This approach not only funds the changes that will produce greater savings but lays the foundations for growth and innovation:
1. Minimize: First, identify areas of clear and immediate cost reduction opportunities. This step provides increased room to maneuver while boosting the confidence of stakeholders in the prospect of near-term cost relief.
2. Optimize: Then work to run current operations more efficiently by improving the use of software and hardware assets, thereby divesting non-essential assets and decreasing the average IT unit costs. 3. Redesign: Then embed structural changes by shifting the focus to an efficient and effective IT operating model. This drives significant improvements in labor costs, extracting savings through better operating models, industrialized processes, transformational technologies, and sourcing strategies. Accenture’s work with aspiring high-performance businesses who are eager to cut costs strategically, begins with discussing a “to be” version of the IT budget that envisions substantial compression of the non-discretionary component with a dramatic increase in the portion that goes to discretionary projects. The big point here is that discretionary funding is not only protected but enhanced.
The work is focused on isolating and removing “hidden” IT costs—the shadow IT assets and infrastructure found throughout the organization—and then teaming with business leaders to manage demand for IT services more cost-effectively. This layered approach is a tall order, no doubt. But it’s a practical route to ensure that cost-cutting and high performance for the long term become attainable together—not at the expense of each other. There are substantial benefits: In our experience, the approach allows CIOs to achieve durable cost reduction that is up to four times greater than with traditional cost-cutting efforts.
Let’s examine each stage of the three-phase journey to significant and sustainable cost reduction:
Minimize: Stabilizing IT spending patterns
One way in which the CIO may be able to tap into relatively rapid savings opportunities is by seeking out and tackling “hidden” IT costs that have seeped into the business over the years and in many ways have become operating costs with little or no value. Accenture went through this stabilization exercise itself when, in the course of a company-wide IT overhaul, our CIO decommissioned more than 200 applications around the world, saving Accenture more than US $12 million as a result. One recent example involved a major retailer who discovered startling amounts of IT cost hidden in its business operations.
The company had already successfully taken steps to minimize internal IT spending, but with help from an Accenture team, the retailer found that the business units had developed their own IT budgets, with the result that some $60 million a year was being spent on IT initiatives of which the CIO was not aware—including salaries for 89 IT professionals on the business units’ payroll. The CIO reclaimed the $60 million, rationalized the IT services to support these business units , and then provided the rationalized services to the business for half the cost. The company realized a savings of $30 million. (See pg10 “Profile: Strategic IT cost-cutting in action.”)
Optimize: Running current operations more efficiently
The next phase begins the work of making permanent changes in IT spending—and IT capabilities—both within IT and in the business. The change that the CIO needs to lead—and to impress on top management—can be seen in the contrast between the two charts in the figure below. (See Figure 4.) The right-hand diagram suggests an alternative to the reactive cuts to IT-focused discretionary spending described earlier. With careful re-targeting, the CIO can redirect some of the ongoing operational non-discretionary spending to deliver greater business value. Savings from a server virtualization initiative, for example, can be directed toward a process redesign on how the servers are managed, yielding durable savings in labor costs.