The first article in this series, Understanding the ROI of Value Creation, is about safeguarding IT budgets shared an approach to protecting IT budgets by reallocating non-value creating IT spend to efforts creating tangible business value.
The second article, How to Recapture IT Spending, then explored ways to recapture non-value IT spending as a means to increase available funding.
Even so, executives sometimes have no choice but simply to cut IT budgets in response to a change in the economy or business circumstances. Many IT departments are still reeling from across-the-board budget cuts mandated during the economic downturn. However, many of these cuts were accomplished through slashing capital development budgets and streamlining head count rather than through strategic efforts to reduce non-value IT spending.
Since swinging the axe and arbitrarily reducing IT spending across the board can put the delivery of critical IT services at risk there are a number of easier and often overlooked opportunities to reduce non-value IT spending and leave the budget for more critical value-creating opportunities intact. For example:
Does the company hold excess or unused software licenses for which maintenance is being paid that could be eliminated? – Reconciling a list of installed applications held by the IT department to a list of software vendors being paid kept by the accounts payable department can often reveal an immediate opportunity for savings. Maintenance payments for applications or licenses no longer used (or never used) by the company can be uncovered. Once likely candidates are revealed, some additional digging may be required to find and review contracts, establish that suspect applications are not currently used and to cancel payments for such unused applications or licenses going forward.
Can fees for services be reduced in exchange for a reduction in service levels from “optimal” to “adequate?” – When times are tight, an economy car will get you from point A to point B just as well as a luxury car — and at a much lower cost of ownership. Many IT services agreements contain “luxury” service levels (like 99.99997 uptime or 24/7 availability, or 30-second pickup on initial help desk calls) that few companies really need. Asking vendors about potential price breaks based on a lower (but still sufficient) service level commitments may yield surprising results and previously unrealized opportunities for savings.
Will vendors discount fees for their current (non-value creating) services now to ensure a chance at renewal when contracts expire in the future? – For most IT services vendors (and especially their salespeople), yesterday’s sale is yesterday’s news and they always are looking ahead to their pipeline for next year or next quarter. As such, some vendors are willing to include consideration of today’s pricing or service levels for a better chance at winning tomorrow’s contract renewal or upgrade.
Suggesting to current vendors that some consideration regarding today’s services pricing might be required to secure an opportunity even to bid on renewal may yield immediate savings as well as position lower pricing as the starting point for negotiations for the renewal agreement.
Will vendors convert fixed-cost IT service contracts to variable-cost IT service contracts in exchange for an extension of the contract expiration date? – As many cell phone users have discovered, those “unlimited everything for one low price” often don’t work out to be quite the deal they thought it was. Based on actual usage, the bill each month on a per-minute or per-megabyte basis would have been lower.
The same principle can apply to the services companies traditionally buy on a fixed-cost basis: help desk services, transaction processing, remote access, etc. By converting fixed-cost IT service contracts to variable-cost contracts (in exchange, for example, for an extension of the contract term) and then reducing the level of usage (in the case of help desk, for example, by instituting a self-help knowledge base that must be accessed before initiating a call to the helpdesk), it may be possible to reduce the total level of spending for those services.
As few IT departments have “optional” capital expense left in the budget or “excess” headcount waiting for the budget axe to swing, IT executives must be creative in finding opportunities to reduce non-value-creating IT spending or put the funding for critical IT services and initiatives (that cannot be tied directly to the creation of business value) at risk. IT executives should target identifying an additional 10% reduction — a challenging but reachable goal for most IT departments.
As the legacy of the 2008 Great Recession continues to crystallize and its impact on IT budgets becomes clearer, business and IT executives alike must focus on finding creative ways to preserve IT funding for critical business and technology initiatives.
Matt Podowitz is a strategic management consultant assisting entrepreneurial, middle market and Fortune 500 clients maximize returns on investment in operations and information technology and address business considerations in strategic transactions such as mergers, acquisitions and divestitures. He is a Certified Management Consultant and Certified in the Governance of Enterprise Information Technology, and specializes in leveraging business functions that historically have been viewed as cost centers to create tangible value for the business. Matt can be reached via the contact page on his personal business blog, ITValueChallenge.com.