It is not uncommon for IT organizations to have sizeable expense reduction targets, to mobilize resources around achieving such targets, and to spend the remainder of the year chasing them with little to no success.
This is a storyline that plays out at both large and small organizations. While there are many approaches to increase the probability of IT cost optimization success, there is no recipe to guarantee it.
There is, however, a recipe for failure. These are 11 common reasons IT cost optimization efforts fail.
- Unrealistic Targets and Expectations
- Lack of Internal Alignment
- IT Cost Optimization is Seen as a One-Time Event
- Traditional Sourcing/Procurement Practices
- No Decision-Making Framework
- Organizations Lack the Courage to See it Through
- Failure to See the Big Picture
- Supplier’s Deal Pipeline and Revenue Targets are Not Managed
- Negotiation Strategy has No Story
- Deal Closure is Seen as the Customer’s Problem Instead of the Supplier’s
- Lack of Internal and External Credibility
1. Unrealistic Targets and Expectations
Scenario 1 – Internally Set Targets
In some organizations, the cost reduction target is set based on a simple math problem comprised of three target numbers: Revenue Goal, Margin Estimate, and Target Selling, General & Administrative Expense (SG&A).
First, let’s assume that the revenue goal and margin estimates are not just aspirational but founded in possible realities. Next, it is unlikely that the revenue goal and margin estimates are adjusted putting target SG&A in the crosshairs.
The difference between current SG&A and target SG&A then becomes the cost reduction target and each business unit is given a “go get” with limited supporting rationale for how the target was apportioned. IT departments, probably the least understood department within a company, is typically given a disproportionate share. Lots of spend, lots of resources, lots of suppliers – it only makes sense, right?!?
Scenario 2 – Management Consulting Firms Creating Targets
Far worse, some organizations engage a management consulting firm to “assess” their organization and identify cost optimization opportunities. These opportunities are identified based on a high-level review that leverages broad industry metrics with limited details supporting the estimates provided. These estimates will most likely include some form of restructuring, program/project deferrals and supplier cost reduction targets with minimal consideration given to the impact on service levels, change management, overall staffing, and flexibility to capture future opportunities.
The management consulting firm will then confidently represent these reduction opportunities in a way that allows them to become a material part of the forecast and ensures they are engaged to deliver the identified reduction but not be held accountable for the actual result.
In either scenario, its usually not until Q3 that the organization realizes the targets were unrealistic to begin with and are then forced to enact hiring freezes and/or put critical programs on hold, among other measures, in a desperate attempt to meet the revenue goal or be forced to report financials that do not meet market expectations.
2. Lack of Internal Alignment
Regardless of the reasonableness of the reduction targets, effective IT cost optimization starts with internal alignment. In my experience, internal alignment is a nonnegotiable aspect of success. However, there are many individuals that need to come together within an organization, all of whom have various competing priorities, objectives, and views on what success looks like and how to achieve it.
What typically happens once the expense reduction asks are disseminated is that everyone acts, overreacts, goes straight to the P&L (profit and loss statement), makes aggressive asks to the suppliers, and ultimately goes in all directions except for the same one which renders the process ineffective before it even got started. This failure highlights two critical risks:
- Internal Misalignment – This only serves to stifle decision-making, and fracture internal relationships. Keep in mind, one’s cost optimization effort is another’s business disruption.
- Engaging Suppliers Too Early – Supplier account executives are trained to know your organizational structure and leverage their knowledge of your structure wherever possible to create internal division that obfuscates reality and tips the scales in their favor. By engaging a supplier before alignment has been directionally reached, you are essentially doing their job for them as they will seek out misalignment, expose it, and leverage it for their greatest benefit.
3. IT Cost Optimization is Seen as a One-Time Event
Let’s imagine that it’s the middle of Q1, the expense reduction targets just got handed down, you inform your team and business partners (sourcing/procurement, finance, etc.) and everyone dives in to identify cost reduction opportunities. They come up with application rationalization efforts, conduct RFPs to add competitive pressure to existing relationships, eliminate technical debt, etc. All of which sound good, so you ask the next series of questions, such as:
- Do we have a target list of applications to rationalize and a plan to do so?
- What solutions and services should be RFP’d?
- Where do we have technical debt?
- What is the net impact of these efforts (financially, operationally, etc.)?
- When can we get started and when do we see results?
What do you hear? You guessed it, nothing but the sound of SILENCE!
At this point you’ve probably realized it’s already too late and managing executive expectations is your only option. You ask yourself, “How did this happen and where did we go wrong?”
The simple truth is IT cost optimization is not a one-time event. It must become part of an organization’s DNA for expense reduction efforts to truly be successful. In short, it is just what you do on an ongoing basis. Preparedness is the key byproduct of looking at cost optimization in this manner where regardless of the year or the asks, you already have a set of identified opportunities, a means by which to execute them, and all you need is a compelling event to put the plan into motion.
With that, I challenge you to ask yourself, “What could we be doing today to put ourselves in a position for success in the future?”
4. Traditional Sourcing and Procurement Practices
Traditional procurement practices are too restrictive, too prescriptive, and take too long to be an effective means for driving cost optimization within IT.
The RFP: A Procurement Department’s Answer for Everything
Most procurement policies require that an RFP be conducted for spend greater than a certain amount. While this might be effective for the acquisition of net-new technologies, it is virtually useless when renegotiating your existing cost base. Generally, the largest opportunities are with your existing suppliers, where significant technical constraints and switching costs are present. Introducing a competitive environment will not be taken seriously by the supplier and for good reason. If most IT leaders know this to be true, then why is an RFP every procurement team’s go-to answer for cost reduction?!
IT Category Plans
Development of category plans as a means to drive IT cost optimization are another example where traditional procurement practices inhibit cost optimization success. If done by the book, these are multi-month analysis/paralysis efforts where any identified opportunities are likely no longer relevant once the plan is complete, ultimately leaving the organization with a great presentation but little more.
Thus, it becomes important that standard sourcing/procurement practices are seen as a framework and not an ultimatum where the focus is on rapidly identifying, assessing and putting opportunities into motion. Keep in mind that when it comes to IT expense reduction, time is always against you. You will have to be nimble and make meaningful progress within the first two quarters of your fiscal year to ensure target attainment by yearend.
5. No Decision-Making Framework
Oddly enough, most organizations have some form of a cost optimization framework, and if they don’t, one can easily be obtained from their favorite consulting firm. If this is the case, then why aren’t more IT cost optimization efforts successful?
In my experience, it is not the framework itself that often results in failure but how the team operates within the framework to rapidly identify opportunities, assess them, and make decisions. Simply put, they cannot make decisions on the identified opportunities and they lose valuable time. It is important to note that in many cases, the inability to make a decision is far worse than making the wrong decision.
To drive IT cost optimization decisions, organizations should focus on first obtaining alignment on the following:
- What are our objectives?
- What is our risk tolerance?
- Do we have the capacity and the capability to deliver?
- Value – What value am I going to receive?
- Risk – What risks will I incur?
- Time and effort – What effort will I have to expend to realize the value?
6. Organizations Lack the Courage to See it Through
So, the team has done all the right things to identify a series of expense reduction measures to meet the unrealistic goals handed to them. These measures might include simply discontinuing support, not doing the deal a supplier is pushing for, or making the expense reduction target the supplier’s problem to bear. Whatever they may be, the next challenge is obtaining internal alignment on the identified levers, and for some, this is the bridge too far.
Organizations are not necessarily cut from the same cloth. They all have a different appetite for risk and ability to manage their suppliers. But in many cases, FEAR renders even the best cost optimization opportunity ineffective.
Organizations may think an opportunity is too provocative and wonder:
- How will the supplier perceive the company?
- How will the supplier perceive me?
- How might this impact our relationship?
No matter what the reservations may be, you can expect each supplier to leverage emotions and inject fear, uncertainty, and doubt into the equation which can cause the organization to freeze, or worse, second guess the appropriate course of action. Whether this delays execution or stops it altogether, it’s a lost opportunity either way.
In these situations, it’s critical to remember the importance of obtaining alignment on the approach, process, and opportunities early and often. Keep in mind that a supplier cannot say “Yes” to an ask that’s never made, and in many cases it’s not what you’re asking — it’s how you ask it.
7. Failure to See the Big Picture
Most sourcing organizations see IT deals as a series of unrelated transactions and focus on driving closure of each individual deal while disregarding the synergies that may be present across transactions and suppliers.
Successful strategic sourcing professionals recognize that a negotiation is never about the deal on the table but about those that came before, those in the periphery, and those yet to come. To successfully drive cost optimization efforts, you must see the forest and not be lost in the details.
Consider for a moment how an IT hardware transaction with one supplier can be leveraged to drive cost out of a telecom supplier’s network deal/renewal. For example, knowing that large telecom suppliers like Verizon and AT&T also resell hardware (servers, storage, network equipment, etc.), negotiate the bottom-line deal with both the hardware OEM and telecom supplier (i.e., MPLS Circuit, VOIP). Prior to closure, request additional “meaningful” concessions from the telecom supplier in exchange for serving as the reseller on your hardware deal.
Everyone wins — the hardware supplier gets their deal, the telecom supplier gets their deal as well as additional revenue through the hardware transaction, and you get two good deals along with a financial concession.
8. Supplier’s Deal Pipeline and Revenue Targets Are Not Managed
Each year, sales executives are given a revenue target and are required to establish a pipeline of deals to ensure that revenue target is realized. To show progress and keep their leaders at bay, they will attempt to sell you things you do not need and/or include “potential deals” within their pipeline which are not funded and are aspirational at best. From here they will leverage their knowledge of your organization and the emotions of your executives to drive these deals on their timeline.
This is a recipe for disaster which will most certainly stifle any cost optimization opportunities with this supplier, as your account executive will have zero internal political capital with which to call upon to meet your aggressive cost reduction asks.
When it comes to your strategic suppliers, you should focus on driving transparency into their revenue targets, ensure only legitimate projects/purchases are included, and understand their target shortfalls. With this information you are able to identify “win-wins” and ensure your account executive is maintaining a high-degree of internal credibility that can be leveraged to drive your optimization efforts.
9. Negotiation Strategy Has No Story
Effective negotiation strategies must delicately balance ART with SCIENCE to drive the intended outcomes. In this example, “science” is the market data or benchmarks that form the basis of your negotiation strategy, and “art” is the compelling story that is told to drive the intended outcomes.
In my personal experience, it’s art, not science, that is the most important aspect of any negotiation. You can have all the right data, but if you cannot use it to weave a compelling story focused on mutual interest to drive outcomes that no one thought were possible, what’s the point of having all the data in the first place? A compelling story will garner greater results than data ever will.
However, traditional procurement departments focus on training their teams to undergo extensive efforts to obtain data as a basis for the negotiation. They often go so far as subjecting their teams to countless hours of training focused on identifying the Zone of Possible Agreement (ZOPA), the best alternative to a negotiated agreement (BATNA), or how to conduct a SWOT analysis, instead of training them on how to bring this data to life through a credible and compelling story.
As previously mentioned, the largest reduction opportunities are generally obtained through your existing suppliers where little alternatives exist and technical constraints are high. In this environment, the science (i.e., data) no longer matters, because the supplier already has their deal. If you have no story, you have no cost reduction.
10. Deal Closure is Seen as the Customer’s Problem Instead of the Supplier’s
How many times do you find yourself burning cycles near a supplier’s month-end, quarter-end, or year-end to close a subpar deal on their timeline? In essence, the supplier has made obtaining closure your problem. To add insult to injury, the supplier tells you that if the deal is not closed by their date, the deal is off the table, which ultimately leaves you to negotiate the terms of the subpar deal. Seems crazy when put this way, but suppliers will leverage this approach to counteract any cost reduction efforts or efforts to optimize an individual deal.
If you’re currently in this position, it is likely because you, your team, or someone within your organization shared internal timing, the catastrophic events that would ensue if not met, and/or specific technical constraints handcuffing you to the supplier. The supplier then leverages your timeline against you, calling all of your bluffs, and waiting you out until you’re forced to sign.
If you find yourself in this situation, you must take back control. Getting a deal to ‘done’ should always be the supplier’s problem. There are two key considerations: time and terms. In most cases, deals are completed on the supplier’s timeline and on the supplier’s terms. Leverage their approach against them so your ability to close the deal is directly correlated to their ability to align to your deal objectives.
At this point, if the deal does not get closed, it is on the supplier and there is no need to renegotiate back to a subpar deal. Do not underappreciate the leverage this will provide you.
11. Lack of Internal and External Credibility
In real estate, it’s location, location, location. In negotiations, especially those with your strategic suppliers, it’s all about credibility, transparency, and follow through. Far too often, organizations take the smoke-and-mirrors approach to negotiating with their suppliers. They tell them as little as possible, constantly move the goal post, and expect the best deal.
I have never understood this as an operating philosophy and will never advocate for it. However, it is the standard not the exception. Rest assured that taking such an approach only makes your supplier account executive’s job impossible even when they sincerely want to deliver. Simply put, if they cannot do their job to advocate internally within their organization on your behalf, you get no expense reduction.
Instead of smoke-and-mirrors, clearly convey your internal constraints, deal terms, and transaction timing. Highlight that their deal will get done as soon as your terms are met. If they deliver on your terms, you deliver on the deal. If they do not deliver, they get no deal. There can be no middle ground for this to be an effective strategy.
Do this on every deal and the supplier community will see you as a highly credible dealmaker and when it comes time to make the tough asks associated with a cost optimization effort, you can leverage this credibility to unlock additional value.
Credibility also works internally. If the internal team does not trust you can get it done, real cost savings opportunities will fall on deaf ears. This lack of confidence will be conveyed to the supplier at which point you will no longer have a seat at the table. The supplier will expose this internal misalignment and ultimately minimize or eliminate any potential savings opportunity.
There is no recipe that will guarantee IT cost optimization success, but it does not mean success cannot be attained. As you can see from this list of cost optimization mistakes, it’s not really about how you respond to the asks once the reduction targets are identified, but about what you can be doing every day to put yourself in a position to be successful.
In the end, if you are constantly focused on optimizing costs, enabling strategic programs, enhancing the value you receive from your suppliers, and avoiding the pitfalls of traditional procurement practices, you will be on your way to cost optimization success.