How CFOs Can Tackle the Cost Optimization Equation

CFOs must lead the charge to create a digital optimization strategy rather than simply focusing on ways to trim the budget.

Organizations worldwide are behind the curve when it comes to funding digital business. Yet, their CFOs are under pressure to make significant IT investments for improving digital capabilities at a time when achieving enterprise growth is a challenge. Reconciling the need to invest in digital capabilities without disrupting growth requires a new approach to cost optimization, as technology isn’t just about operational “run” costs anymore. Increasingly, information and digital technologies are the enablers of both efficiency and growth in a changing world.

Some of the greatest opportunities for cost optimization are outside IT, which represents only a small fraction of business costs

“Cost optimization is not a new topic for finance leaders. However, in the age of digital business, cost optimization takes on new dimensions,” says Barbara Gomolski, managing vice president at Gartner. “It means looking beyond IT and including business costs in the initiative. It also means that simply cutting the IT budget and waiting until the economic environment is more favorable to make digital investments is a flawed approach to remaining competitive.”

The cost-cutting cycle

Organizations that have felt the disruption of the digital age, or have been under severe economic pressure, cannot rely on cutting IT costs as a growth strategy. Instead, progressive CFOs should use a mix of IT and business cost optimization measures for more efficient performance while preparing for the digital future.

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Some of the greatest opportunities for cost optimization are outside IT, which represents only a small fraction of business costs — 4% on average, according to Gomolski. CFOs are often reluctant to seize the opportunities to use IT and digital technology to drive efficiency in the business because such initiatives bring cultural and political change. For example, when finance leaders try to shrink their IT footprints and lower costs, they soon realize business process standardization is required, which may fall outside their purview.

Incorporate IT and business costs

What’s more, reducing IT costs may require exploring radical cost-cutting measures, such as moving off Tier 1 IT systems, retiring — rather than replacing — legacy systems and turning to third parties for support of key systems. Such decisions are inherently more risky than traditional IT cost optimization techniques, such as consolidation and standardization of hardware platforms.

Develop a plan for cost optimization that incorporates IT and business costs

In addition to proactively exploiting both traditional and nontraditional cost optimization techniques, finance leaders — with the support of their IT executive counterparts — should take a leadership stance on helping the rest of the organization reduce costs and create value using information and digital technologies. To do so, CFOs should work with their peers to develop a plan for cost optimization that incorporates IT and business costs and prepare for digital business disruption and volatility.

Read more: Efficient Growth: The New Finance Mandate

Gartner for Finance clients can read more in Cost Optimization in the Age of Digital Business by Barbara Gomolski.