IT costs are an expensive component of any organization’s budget. Cutting these costs can be difficult when there are so many other priorities and the fact that many costs seem like they are fixed. This article will show that many IT costs are not as fixed as they might appear and offers suggestions for reducing the IT budget.
When looking at most IT budgets, personnel costs are often the predominant expense. Fortunately, there are many strategies for reducing labor costs and I will discuss these in the first section of this post. But, there are other costs which can be reduced as well and so I have added a second section to deal with these less obvious opportunities.
One of the most effective strategies for cutting costs in your IT organization is very easy to implement; simply publish a metric each month of the money you have saved from your cost-cutting initiatives and celebrate when you have a major accomplishment. Metrics are a great way to influence behavior and having a published number will encourage your organization to focus on reducing costs. For more information on metrics, see my article on how to use metrics for IT success.
Reducing personnel costs
Many IT organizations are top-heavy with personnel which is something that just happens over time. While having experienced people makes it easier to get the work done, it is suboptimal from a cost standpoint. To deal with this, some organizations have periodic reductions in personnel to move their job levels back to reasonable levels. But these actions have consequences as they can cause a great deal of angst in the organization. And, they can be avoided if there are processes in place to incent managers to keep the organization at the right levels without the trauma of a layoff.
It is important to understand where your organization is at present and to set a target for where you would like to go. I like to calculate an organizational metric that shows how streamlined the organization is and provide a scorecard to show future progress. As an example, if an organization has 8 levels starting with new college graduates and going to Vice President, a simple metric can be created by assigning a number to each employee (e.g., new college graduate = 1, VP = 8), summing the numbers and dividing by the number of employees to determine the average level in the group. This provides a baseline and then reinforces good behavior by showing how actions improve the metric.
With all that as background, let’s get to the specific techniques.
1. Replace turnover with lower level employees
Setting the expectation that all replacements will be one level lower than the person who leaves is an easy way to keep your organization in line. Of course, this might not always be possible so you should have an exception process to deal with unique circumstances.
2. Hire new college graduates every year
If your organization knows you will be hiring a certain number of new graduates, they can plan for this when they have attrition. Find a local college you like, develop a relationship with the placement office, and recruit there consistently. Also, using interns can be a good way to find talent; see my article on building a great internship program for more details.
3. Manage your contractors
Sometimes, contractor costs get out of control because they are viewed as a separate bucket (e.g., there might be a focus on employee costs but managers know contractor expenses are not subject to the same scrutiny). Or, some organizations may use more high-priced contractors than necessary due to a belief that it provides flexibility if business conditions change. While this is true, managers should not underestimate how difficult it can be to eliminate contractors who have specific skills that are needed. To make sure your organization is focused on the expense associated with contractors, publish a count of the number of contractors you have, the amount you are paying them and how much overtime they are working (another hidden cost). This visibility will encourage better management of these resources.
4. Use offshore resources less than you do now
This one might surprise you. While many people use offshore as a strategy, I am going to go against the grain to say it is overused and that other techniques can often be more effective. Yes, I believe there is work that can be effectively performed offshore at cheaper rates. But, I believe too many organizations view offshore savings as a math exercise. For example, if offshore rates are 30% of home country rates, ROI’s are calculated as if every position moved to the offshore location saves seventy cents on the dollar. While this may be true of some work, there are many jobs which cannot be done as effectively offshore and I have seen several examples where the offshore cost was higher than the home country cost. In addition, there can be significant travel costs which are usually ignored when calculating ROI’s. Unfortunately, too many senior executives do not understand this and look for the offshore silver bullet when they want to cut costs. Be careful. I believe a far more effective strategy is to let your managers use offshore only where appropriate and incent them to reduce personnel costs in other ways.
5. Reduce turnover
The costs of recruiting and training new employees is significant. The strategies I use to combat turnover will be the subject of a future post but, in short, I believe turnover can be significantly reduced by making sure employees understand why the work they are doing is important and by showing employees that you appreciate their efforts. The cost of recognizing an employee’s contribution is quite small but the impact can be huge. For more information on recognizing employees, see my article on how staff meetings can be used for this purpose.
Reducing non-personnel costs
Obviously, not all costs are related to personnel. There a number of ways the budget-conscious CIO can cut expenses without losing headcount.
6. Virtualize servers by using containers
It wasn’t too long ago that every application used a dedicated server and this multiplied due to DR servers, test servers, etc. Many of these servers had low utilization rates so hardware costs were not optimized. If you still have dedicated servers, partitioning them to allow multiple applications to share the hardware can save money. Extending this concept, containers are a great option. Linux containers are self-contained runtime environments that are lightweight and portable. Because services can be run on the same box, hardware expenditures are reduced.
7. Use cheaper hardware
In addition to maximizing hardware utilization using containers, there is often an opportunity to run applications on cheaper devices. This strategy became popular a few years ago with the creation of powerful PCs that could be linked together and perform as well as expensive mid-range servers.
8. Use the cloud
Storage and hardware no longer need to be on-site and the cost of renting can be much lower than the cost of owning as resources are only used when needed. Containers can also be useful here as they allow customers to shop for the best price from cloud providers.
9. Decommission software
If you look at your software licenses, you are likely to find opportunities to save costs. As software agreements are negotiated over time, the new costs frequently provide an incentive to move off certain software. In addition, I have often found expensive software being used for small functions where the ROI to move to another solution was easily justified.
10. Use open source software
Open source eliminates the initial costs of acquiring software as well as the recurring annual maintenance costs. But, open source is much more than a cost play. With open source, you have access to the source code so you can make your own modifications. In addition, code updates are made by developers from many companies so the software often improves faster than it might if a single company was supporting it. Finally, when you have an issue, you are not tied to the software provider for help but rather have many options for assistance.
11. Virtualize databases
Database technology now allows for a core image and the creation of other databases that are incremental changes to that core. For example, a full-sized test database may take very little space because it simply points back to the production instance. In addition to saving storage costs, this can be a great productivity savings for developers (e.g., think about the ability to save a database image, run a test cycle, make corrections, and then go back to the original image to run the test again).
12. Take the time to do things right with your hardware/software/coding
This one is hard to justify with tangible numbers but there can be huge savings by taking the time to do a few things right. For example, there can be a large cost if programmers are working with outdated and/or multiple versions of hardware and software. I like using a metric to show how well the hardware/software in place is compliant with the architectural roadmap. In addition, automating your regression tests can save money and improve quality. Finally, there are large costs incurred when programmers take shortcuts to hit deadlines as this often results in much more work later (look up ‘technical debt’ for more details on this concept).
One issue that often arises with IT cost-cutting is the fact that not all cost savings are actual savings for the organization. For example, a large organization may charge different IT groups a rate for mainframe usage and these organizations may spend time making their applications more efficient to reduce their mainframe costs. But, if the larger organization has a mainframe contract which is not impacted by these changes (e.g., the contract is based on peak usage and the changes impact off peak hours), then other IT groups will bear the costs.
So, the question becomes: should an organization reduce internal costs that are allocated to them from other groups. The answer is yes if the changes force the internal organization to make changes which result in real savings. For example, if actions by a divisional IT shop result in the need for fewer personnel in the central servicing organization, this should result in lower rates. But, in the mainframe example above, it probably does not make sense to spend time on reducing cycles that will have no impact on the overall organization.
A final thought on your journey to reduce IT costs is to make the CFO your friend. CFO’s love saving money and they can be supportive in the cost-cutting process. They can be very helpful in looking at a cost-cutting initiative and providing an objective analysis of the real costs that are likely to be saved upon completion. In addition, cutting costs often challenges long-standing ways of doing business and the CFO can be a key advocate when you need to fight an internal battle.