There are four discrete levels at which IT organisations can help to optimise business costs. Gartner recommends that IT and business leaders use a cost optimisation framework as a template when evaluating cost optimisation initiatives.
Gartner's Four Levels of Cost Optimisation framework includes two lower levels – IT procurement and cost savings within IT – focused on the reduction of cost within IT, while the two upper levels – joint business and IT cost savings, and enabling innovation and business restructuring – involve IT and the business teaming up to reduce operating costs.
"Whether it's due to an efficiency play, response to competitive action, meeting the needs of a powerful customer or dealing with an economic downturn, a sudden, renewed focus on IT costs can sometimes lead to ill-considered management responses," says Barbara Gomolski, managing vice-president at Gartner. "However, experienced IT leaders know that cost-cutting campaigns seldom leave the organisation positioned well for IT-innovation-enabled and new-value-creation-based expansion."
Where appropriate, each level of this framework explores cost optimisation issues by technology, domain, technology role, supporting facts and quantifications, estimates of savings and risk, and, in some instances, vertical industry. The broad definitions of the four discrete levels are given below (listed from lowest to highest):
* IT procurement – True partnerships with IT vendors mean that each party benefits in the good times and makes joint sacrifices in times of economic uncertainty. Each year, IT organisations spend billions of dollars for hardware, software, IT services and telecommunications services. The manner in which IT organisations approach procurement issues will affect how much they can reduce spending to meet business goals.
* Cost savings within IT – A priority for many IT organisations will be to identify opportunities to reduce baseline IT costs, not just move them to another budget centre. Where IT organisations focus is where they will be successful with cost savings.
* Joint business and IT cost savings – Consider that the average IT budget is roughly 3% of revenue, while total operating expenses are 80% to 90% of revenue. If the business is looking to reduce costs in 2009, IT managers should try to join IT with the business to reduce costs in business operating expenses.
* Enabling innovation and business restructuring – As economic uncertainty passes, cost optimisation will refocus on efforts to implement long-term process improvement and enable business structuring and innovation.
Gartner recommends that the framework is used as an organising structure in which to track cost optimisation programmes as well as communicating the impact of cost optimisation to the business. Mapping out cost optimisation efforts to the framework can help to determine whether an organisation's overall initiative is out of balance (all cuts coming from cost savings in IT, for example) or whether an organisation has mixed IT costs with an appropriate amount of optimisation techniques (such as innovation and business restructuring) that can prepare an organisation for a return to growth.
"As the immediate needs of the business change in relationship to the macroeconomic climate, more optimisation focus will be transferred to the higher levels of the framework, reflecting efforts to enable a return to growth," says Kurt Potter, research director at Gartner. "As organisations focus on the higher-level cost optimisation areas, they will recognise and communicate higher levels of business benefit aside from cost cutting."
Organisations should differentiate between cost optimisation and cost cutting. "IT cost savings often result from optimisation, but IT cost savings are not a given when optimising business processes," says Mark Raskino, vice-president and Gartner fellow. "In other words, optimising the business may require spending more on IT in order to meet the service-level expectations of business and IT in the future."
Arbitrary cost cutting often delays optimisation, because investments that would normally yield better results in the long term are delayed. These are the challenges that IT and business leaders are facing in the current period of economic uncertainty.
"Across-the-board cost cutting may be a reality for organisations that are fighting for survival but should always be accompanied by measured and intelligent planning for the future and discussion around the IT and business trade-offs," says Gomolski. "It is essential that IT leaders know their organisation's return-to-growth strategy and make certain that this strategy gets the funding and attention it needs in order to be ready when the time comes."