Classic IT Challenges – Reducing costs

This is the sixth post in a series of writings to discuss issues facing Information Technology (IT) departments. If you have not read any of the first five challenges you can find them under project work vs production support, prioritizing work, operations vs innovation, estimating work and understanding complexity.slash-cost

IT shops vary in size, budget, and processes. But all IT shops share a common set of challenges that shape how they interact with their inter-company customer base as well as the clients of their organization. There isn’t a single answer to these common challenges and they don’t disappear after a process is put in place to address them. The manner in which IT management chooses to respond to the challenges is interwoven in the culture, processes, and services of the group. My thoughts are more around framing the problem than presenting solutions.

Challenge #6 – Reducing costs

The Information Technology group of a company shows up in the financial statements under the general and administrative costs of the SG&A section.  Management teams want to keep their costs in alignment with revenue and have target percentages for total costs as a ratio of revenue. Budget cuts, expense deferrals, and lay-offs are all activities associated with managing costs.

The biggest percentage of the IT budget is labor and the two most common ways of controlling labor costs are through shared services and offshoring. Shared services is a method to remove redundancy in staffing. So two IT groups may be combined into a single IT group that provides services to multiple locations. Presumably some staff are eliminated because their job functions are redundant.

Offshore labor for IT services such as development, QA testing, and infrastructure support is attractive because of lower labor rates. IT managers use this tactic to keep the number of contributing team members the same while at the same time decreasing overall costs. Other attractive features to offshoring include reducing benefits expenses, eliminating the need for office space, and removing the administrative management tasks for the individual (annual reviews, etc.)

The Challenge

The core challenge for IT management really centers around justifying the expense that IT  creates within an organization. In simple terms, this is a mindset that thinks “how do I pay for myself”? There are two ways to justify the expense:

1. Enable automation that reduces operating costs – Leaders in other areas of the business often look to IT to automate processes that require manual work or to automate  repetitive  processes in their area so they are completed faster. Not unlike offshoring or shared services, the other areas of the business are really looking to reduce their own labor costs.

2. Enable new revenue – IT shops may create software that is sold as a product or software that is used as a service to facilitate sales (eCommerce). IT managers want to show that the revenue generated by their work exceeds the costs to create the work.

Make no mistake, the battle to contain costs is constant. It’s an everyday battle for IT managers. The most effective IT managers change the mindset of their organizations to think of IT in terms of revenue enhancement and automation. If IT is simply a number on a financial statement then the business doesn’t recognize the value that IT creates to offset this number. That’s a dangerous place to be because you can’t cut your way to growth and prosperity.

Next Week

Challenge #7 – Functional groups introducing technology without IT input