Create A Cost Optimization Strategy For The Digital Business Economy

Create A Cost Optimization Strategy For The Digital Business Economy

September 2016

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By Barbara Gomolski
Gartner, Inc.

With the economy slowing down in some sectors and geographies, CIOs may hear some form of the question, “What’s your cost optimization strategy?”

How should they respond?

As concerns grow that the current slowdown could spread further, CIOs are feeling pressure to cut costs. But let’s face it: IT departments are already running incredibly lean, particularly since the Great Recession (which began in 2007). In response to that relatively recent global crisis, CIOs squeezed out excess IT capacity to make their organizations vastly more efficient. Gartner surveys show that the average change in CIOs’ year-over-year budgets for the five-year periods leading up to 2008 and 2016 were 2% and 0.004%, respectively.

Simply cutting IT costs isn’t the answer. Moreover, IT costs represent only a small fraction — 4% — of business costs.

Cost optimization in the age of digital business

Let’s look at what cost optimization means today, in the age of digital business. Take, for example, one of the world’s largest insurers. One of its major initiatives in the works is modernizing legacy reporting systems to automate business processes. On the innovation front, the company has also invested in an Internet of Things (IoT) accelerator program, and has developed an array of mobile apps designed to improve customer experience, business partner relationships and employee productivity.

In the digital business economy, cost optimization is about using a mix of IT and business cost optimization to boost business performance while preparing for the future that digital disruption constantly reinvents.

Even in an economic downturn, simply cutting the IT budget and putting a freeze on digital investments isn’t a viable option for organizations that want to stay competitive. That approach limits the ability to create revenue-generating opportunities when they are needed most.

The three-pronged approach to cost optimization

Remember when IT and business initiatives existed in siloes? Those days are long gone. Information and technology are embedded in most companies’ product and service portfolios — meaning that they are now joint IT-business endeavors. The CIO’s cost optimization strategy should be holistic, focusing on three different types of activities:

  1. IT cost optimization: Reduce IT costs while maximizing business value
  2. Business cost optimization: Use IT to digitalize and optimize business processes
  3. Digital business: Prepare for a digital future by digitalizing physical assets, data and business processes

In some organizations, reducing IT costs will mean exploring more-radical cost-cutting measures, such as moving off Tier 1 systems, retiring (rather than replacing) systems and sourcing support of key systems to third parties.

CIOs also need to be proactive about helping the rest of the organization reduce costs. Business operations and non-differentiating activities are good starting points. Also consider how IT capabilities, such as bimodal, can be applied in other parts of the organization to help them operate more efficiently.

The CIO as digital business advisor

The global insurer is a great example of how different types of activities can contribute to CIOs’ cost optimization objectives. Ultimately, using more information technology in a smarter way, rather than simply focusing on ways to trim the budget, will be your best strategy to help the business run more efficiently.

Unlike the global insurer, many organizations are behind the curve in terms of funding digital business. The economic slowdown further threatens organizations’ ability to make these investments.

The good news is that business needs technology more than ever. Technology isn’t about just keeping the operational lights on anymore — it’s often about staking out new ways to generate revenue by attracting and keeping customers. To grow and transform — in sum, to remain competitive — the business needs to have a digital optimization strategy. This is a value proposition that gets the attention of CEOs and boards of directors.

This is an opportunity for CIOs to adopt the role of technology advisors and counselors to CEOs and boards of directors. It also gives them a framework to answer the question, “What’s your cost optimization strategy?”

Barbara Gomolski is a managing vice president within research at Gartner. 

 

This article was written by Gartner Inc. from Forbes and was legally licensed through the NewsCred publisher network.

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