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1 April 2008

Cost reduction options

By Andrew Clifford

IT cost reduction methods fall into ten categories. Some have much more potential than others.

I have spent the past few years exploring IT cost reduction. Looking back, I see that I have fallen into the trap of presenting my views as "the solution", and not giving a fair account of other approaches.

To address this, I have been looking more broadly at IT cost reduction methods. Most methods fall into one of ten categories.

Five of the categories are supply side cost reduction, which reduce the cost of meeting IT demand.

  • Negotiation. Better structuring and negotiation of supplier agreements and contracts.
  • Outsourcing. Moving IT activity to other organisations who can provide it at a lower price.
  • Consolidation. Meeting multiple demands with the same solution, such as using virtualisation to reduce the number of servers.
  • Commoditisation. Moving to cheaper open source and commodity technology.
  • Process improvement. Improving the efficiency of IT working practices by managing processes more effectively.

Five of the categories are demand side cost reduction, which reduce the demand for IT.

  • Sharing. Combining demands into a single demand, for example getting agreement for different departments with similar needs to share a single system.
  • Replacement delay. Run systems for longer before they are renovated or replaced.
  • Business alignment. Direct IT spend to the systems and projects that support priority business areas, and cut spend from lower priority areas.
  • Value focus. Reduce the perceived requirement for IT to only those requirements that directly add value to the required business change. See Cutting costs: where to start for some ideas.
  • Size and complexity reduction. Proactively manage IT to be smaller and simpler, to reduce the demand for running, changing and replacing IT.

All these methods have some potential. To understand which are most valuable you need to consider:

  • What does the method affect? Does it impact all of your IT activities and spend, or just some of them?
  • What level of saving could you achieve?
  • How hard is it to get the saving, and how long does it take?
  • Have you exhausted the method, or are further savings possible?
  • Are there other benefits to the method, such as improvements to control and improved agility?

The "easy" methods are negotiation, business alignment, value focus and some kinds of outsourcing. These can be implemented without a major impact.

The most valuable methods are process improvement and size and complexity reduction. These impact IT broadly, have a high level of saving, and have benefits of improved control and agility. They are also the hardest methods, with the greatest impact on IT.

Most organisations have already achieved many of the benefits of process improvement. They have effective project management processes and service delivery processes. Further improvements have diminishing returns.

For most organisations, the biggest opportunity is size and complexity reduction. My main interest is in methods that make this easier, such as system quality management. This is not the only solution to cost reduction, of course. But it is the one, in my opinion, with the most potential.

Next: If project management never existed

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