Effective IT Cost Optimization Starts with Internal Alignment

Great leaders know that how they get results is just as important as getting the results themselves.  In this time of economic turmoil, there is no greater truth.  Companies are compelled to undertake unthinkable measures to ensure viability, while maintaining the confidence of employees, customers, shareholders, and partners.

A critical component of most company’s COVID-19 response strategies is the conservation of cash, which may include, among other levers, cost reduction initiatives.  Companies will naturally revert to existing operating models to drive these initiatives, but experienced leaders know that the scale and velocity of the initiatives will require a much higher degree of internal engagement and alignment to produce an effective outcome.

Most importantly, these leaders will avoid the natural tendency to apply immediate pressure to their vendor partners before they understand their company’s objectives and establish internal alignment.

Cost Optimization Begins Internally

The concept is easy, but for many, execution is very hard.  Cost optimization initiatives are cross-functional efforts and require an understanding of each stakeholder’s priorities and objectives.  Experienced leaders know that how they navigate their organizations during this time will directly impact the results produced and the perceived effectiveness of their team.

Regardless of function, leaders need to ensure their teams have a clear appreciation of the priorities of each part of their organization.  Situational awareness and recognizing the stresses on the leaders of other parts of the organization are especially critical at this time.  It starts at the top.

Here’s a look at the priorities of business and IT leadership and opportunities for alignment.

CEO:

• Demonstrates commitment to the health and welfare of employees, customers and partners
• Demonstrates the resiliency of the company to stockholders, customers and employees
• Demonstrates how the organization is contributing to combatting COVID-19
• Pushes on line-of-business (LOB) leaders to present creative and effective business plans
• Communicates shifts in strategy to stakeholders given current circumstances

Bottom line:  The CEO’s priorities extend well beyond a cost reduction initiative.  They will be looking for clear consensus and alignment from their leadership team when presented with revised business plans, including options considered, risk considerations and recommended courses of action.

CFO:

• Demonstrates the financial resiliency of the company to key stakeholders
• Resets revenue, expense, capital allocation and cash management objectives
• Communicates revenue and cost reduction targets to each LOB
• Manages the end-to-end enterprise re-planning and cost reduction effort
• Resets credible expectations and guidance during the next earnings call

Bottom line:  The CFO will set the targets at a top-line level for each business area.  The targets may be perceived by LOB executives to be unachievable and potentially create too much risk to the business.  Arguing the targets is political suicide. Everyone has the same problem; it’s time to get to work.

Line-of-Business Executives:

• Determines and addresses customer demand and requirements
• Implements business continuity measures and addresses operational risks
• Develops alternative business and financial plans, per direction of the CFO
• Re-evaluates in-flight and planned projects (e.g., accelerate, ramp down or cancel projects)
• Presents a credible, holistic, integrated revised plan to the CEO and leadership

Bottom line:  LOB executives will determine the success or failure of the company’s ability to navigate the challenge of COVID-19. But their success will be highly dependent on the ability to collaborate and obtain effective support of the CFO, CIO, CPO and others.

Transformation Executives:

• Honestly assesses the state-of-the-state of the transformation initiative (e.g., risk, spend and delivery profile)
• Determines the project’s ability to stay the course given financial, resource and delivery constraints
• Collaborates with software and system integrators to revise implementation plans
• Collaborates with LOB executives to determine a mutually agreed upon go-forward strategy
• Presents a credible, holistic, integrated revised plan to the CEO and leadership

Bottom line:  Transformation leaders, given the sizable spend and risk associated with transformational programs, are going to be under a high degree of scrutiny given the pressure that LOB executives will be under to meet revenue, expense and operational objectives.

CIO:

• Maintains operational continuity, security and compliance posture
• Meets the immediate demands of the business (e.g., work from home, capacity needs)
• Develops IT-specific cost reduction strategies to meet CFO targets
• Ensures IT effectively supports the re-planning efforts of LOB and transformation leaders
• Leverages vendor relationships to address operational needs and cost reduction objectives

Bottom line:  CIOs and their organizations will be under tremendous pressure to support the needs of the business while also maintaining the business of IT.  Given the typical size of the IT budget relative to other departments, IT will be under tremendous pressure to reduce costs.  They will also need to lead the debates on fixed vs. variable and discretionary vs. non-discretionary spend.

IT Finance

• Supports CIO with influencing cost reduction targets issued by the CFO
• Supports CIO with distributing equitable cost reduction targets to each leader
• Collaborates with IT leaders to ensure accurate capital and operating expense forecasts
• Creates governance process and reporting necessary to track progress against reduction efforts
• Supports CIO with presentation of re-planned project portfolio and operating expense plan

Bottom line:  The IT finance team must serve as a glue between IT leadership, corporate finance, and IT procurement.  There must be a single version of the truth among all parties.  Within this continuity, significant relationship issues can and will arise due to misalignment that could occur as IT leadership sets expectations with the CIO, IT procurement sets expectations with the CPO, and IT finance sets expectations with the CFO.  (As a side note:  Good luck to the IT finance team with re-education of leadership on capitalization and the impact of cutting projects on the P&L.)

IT Procurement

• Obtains detailed insight into the revised project portfolio and expense reduction targets
• Revises category management plans (e.g., vendors, spend, contract renewals and negotiation levers)
• Presents cost reduction opportunities to the CIO and the CIO’s direct reports
• Collaborates with IT and IT finance to ensure cost reduction opportunities are accurately captured
• Supports IT and LOB executives with the re-negotiation of vendor agreements in a highly scripted manner

Bottom line:  The procurement team, although an integral component of the initiative, cannot approach the vendor community independently.  IT and LOB executives need to use their political and relationship capital with the vendor community to achieve their desired outcomes.  Doing otherwise will surely result in damaged relationships (internally and externally) and suboptimal results.

In summary, clear internal alignment, including defined project, operational and financial objectives, is a critical first step.  In addition, a governance model between finance, lines of business, transformation programs and IT must be established (if one isn’t already in place) to ensure the organization is well aligned in advance of presenting business plans to the CEO.

Those companies that go directly to the vendor community as a first step in their cost reduction initiative will leave themselves vulnerable to the vendor’s most effective relationship and negotiation tactic – the use of “internal misalignment”  across your organization to avoid, delay and mitigate any impact of your company’s cost reduction initiative on their company.

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Reprinted with permission. © IDG Communications, Inc., 2020.  All rights reserved.

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