In today's rapidly changing business landscape, technology is more important than ever to gain a competitive advantage. While this situation provides opportunities, it often results in escalating costs and challenges in balancing trade-offs between cost and value.
Since the pandemic, escalating costs has been a major challenge, which is clear when looking at the yearly global IT spend growth in the following graph, based on data from Statista. As such, the real question is not whether to invest in technology, the question is: “How can you optimize IT costs for improved long-term profitability?”
This is how you optimize IT costs for an improved long-term profitability
A common mistake when starting an IT cost optimization initiative is to focus on cost reductions. The downside of an approach focusing on cost reductions is that you risk long-term profitability for short-term savings. Our recommendation is to go beyond just budget cuts and instead focus on aligning IT costs with business goals for long-term profitability:
An initiative to optimize IT costs can be divided into the following three phases:
1. Streamline - results within 1 year
Based on a data analysis of cost and performance, combined with benchmarking insights, this phase will address opportunities to eliminate waste, reduce costs and consolidate resources. Optimizing cloud expenses and lowering supplier costs are two examples of typical activities. To sustain the results from this phase, it is important to introduce procedures for continuous cost management and for retiring applications.
2. Substitue - results within 2 years
Focus on substituting and consolidating costly technologies with more cost-efficient alternatives. Additionally, ensure that both ongoing and upcoming development initiatives are cost-effective and yield a positive return-on-investment (ROI).
3. Strategize - long-term results
Challenge ongoing and planned strategic IT investments to ensure alignment with business strategy and that the investments are expected to deliver a positive ROI. To successfully challenge strategic investments and turn tech into profits, it is critical that your current IT goals are aligned with the business strategy for long-term profitability and competitiveness.
Key Success Factors
Knowit has a proven track record in profitability and cost optimization across several industries. Based on our experience, we want to highlight the following key success factors:
- Align with ongoing initiatives to ensure that you understand the dependencies between different initiatives and their objectives
- Adopt a data- and fact-based approach to ensure that you make informed decisions
- Challenge the current situation and address multiple cost-reduction levers simultaneously but focus on the largest potentials
- Drive implementation progress top-down to secure cost-savings and communicate results to build awareness and commitment within the organization
To support your future cost-optimization journey, we have developed a cost strategy matrix based on the different approaches we recommended previous clients to adopt when starting a cost optimization initiative.
What is your cost optimization strategy? Reach out to us to learn more about how you can start improving your IT costs.