IT leadership must reduce spend without impacting keep the lights on (KTLO) services. However, the economic fallout from COVID-19 has expanded the remit of KTLO: In a recent survey1, 64% of IT leaders have seen an increase in demands for technology, and a 29% increase in spend to support remote work.
Survival, not growth, is the immediate goal in 2020. Post COVID-19, organizations are prioritizing cost optimization (66.2%) and operational efficiency (33.8%)1. Wanting to come out of the current difficulties “stronger” and “more robust” is laudable, but there’s a short-term reality: CIOs need to preserve cash-on-hand. With cash, organizations have the flexibility to survive the downturn; without cash, organizations will be forced to downsize employee operations (or, at an extreme, declare bankruptcy) to pay off fixed expenses. CIOs do their part by cutting costs—quickly.
Here are four financial steps to take during the economic crisis:
#1 Tag spend as “addressable” vs. “non-addressable” for potential cuts
IT must look at the entirety of its spend and identify areas to cut. Some areas are more suitable than others. Fixed assets, vendor agreements, and MSP relationships may have long-term financial commitments in place. However, agreements within a 30- or 60-day renewal window need close inspection. All organizations are trying to maintain cashflow—vendors are no exception. Cut vendor costs by canceling agreements or renegotiating renewal terms.
Eliminate or descope projects that are not critical. Projects, by their very nature, are investments that reap future rewards—when short-term survival is table stakes, IT leadership should, at a minimum, push out projects and cut the associated labor. The same approach applies to existing IT services. Eliminate or reduce services that are not critical to the short-term.
Organizations often lack a technology context to determine “addressable” vs. “non-addressable” IT spend. Many IT budgets—mired in manually updated spreadsheets—look at technology spend at the account level. This financial view only speaks to how much is spent. It offers no insights into supported initiatives. To cut costs and re-plan effectively, IT leadership needs an ITFM solution with an IT context that surfaces addressable and non-addressable spend.
#2 Freeze or reduce discretionary spending
COVID-19 has drastically reduced travel and expenses (T&E). More than 80% of organizations regard lowering T&E as their primary cost-cutting initiative1. The pressure to cut T&E may loosen as state and local health directives ease, but following the right procedures for national and international travel will be costly. Lock in T&E cuts throughout COVID-19 by ensuring a successful remote work experience—for employees and customers.
Spend that was discretionary may have become mandatory. 60-70% of organizations have taken immediate steps to support remote working (e.g., increasing VPN, connectivity, security posture, and cloud) 1. Organizations must fund this support through cuts elsewhere (e.g., vacating office space, suspending/deferring utilities), and cutting fixed costs (e.g., retire on-prem legacy solutions).
Control discretionary spend by deferring, eliminating, or altering commitments. Earmarked, but not-yet-incurred spend has the most significant impact on cashflow (e.g., scheduled new hires, onboarded new vendors).
#3 Enable scenario planning to evaluate options
IT leadership must assess the impact of any cost reductions before executing them. The IT cost model is more complicated than for any other line of business, and the downstream implications of a cut shouldn’t come as a surprise (e.g., business partners need to know the impact on IT services from a uniform percentage cut across all of IT).
Scenario planning may involve accelerating existing initiatives. Applications may be financially retired (e.g., fully amortized) but still operational on legacy hardware with specialized support staff. COVID-19 can be the forcing function to decommission that application.
All scenario planning must include protection for core business revenue and a do-no-harm impact on cashflow.
#4 Reforecast and track actual execution to plan
Organizations struggle to use traditional budgeting methods to manage technology finances. Annual budgets are out-of-date once actuals start showing up on the general ledger (GL)—they do not help build a financial response to COVID-19. Forecasts are the right IT financial management (ITFM) response to the current economic disruption.
COVID-19 needs a mature forecasting process. Continuous forecasting codifies alignment to IT strategy and removes the arbitrary cut-off between one financial year and the next. Only 10% of our recent survey respondents have a continuous forecast process—a majority (39%) have a quarterly cadence1. Considering the economic trauma within Q1 that will resonate beyond FY2020, organizations need continuous monthly forecasting to track actual execution to plan.
Apptio helps to optimize spend quickly
To help respond quickly and effectively to these challenges, Apptio has created a special offer to accelerate cost optimization and the process to update forecasted spend during this time of economic disruption. Apptio’s Financial Management solution helps organizations quickly identify optimal cost-saving opportunities across core areas such as labor, vendors, and projects and then package them in an updated aggregate forecast. Read more here.
1 Apptio Database, May 2020