Cost Optimization Means Spending on the Right Things

contributed by Neil Suri, Gartner for Midsize Enterprises

Too often, CIOs at midsize enterprises (MSEs) tackle cost optimization by cutting costs or creatively shifting IT spend. While these tactics indeed reduce short-term IT costs, they fall short of creating long-term business value. Delaying projects, restructuring contracts, and hiring freezes only go so far. In addition, technology spending should be forward-looking instead of purely reactionary.

At the median, IT spend at MSEs represents 3.5% of total business revenue (see Figure 1). Rather than solely focusing on optimizing those costs, progressive CIOs rethink how technology investments can influence the other 96.5% of spending. CIOs that approach conversations about cost optimization from a strategic investment perspective are better equipped to balance critical business priorities while driving long-term cost savings. Demonstrating the value of IT to a non-IT audience is also a lot easier when your department has the potential to transform business outcomes. 

Figure 1: IT Spend as a Percentage of Revenue at Midsize Enterprises (MSE)

Source: 2018 IT Budget Benchmark, Gartner IT Leadership Council for Midsize Enterprises

Moving from tactical cost-cutting to strategic technology investments, however, requires a change in perspective. Where should MSE CIOs drive down current costs by investing in future value?

• Invest in products, not projects. Linking IT spend to individual technologies or operational improvements leads to a disjointed accrual of value. Instead, CIOs should allocate resources from the top by aligning to product lines or business capabilities. Structuring IT investments around a tangible product or service is necessary to enable digital growth. Because project priorities can shift overnight, product-based funding creates flexibility as investment is continuously directed towards the most important product lines. Review this infographic to see how to adapt IT funding to support products over projects. 
• Explore digital opportunities. When IT opts for short-term patches to legacy applications and infrastructure, they get bogged down by technical debt. In contrast, sophisticated digital solutions maximize value because they can be scaled, exported, and re-used. Rolling out strategic digital technology can even create new streams of revenue when the use case is clearly defined. See how Service King seized an opportunity to fix a broken system with a new, revenue-generating digital product.

IT cost optimization isn’t only about cutting costs or identifying new sources of efficiency. It is also about strategic investments oriented around business objectives. MSEs that embrace flexible, value-based cost optimization techniques can persuade business partners where to save and where to spend. Access additional midsize enterprise guidance on Gartner.com or tap into our community of Midsize Enterprise Executive Partners to rethink cost optimization for your organization.  Can’t access links?  Talk to us about becoming a client.