In 1543, Flemish physician Andreas Vesalius revolutionized medical science with a series of books and sketches on human anatomy. Until then, the human body had been a black box, but Vesalius established a common understanding of anatomy, giving doctors a roadmap of sorts for performing surgery and paving the way for continued medical advances.
IT financial management is a bit like medical science of the Middle Ages: Technology has become the skeletal structure and nervous system of the enterprise. As companies innovate and pursue digital transformation, more than 60 percent are funding digital transformation initiatives by optimizing existing run costs and repurposing the savings. Even though many CIOs are embracing this approach to IT cost optimization as a means to fund investments in new innovations like cloud, agile, AI, RPA, and more, 77 percent have trouble identifying and articulating the true cost of their IT portfolio.
This means that for all the advances in technology, IT spend is still a black box. Without insight into how spend is supporting apps and services, or which business units are consuming the most resources, trimming costs to drive optimum benefit for the business is just a shot in the dark.
But that doesn’t have to be the case. IT cost optimization should be an informed, repeatable process. And though it may seem counter-productive, it shouldn’t always focus on spend. It’s the iterative process of maximizing the value of IT, to spend smarter on what will deliver competitive differentiation, improved customer experiences, and keep companies modern. Gartner found that CIOs who handle IT cost optimization as a reactive, one-time action “fail to maximize cost optimization activities and opportunities.”
Free-up resources to fund innovation
As a technology and finance leader, it’s up to you to start conversations about IT cost optimization to eliminate wasteful spending and to drive discussions about where to innovate and invest. For example, should you re-architect a legacy application or move to a cloud-based SaaS offering? Are you reaping the full benefit of your current cloud platform, or should you diversify? Is your data governance stance fully compliant with the latest privacy regulations?
Data points such as CapEx vs. OpEx, usage rates and licensing costs can help narrow the choices of where to trim the IT budget and help you make more informed decisions. And company and industry peers can offer guidance on where to optimize costs, and how to direct the savings. Gartner recommends that you “develop cost optimization teams, including IT leaders and business unit leaders, in examining IT costs in the context of business processes and services.”
You also need to determine how in-depth you can get in optimizing IT spend, and where you are in your IT financial management maturity. Some opportunities to reduce spend will be quick, while others will require more data, more stakeholder involvement, and the ability to influence business unit consumption. If you’re starting, you may need to adopt an approach to IT cost optimization that focuses more on low-hanging fruit, whereas if you already have foundational transparency into IT costs, you may want to take an approach of rationalizing existing investments based on cost, quality and value. Approaches to IT cost optimization include:
- Scrutinize spend to correct financial loopholes (e.g., excessive budget padding)
- Economize to eliminate waste (e.g., orphaned VMs that were never de-provisioned)
- Rationalize to remove redundant business capabilities (e.g., unused app licenses)
- Commercialize to curb demand (e.g., excessive infrastructure spend by a business unit)
Data + questions = impact
Regardless of the approach, making impactful decisions starts with having the right data and knowing which questions to ask. That isn’t easy when IT spend is a black box.
Consider the case of First American Financial:
The firm’s IT portfolio was beginning to swell with redundant systems, but since implementing Apptio’s TBM solution, First American uncovered more than 100 legacy applications that were ripe to be retired.
Armed with this insight, Larry Godec, Senior Vice President and CIO, and his team started several different infrastructure optimization initiatives, and they are now driving toward eliminating almost 10 percent of First American’s total infrastructure costs.
Says Godec: “Our plan is to take those dollars and move them towards change-the-business initiatives. So now when we meet with business leaders, we can have the great conversations around not only how much are we spending in the areas but how we may want to shift priorities on projects or potentially even shut projects down for higher priority initiatives.”