Five areas of focus for IT cost optimization

With digital technology as a top priority amid today’s rapid change, CIOs must address various organizational issues to optimize costs.

In brief

• CIOs face ongoing pressure to cut costs while positioning their organizations for growth.
• Optimizing IT spend requires leaders to address a broad spectrum of issues, including workforce management and vendor relationships.

As we continue to adapt during uncertain times, organizations need to be significantly disciplined in terms of spending. However, they must also prepare for their next wave of growth as they strive to operate from a position of strength. To stay ahead of the curve, organizations have to rethink how they manage technology spend and truly reshape their IT cost structure and future operating model.

According to a recent forecast, worldwide IT spending is projected to total $4.5 trillion in 2023, an increase of 2.4% from 2022.1 Accounting for anticipated inflation in 2023, this isn’t necessarily an overall increase in spending. Digital technology initiatives remain a top strategic business priority for corporations and their chief information officers (CIOs) as they continue to reinvent the future of work. They are now focusing their spending on fortifying their infrastructure and accommodating for increasingly complex employee hybrid work arrangements. To accommodate this, other technology areas will need to free up capital and resources.

Key CIO challenges

To successfully optimize their technology footprint, CIOs should ensure that IT leaders understand the following key challenges and considerations.

• Organizational buy-in: IT leaders must gain buy-in from business units within the organization so that they can help identify cost opportunities while also understanding the value that IT cost optimization can provide. Financial transparency, for example, can help with this by enabling a baseline understanding of key cost drivers, which includes shadow IT drivers.
• Keeping up with the rate of change: Organizations are always facing change, whether it is new tools, technologies, market constraints or major events such as mergers or acquisitions. Therefore, they have to a) invest and remain bold in defined areas and b) retain their ability to pivot and redirect investments and resources at any time.
• IT financial management leading practices: Time and/or effort is needed to develop sound IT financial management practices that protect the organization against bad decisions or tight situations. These practices can include baselining costs, developing end-to-end business cases, harvesting benefits and continuously looking for ways to optimize returns.
• Cost optimization as a mindset, not just another activity: Successful cost optimization requires a shift in mindset. Organizations should shift their focus to thinking of cost optimization as an ongoing activity rather than a onetime practice.

Decisions around cost optimization aren’t always about cost reduction. The key challenge is to maximize business outcomes delivered from IT spend.

Drawing on the latest EY industry experience and a series of interviews with subject-matter professionals and industry leaders, below are the five key areas CIOs need to address to optimize IT costs and maximize returns.

1. Project and Investments

As organizations look to reduce their IT spend, business units must justify the need for certain expenditures. The Project and Investments area is necessary but requires a dynamic planning and funding model, full transparency and accelerated delivery.

For years, IT leaders have implemented systems to track projects and portfolio throughout their organizations. However, they still struggle with capturing business value and making accelerated decisions; keeping project data accurately updated; getting visibility on resource and contractual commitments, dependencies and progress; and continuously reviewing and stopping projects that are not delivering value.

Maximizing returns and optimizing costs in the Project and Investments area can be improved significantly with the following:

2. Partner Ecosystem

Another key area of focus for organizations looking to reduce or get more out of their IT spend is the optimization of the supply of equipment, resources and services through IT vendor management and contract renegotiations. In an economy where supply chains are more and more dependent on third parties, organizations are challenged by a reliance on vendor resources for support and technical expertise in key areas, resulting in a limited ability to effectively manage technology spend.

Optimizing vendor relationships is a key step in reducing IT spend and execution risk across the organization. Focusing on vendor selection helps organizations find the vendor that will yield the highest value while also ensuring that all key requirements are met for a given initiative. Additionally, revisiting existing vendor relationships to renegotiate contracts can lead to the best value.

However, organizations need to go beyond the transactional aspects often associated with the vendor management function. They need to evolve from just managing and procuring vendors to developing a strong relationship with fewer partners for long-term value creation. A well-balanced partnering strategy can not only maximize outcome, but it can also reduce execution risks. The keys for success, however, are to select the right partners, communicate demand promptly and implement the proper operating model with joint incentives and rewards mechanisms.

Getting the most out of the partner ecosystem requires the following:

3. IT Processes and Ways of Working

To reduce costs and work more efficiently, organizations are transforming their IT processes to improve alignment between IT teams and business units. Poor collaboration between these two groups can hamper an organization’s ability to achieve its digital goals. To combat this, organizations are increasingly leveraging Agile and DevOps approaches to accomplish their objectives in a timely manner.

A strategic way CIOs can improve the IT Processes and Ways of Working area is to further automate delivery opportunities in their organization. CIOs are turning to automation to address their project backlog and increase the speed of IT delivery to production through implementation of a clear path to production, rollbacks, code scanning and other actions.

IT executives can significantly improve the efficiency of the IT processes and transform their ways of working for increased output by leveraging the following:

4. Technology Ecosystem

As an organization’s technology ecosystem continues to grow, legacy technology is not properly retired, which increases the complexity and maintenance overhead, thus hindering security and scalability. IT leaders should look to be more effective and efficient with costs while dealing with an ever-expanding technology ecosystem. Ideally, there should be a balance between optimizing and adding to existing functionality instead of continuously augmenting it.

With 83% of IT resources and investments focused on operating and maintaining older systems, rationalizing the existing technical stack to reduce spend should be part of the CIO’s playbook.

Over the years, environments have become more and more complex. Rationalization will require a systematic approach and some investment too. But it starts with the systematic management of technical debt and a solid, detailed inventory across the IT footprint to assess business value, risk and total cost of ownership. This enables leaders to identify opportunities and reprioritize resources.

CIOs can optimize the costs of their technology ecosystem through the following:

Conclusion

The CIO must work with their business stakeholders to reduce costs swiftly and thoughtfully as they analyze each focus area while positioning the organization to drive new growth and innovation. The CIO along with enterprise leadership will have to balance the challenge of cost-reduction measures with the potential value to the business of reinvested savings. The right balance is key to positioning the business to succeed in the changing technology landscape. It cannot be achieved by the CIO alone but in partnership with the business. And it is not a one-and-done affair but requires continuous focus. Even if the practice was done a few years back, it deserves a new level of attention or scrutiny given the change of circumstances, needs and capabilities. It may seem repetitive, but it’s a very healthy discipline.