by John Edwards

7 IT cost-cutting mistakes you must avoid

Jun 10, 2021
BudgetingIT LeadershipIT Strategy

Are you cutting costs or cutting corners? Your job may depend on knowing the difference.

scissors cutting paper currency - reducing funds - cutting budget - decreasing finances
Credit: Thinkstock

Successful CIOs are always looking for ways to eliminate excess costs. Unfortunately, in their zest to trim waste, many IT leaders find themselves falling into common traps that needlessly damage IT and enterprise services and operations.

Knowing what to cut, when to cut, and how deeply to cut, is as much an art as an economic science. A good way to get started is by avoiding the following seven major IT budget-cutting mistakes.

1. Cutting costs without business engagement

Samir Datt, a managing director in the technology consulting practice of global consulting firm Protiviti, recommends working closely with enterprise business leaders to create a well-defined and efficient IT organizational framework.

“Apply IT spending to core capabilities that make the most sense for the IT organization to own and are aligned to business initiatives, while reducing costs, [such as] via outsourcing in less important areas,” he advises.

Datt also notes that partnering with procurement and HR leaders can open the door to additional cost-saving opportunities, such as identifying potentially beneficial contract modifications and attracting and retaining key talent.

2. Waiting until leadership mandates cuts

Failing to act proactively on cost reductions due to inattention, denial, or excessive optimism is a common pitfall. “As a result, IT budget cuts aren’t aligned to correspond with corporate objectives,” says Rocco Rao, analyst, research director, and executive advisor at Info-Tech Research Group, an independent IT research firm.

Needlessly delaying action to the last minute will limit budget cut options to strictly reactive measures, such as reducing staff, cancelling projects, and deferring asset purchases. “A proactive approach looks at strategies for optimizing IT operations, sourcing, and project portfolio management,” Rao says.

When IT is viewed as a largely reactive entity, the CIO will likely be held accountable for reduced service levels, since required cuts weren’t handled efficiently in consultation with the affected business units. The result is a missed opportunity for IT to present itself as a business partner, a strategic and not a solely operational player, Rao notes.

3. Cutting before conducting sufficient analysis

IT leaders who make cost-cutting decisions too swiftly, and without the necessary information and insights, can leave the IT organization struggling with performance and efficiency gaps. “If cuts are made in cybersecurity, for example, then the rest of the IT infrastructure and networks could be at greater risk,” says Bason Paravattil, solution director, cloud infrastructure services for business and IT consulting firm Capgemini North America.

Another example of imprudent cost-cutting is slashing data center budgets as an organization moves to the cloud. “On the surface it makes sense, but the economics of IT are constantly evolving, and moving to the cloud doesn’t necessarily mean it makes financial sense to make data center cuts in a reactionary way,” Paravattil says. He believes that the best way to ensure fully informed decision-making is for IT leaders to do the upfront work, using multiple data sources to validate budget cuts.

4. Delaying investments in critical tech programs

At first glance, slowing down or stopping investments in new technologies may appear to be a smart move. Yet looks can be deceiving. “Programs will need to be reviewed continuously, since small savings now can lead to making larger investments more quickly as IT struggles to keep up with the increasing demands of a 21st century business,” warns Chris Fielding, CIO of Sungard Availability Services, an IT recovery services provider.

The problem is two-fold, Fielding notes. “Not only does your ability to meet changing business demands diminish, but delaying investment will eventually lead to a significantly larger, compounded investment down the road, all while team skills begin to age and talented staff members start to look for more challenging opportunities,” she says.

Fielding suggests addressing the issue by creating a roadmap and timeline that defines enterprise goals and IT’s vision for meeting those objectives. “Layer investments in order to take small steps that drive change across the organization, as well as allow you time to invest in teams’ skill development,” she advises.

5. Failing to optimize spend

Spending optimization can lead to significant savings without diminishing the performance of critical operations or services, notes Matt Deres, CIO of Rocket Software, a privately held software development firm. He advises taking all relevant costs into consideration to determine how much a particular service, such as financial systems, servers, desktop support, and network services, needs to run. “If you have these details, along with start and end date data for all your contracts, it’s a much more straightforward task to proactively understand your cost structure and where you can optimize by reducing duplication or unused services,” Deres says. “In times of more forced cost reductions, this data is a powerful tool to collaborate with the business on what services may need to be suboptimized to meet the budget constraint.”

6. Cutting costs too widely and indiscriminately

IT leaders often overreact to a budget reducing mandate by swinging an overly broad ax. To align with orders from the top, many IT leaders take a “one size fits all” approach for cutting costs, observes Ramesh Balakrishnan, a senior manager at IT and business advisory firm EY Consulting.

“This is typically a shortcut used by leaders who don’t make or have the time to analyze tactical areas where they can cut costs, with minimal impact,” he says. “Cuts are enforced without visibility into areas sensitive to either the foundation of the entire organization or to [places] that could have an adverse effect on the business or users, such as risk management or areas that are actually accelerating business growth.”

Balakrishnan believes that cost savings should be viewed holistically as a combination of both tactical cost-cutting and cost optimization. “Tactical cost-cutting is used in specific areas and based on a sound understanding of benefits versus impacts to the business, users, and team morale,” he says. “Cost optimization looks at longer-term cost savings through optimizing spend by building capabilities such as automation [and] proactive monitoring, which leads to head count avoidance and better leveraged investments.”

Keeping only tactical goals in mind when cutting costs often leads to larger unforeseen problems, such as adverse business impact, issues with end-user productivity, and increased risk to security breaches. “It’s critical to understand that shortsighted cost-cutting, without considering the larger impacts to the business, usually ends up being many times more expensive than the savings achieved through the cost cuts,” Balakrishnan notes.

7. Passing the buck

In these difficult times, CIOs are under intense pressure to cut costs, often within a mandated target range, such as 10% to 15%. Since few IT chiefs enjoy making hard decisions, there can be a strong temptation to pass the mandate down to organizations embedded within the IT division, requiring each unit leader to meet the cost-cutting goal. “After all, the organizations within the IT division should know where cuts can be made to deliver the required savings,” says Tim Potter, a principal with business and IT advisory firm Deloitte Consulting.

Yet while passing difficult funding decisions downstream may seem like a logical way to handle a generally unpleasant and unpopular task, it’s rarely a good idea. “This [approach] often leads to cost-cutting initiatives that will never be realized, as the efforts are shortsighted and misaligned with the overall corporate strategy,” Potter explains.

CIOs who pass the cost-cutting buck to subordinates risk getting less than what they bargained for. For example, the technology platforms team might decide to reduce the investment necessary to expand their cloud platform, leaving the IT division unable to meet the needs of a business division that’s planning to deploy new machine learning-powered solutions designed to better engage customers. Meanwhile, the IT program management leader opts to trim operations by 10% to 15%, shortchanging the new methods or tools desperately needed to improve productivity.

In both examples, attempts to reduce costs are never truly realized. “Either the IT division reverses course or shadow IT/ technology functions emerge in the lines of business,” Potter warns. “That’s when you know the cost-cutting initiative has been directed at the wrong areas.”