In an uncertain financial climate, as businesses are continually required to do more with less, attention is drawn to the IT department and the vast amounts of money organizations spend on technology. While it is easy to simply slash costs and reduce budgets in these areas, this is not a sustainable long-term solution. Cutting costs right to the bone without adequately assessing risks and benefits can negatively affect capabilities and reduce service quality. Instead, organizations are turning to IT cost optimization to reduce their spending and build value over time by embedding more efficient spending habits and ways of working.
Shortcuts:
IT cost optimization is the continuous process of evaluating an organization’s technology usage and spend against business requirements to reduce costs and maximize value.
IT cost optimization and IT cost-cutting (alternatively called IT cost reduction) are not the same thing. IT cost cutting is simply reducing IT spending for immediate savings. This could be a one-time thing or done at regular intervals, such as the beginning of each year. IT cost optimization, on the other hand, is a proactive approach to keeping costs down by changing behavior and embedding changes in how the department works and money is spent.
| IT cost-cutting | IT cost optimization | |
| Focus | Financial benefit | Proactive reduction of costs and increase in value |
| Impact | Immediate | Over time |
| Timescale | One-off or at regular intervals | Continuous strategy |
| Sustainability | Not always. Spend is often cut without full insight into interdependencies, potentially harming value creation and productivity. | Sustainable, as it aims to change practices and embed efficiency. |
| Research required | Simplified to immediately identify cost-saving opportunities, usually based on purely financial figures. | Thorough analysis for deep insight into how the business operates. |
When an organization chooses to reduce costs, it will often do this through cost-cutting: identifying areas of high expense and immediately reducing spending in these areas. Although, ideally, these cuts should not negatively impact business capabilities or product/service quality, the reality can be very different. Organizations that make cuts in the wrong places can find themselves losing revenue due to their business capabilities taking a hit as they challenge themselves to work with fewer resources than is realistically possible.
IT cost optimization, on the other hand, intends to find ways to make sustainable savings that won’t affect the quality of the product or service. These changes could be cultural, such as more stringent processes for identifying business fit before purchasing applications, or practical, identifying technology that is underused or not delivering the value expected.
Ultimately, IT cost optimization aims to reduce spending and make better use of financial resources. But a strategic approach also yields other value that simple cost cutting cannot deliver.
By ensuring your spending decisions are aligned with business goals, the savings you make will benefit the business and are less likely to negatively impact areas like revenue, service quality, or customer satisfaction.
Thorough analysis means the ability to identify where costs are coming from and whether they are increasing or decreasing. This allows for more accurate cost control to ensure costs stay in line with what is expected or required.
IT cost optimization targets overspending on IT resources and expenditures that are not delivering a return on investment (ROI). It identifies how IT spending aligns with capabilities and areas that need more or less investment according to their importance to the business.
IT cost optimization encourages organizations to do more with what they have, helping to identify where resources are best spent.
Ultimately, over time, spending is reduced by cutting any unnecessary costs.
Getting deep under the hood of how the organization operates and analyzing its enterprise architecture eliminates issues leading to long-term spending inefficiencies.
IT cost optimization is not easy, and with the number of barriers that need to be overcome depending on the size and complexity of the organization, it’s no wonder that many resort to simple cost-cutting measures that are easy to implement instead of proactive strategies requiring planning and analysis. Here are some of the factors that affect how effectively a business can optimize:
Ardoq's built-in IT cost optimization structure is based on quick time-to-value
approaches across a range of customers and industries. Importing and managing high-level cost data into Ardoq provides insight into the source of costs, and the platform makes identifying gaps and maintaining data quality simple.
IT cost optimization is just one way to optimize your business. Learn more about how to stay competitive through enterprise architecture in our guide to Digital Business Optimization.
Although businesses will vary depending on size and complexity, if you’re just starting on your IT cost optimization journey, here are some key areas to start by looking at:
1. Application usage: Is every application delivering the value expected? Are there any unused software licenses? Are the licensing plans correct for the size of the organization?
2. Legacy systems: Are they vital to the business’s operations? How easily can they be upgraded or decommissioned?
3. Maintenance: Is maintenance proactive or reactive? How long and frequent are periods of downtime?
4. Partners and vendors: Are negotiated contracts as favorable to the business as they could be?
5. Shadow IT: How good is current governance over applications? Does your organization have oversight over applications vital to critical capabilities and value creation?
6. Ways of working: Are resources being used efficiently? Is work taking the time it should be taking?
7. Workforce: Do employees have the skills needed to do their job? Are there enough to ensure tasks are completed to the standard required?
You understand the benefits and difficulties of IT cost optimization, and it’s clear what areas you will need to analyze. But how should you get started? Here’s a basic framework to gather the data required for your efforts. This will govern any cost optimization you will do in the future, turning cost-saving efforts from a single project into an ongoing strategy.
What do you want to achieve from cost optimization?
This includes all hardware, software, applications, and systems used in the business. Your goal is to build a clear and accurate picture of how things are and how they support business capabilities. Once this has been built up, it should be a goal for the future to keep it up to date. This is often the most painful part of the process so it’s important to rely on data-driven platforms like Ardoq which can radically expedite the collection and visualization of the data, keeping your overview automatically up to date via integrations with your existing tools.
A reliable assessment of spending will require lots of collaboration with stakeholders to ensure financial transparency, but getting IT and business in line with each other can be tough. This could require a combination of hundreds of data sources and interviews, taking hours to piece together — time the IT department can struggle to find. That’s not to mention the time required to keep this data up-to-date to ensure the assessment remains accurate.
With Ardoq, you can automate this data collection and integrate directly with data sources, making it much easier to reliably assess costs and ensure this information can be trusted.
Now you can see what IT spending is occurring and where, it can be discussed whether this spending is justified, and how it can be reduced if necessary. For example, different departments may use different project management tools depending on their preference, when this could be one central application that is used throughout the business.
Once you have established your basic framework, there are many ways to optimize IT costs. Some changes can be quick to implement; others will take careful planning and see value over time.
Automation can be used to handle repetitive, manual tasks, which eat up time and resources that could be better spent elsewhere.
APM involves looking at your suite of applications and determining how they align with business goals and capabilities. Find shadow IT by asking employees what applications they use to do their jobs and comparing this to existing information. You will also want to consider any legacy technology, as the operation, optimization, and maintenance of this can be incredibly wasteful compared to newer solutions.
What is the process for purchasing a platform or service? How do you manage the users of the service? What happens when an employee leaves? If too much wasteful spending is occurring, you may need to introduce more criteria to ensure that potential purchases will meet business needs.
Cloud computing is a vital part of modern organizations, providing them with capabilities, infrastructure, and scalability that they wouldn’t normally be able to have. However, without careful management of an organization’s cloud migration strategy, costs can soon spiral as usage increases. As with applications, this requires a strategy to govern and evaluate spending, ensuring that cloud services align with business needs and are being used efficiently.
Consider whether business needs are being met by your current relationships. What could be improved? What’s missing? Optimization could mean reducing the costs of your subscriptions or gaining greater value from the amount you pay.
Scalable solutions can be adjusted to fit an organization as it grows in size and complexity, allowing the efficient allocation of resources only where and when they are needed. This reduces overspending and allows the business to stay in control.
Decide where the organization wants to be and how technology will be used to achieve this. Then you can decide what you will need and make future spending forecasts.
IT cost optimization requires reliable data and a single source of truth to accurately measure expenditure. Ardoq provides the ideal starting point for assessing your technology portfolio by providing visibility into application architecture, technologies, and infrastructure.
Once you have visibility over costs, it’s time to go deeper. Ardoq allows you to assess critical IT functions for business capabilities and service delivery, helping you understand the potential impact of changes and where cost optimization will have the greatest effect.
When possible changes have been identified, data-driven impact analysis allows you to understand the impact they will have on IT and the wider organization, for example, identifying dependencies that would be affected by decommissioning legacy software.
This means having more visibility of your technology portfolio, better allocation of resources for vital services, and greater control of IT expenditure.
Learn how one European financial services organization used IT cost management to regain control of its capabilities and expenditures.
Storing data onsite can lead to high costs, both from the hardware required and its associated maintenance and the space needed to store and secure the data. Cloud providers can provide organizations with more cost-effective storage solutions, computing power, and resources they may not otherwise be able to have. However, this must be used with caution. The amount of data being stored can easily fluctuate if not monitored closely, increasing usage costs.
When done effectively, automation can help keep costs down by completing repetitive, manual tasks more quickly than a human could and with minimal intervention. This leaves resources free to be used for other work that provides greater value to the organization.
IT cost optimization relies on accurate data to map spending, functionalities, and dependencies correctly. Thorough analysis can identify spending patterns and resource wastage to ensure IT is delivering maximum value to the business. A data-driven approach allows for more accurate impact analysis to forecast the potential effect of changes to business models, capabilities, processes, people, and technologies.
Ideally, IT cost optimization should be an ongoing process. The goal is to change behaviors that lead to overspending and implement guidance for smart spending. This means that all financial decision-making becomes optimized, and savings become sustainable. A starting point could be creating a roadmap of things to achieve in a year and reviewing this at the end of the period to see what has been possible and what needs longer to be realized.
We can think of application portfolio management as a subset of IT cost optimization. While IT cost optimization focuses on an organization’s technology portfolio as a whole, application portfolio management looks at its suite of applications to build up a picture of what’s in place and how it is being used.. This can be followed by Application Portfolio Rationalization, where the business case for these applications is analyzed to determine whether spending can be reduced or if they can be retired or replaced.
Ready to see how Ardoq can help you with your IT cost optimization? Book a demo now and speak to an Ardoq expert.