How to realize quick ICT cost reductions - and keep business intact?

Tero Lindholm

29.4.2020

A sudden market slowdown has hit a manufacturing company. The impact to the company's cash flow is dramatic. The CEO must react to the new situation and ICT is included in the corrective action plan. In this new situation, the last agreed strategy is no longer relevant. However, a few, carefully selected business priorities should survive this major event. From an operational perspective, business continuity must be ensured, and ICT intensive services now play an even more important role when serving customers, receiving customer orders, delivering goods and services and managing the critical cash flow. How can the CIO and ICT leaders react to the new situation quickly and improve their part of the cash flow? The CIO must reduce costs by 15% in 12 weeks. At the same time, business must continue without technical interruptions and critical, future proof development program cannot be sacrificed. In order to implement reductions, the current ICT leaders must stay committed to any required quick changes. After the first discussion with her team, the CIO realized that no internal resources were available for quick portfolio wide cost reduction analysis. The current understanding on ICT costs is not detailed enough to identify needed cost savings. If the cost impact were known, many technical dependencies will still complicate cost reduction implementation. ICT cost management is a complex area. The company's financial systems can't maintain all of the ICT cost drivers that are needed to manage ICT capabilities. The CIO would need special financial rules and tools to manage the cost base in practice and have experienced ICT controllers available for the work. Maintaining visibility to the current cost base is not enough. Practical cost reduction actions must be identified and implemented.

Business need levels must be matched with the new business situation

My advice to the CFO and CIO is to follow the money from a business need and criticality perspective. This involves walking through each item in the development portfolios and repeating the process for the existing ICT services. This allows the CIO to maintain the dialogue with the ICT stakeholders and will facilitate decisions being made from a business perspective in the same governance structure that is used in normal situations. Reaching agreement on the business need perspective is one of the first important decisions that must be made. It is important for the CIO to negotiate new business need levels for ICT, matching the new business situation. This business demand drives ICT costs. Related business decisions include, for example, which development projects will continue, identifying the overlapping ICT services that continue and those that are stopped, how many users with strong access rights are allowed in software platforms, like business analytics and CRM and what are incident response times for critical and non-critical ICT services. Customer and company needs also drive deep ICT infrastructure costs. For example, back-up and recovery costs are driven by the agreed business recovery times. Therefore, the levelling of business needs directly impacts ICT costs. A high demand results in a high ICT cost base. The CIO can directly reduce some ICT costs. These actions include, for example, detailed reviews of ICT infrastructure services to identify waste. ICT experts may find unused network connections, spare computing capacity and too frequent upgrades of end user tools. Higher risk appetite and lowered service levels may trigger quick cost reduction opportunities. Following this approach, I would advise the CEO, CFO and CIO not to structure quick reductions around the typically visible ICT costs, like software, data, hardware, external consultants and their own employees. These are building blocks of all ICT actions. However, they are hard to use for business prioritization. This view is useful in itemized cost analysis, simplified benchmarking and for financial bookkeeping purposes. Quick ICT cost reductions can be further accelerated. When combining independent, experienced ICT experts and a cost reduction focused toolset, speed and coverage of ICT cost reduction can be greatly improved. It is also possible to include new modern and quick technical opportunities into the implementation. With this in mind, the CIO can immediately start cost reduction actions.