrition and they will not be immediately replaced, Mathews says.

After 90 percent of IT staff began working remotely in March, “that took away lots of people’s needs” for support, he says. “If those people had been on campus through June, they would have been asking us to spend money. The mere nature of COVID said to people subconsciously, ‘Will we be running in fall and do we really need this?’”

DHL has not needed to do any cost cutting in IT, Miller says, but adds that she has been in that position before. “Usually, what we try to do is have the existing team do more, do a hiring freeze, and reduce travel. We try to take care of our existing associates, so they weather the storm with us,’’ she says. “That’s very important. We have very low turnover — less than 3 percent — and I think that’s because of the way we treat people through more difficult times, and they tend to have a longer tenure with us.”

Manage IT as a business

Guichelaar has come up with a new approach that she refers to as “streamlined governance and managing by exception. It’s quite a cultural challenge,” she says.

Whereas most large organizations typically have meetings to review projects, investments, people, performance, and strategy replete with reams of paper and PowerPoint presentations, Guichelaar has implemented a program that standardizes on one way to look at data. With the click of a button, Guichelaar can see where a project is at, what it’s costing, and whether it is delivering benefits, she says.

“Now I don’t have to go to meetings unless I need to escalate something,” she says. “I need to be able to access my data to make decisions, and the quicker I can get to that the less time I waste and [the less] resources I need and I can be productive.”

This has allowed Guichelaar to turn off another five or six tools, she adds.

Guichelaar ensures the bases remain covered with regard to service provider, tech, and employee spend using a concept known as zero-based budgeting. This method of budgeting requires that all expenses be justified and mapped to every service and function in a business unit, she says.

While most companies have a process for doing budgeting, Guichelaar says she has found zero-based budgeting to be most effective “because it’s from the ground up. So if I cut a tool or service I’m sure I’m doing the right thing because I’ve had the business conversation and we all agree.”

Execute

Everyone agrees that cost cutting must come with a strategy that optimizes IT.

“You have to relentlessly automate and divest anything you don’t need anymore,’’ says Guichelaar. “Move to commodity services wherever you can, and you’ve got to simplify everything that you can. If you do that, I’m convinced you’ll save tens of millions of dollars, depending on the size of your budget.”

Gartner’s Anderson reiterates the call for CIOs to be proactive. “Separate your ideas by quick wins,” such as consolidation of contracts and cutting travel and expenses and training budgets, and longer-term opportunities, such as cost optimization, he says.

“Implement your quick wins in year one while demonstrating on a roadmap you anticipate other types of cost optimization in years two and three,’’ he says. Doing this demonstrates to the business that you are proactive, “and that gives you more credibility when it comes to meeting budget cuts.”

But Anderson also issues a note of caution. “The danger is if a CIO just makes budget cuts without any discussion on how it will impact services and capabilities to produce … business outcomes,” he says. “It reinforces the idea that IT people aren’t good at managing money” and that CIOs “have a bunch of fluff in my budget.”

The business should be telling IT where the cuts need to come from — not the CIO, he stresses. “Those services directly impact the customer, so give them options for cutting their own costs and spending.”

CIOs can no longer have an 18- to 36-month IT strategy, says Mathews. It needs to become “a rolling, 10-day event,” that constantly gauges what your stakeholders want and need. 

Also, consider your resources and “don’t spend any money you don’t need to spend. Every dollar spent on technology will be a minimum of four weeks’ worth of distraction for the IT department,’’ since they’ll have to work on a system and deploy it, he says.

Lastly, says Mathews, “realize everybody’s in this together. No one has it figured out, therefore, stay nimble and listen to others.”