by Paul Horowitz

Cost Cutting Tips: It Takes Money to Save Money

May 19, 2008 5 mins
Data Center ERP Systems Outsourcing

If you're cutting costs to improve your bottom-line revenue, don't. Spending money can position your company for long-term cost reduction. Read on for these and other tips on how CIOs are spending during an economic downturn.

Not surprisingly, cost is at the top of the CIO’s agenda today—as it is for every C-level executive. As the economy slows and companies see revenues decline, cost becomes the lever that businesses can pull on to improve the bottom line. Unfortunately for CIOs, this is a hard lever to pull; in most organizations IT is a fixed cost that, in the short term, doesn’t scale downward with a decline in business volume.

For example, if revenues drop in dramatic fashion and customer demand drops transaction volumes from 10,000 to 1,000 transactions, the IT investment largely remains the same. The same systems need to be there to process the transactions, regardless of how many there are; the same people need to patch and maintain those systems, the same electricity is needed to keep the systems on, and so on. People have long commented on the scalability of IT—one system can quickly grow to support a lot of users. It works both ways though—you aren’t going to realize a cost savings just because you’ve scaled down the number of users.

All is not lost, but we are seeing that CIOs need to actually spend money in the short term in order to simplify their IT environments and to position their organizations for long-term cost reduction. It’s now all about harmonization, synchronization and consolidation, and that’s where we typically see the greatest opportunity for organizations to reap massive savings.

As the old adage goes, “it takes money to make (or in this case, save) money.” Across the board we see companies spending money to make their organizations more agile. Agility enables them to respond to changing customer demands or, in the case of a slowing economy, declining customer demand.

Where Are CIOs Spending?

Again, it’s all about harmonization, consolidation, rationalization. CIOs are focused on rationalizing the systems they have to make their organizations more agile to change. As IT has grown, we’ve seen an increase in something we call “IT sprawl”—complex IT environments comprised of a lot of single-purpose systems. For example, it isn’t uncommon to see companies that have multiple instances of the same ERP product, each with its own infrastructure and support team and I’m not talking about two or three instances, but hundreds of instances in some cases. It’s also not uncommon to see multiple data centers hosting systems that perform a single function or support a single type of business transaction. Sprawl and complexity are strangling agility and impeding cost-reduction efforts. So CIOs are spending money to simplify environments and reduce the sprawl. Consider three of the projects we are currently working on:

  • A global conglomerate is consolidating ERP systems from eight different businesses into a single system.
  • A telecommunications company is consolidating multiple regional billing systems into a single system.
  • A technology company is looking for help developing a strategy to consolidate multiple datacenters into one.

Where Else Are CIOs Spending? Shared Service Centers, Outsourcing and Offshoring

Shared service centers are an extension of consolidation and rationalization. Once rationalized, CIOs are taking their consolidated systems and strategically sourcing them to lower their unit costs. The first step—shared service centers—seeks to bring together IT or business processes to achieve economies of scale. Once combined, companies can look to automate or otherwise improve the process to make it more effective or cheaper. Typically this goes hand in hand with the second step—outsourcing and offshoring.

Strategically find partners that you can work with to reduce the unit cost of each transaction. Although the weakened US dollar and strengthening of stalwart outsourcing partners such as India have decreased the potential savings, there is still plenty of room for significant expense improvement.

What Does the Downturn Mean for Security Spending?

Periods of economic downturn typically correlate with higher crime rates. Whether this trend will apply to high-tech crime has yet to be seen—we haven’t been through a recession yet where we depended on IT as much as we do today. One thing is for certain, though. Recessions mean layoffs and layoffs upset employees. This means security will be in the limelight as layoffs throughout the business increase the risk of insider threats. Employees who have been entrusted with access to customer information, computer systems, etc., may find themselves betrayed and, while the majority of employees wouldn’t think to do something malicious, we know that it only takes one bad apple. One employee that takes a list of customers’ social security numbers home and posts them in a chat room, or one systems administrator that installs a virus on a key computer system can have dire effects on a business.

Where Have CIOs Cut Back?

CIOs would love to be able to tell you that they’re cutting back the “nice-to-have” projects and just focusing their efforts on the mandatory ones. In reality, they need to be very careful. Short-term cost cutting is likely to cut more muscle than fat—a recent study found that 87 percent of the IT budget is used just to keep the lights on; the other 13 percent just keeps pace with changing business requirements. Time and time again we’ve seen companies pursue cost reduction haphazardly and the short-term payoff is quickly offset by loss of business functionality or higher repair costs.

So what do we see? CIOs are scrutinizing their project portfolio to find those few projects that do not provide strong and immediate business benefits—those that might be a cash drain over the next 8 to 12 months—and either putting them on the back burner or extending their time lines to reduce the short-term cash/profit impact.

Paul Horowitz is a senior partner in the PricewaterhouseCoopers Advisory practice with expertise in financial and IT management. Paul has more than 26 years of experience helping organizations manage large and complex technology implementations.