Contributed Article by Rich Razon, Head of Business Development at TeamQuest

Cost optimization can alter the future of your IT department, so make sure to take every possible planning precaution before implementing a new strategy.

IT cost optimization is all about tuning IT to the greatest possible benefit of the business. Though many tend to confuse the two, it's a completely different concept that cost reduction: because the goal is maximizing business value, cost optimization can actually increase business costs along with overall revenue. Whatever the specifics of your optimization plan, it should begin with a three-step process that will ensure everything is in place before implementing it.

Get Organized

Your first step towards cost optimization is assembling the right team. You'll need management from outside the IT department to support your capable group of experts. The team doesn't necessarily need to include many full-time team members, but the team leader should be full-time.

Management support is essential. If you are CIO, make sure that your CEO and CFO are onboard with cost optimization. If your position is below CIO, it is even more critical that you have the CIO's backing before you take the reins on what could be a major initiative.

Education matters. Upper-level management needs to know that cost optimization is not the same as cost reduction, especially if you've been instructed by your boss to cut costs. Focus on the three goals of cost optimization: minimizing risk, driving business value, and reducing wasteful spending. Keep your mind open to initiatives that may increase IT costs in the short-term, but create efficiencies that will reduce costs over the course of a few years.

The Four Types of People You'll Need

1. Finance

It should go without saying that you will need people who understand money, have access to important statistics and figures, and who can help you gauge the impact of your strategies on the business. It's not just an understanding of current financials that you are looking for -- you'll want someone with analytic forecasting skills as well.

2. Legal

Many cost optimization plans require a reshuffling of licenses and service contracts. You're going to need team members who have access to and understand your organization's agreements. It's good to involve them in the earliest phases of your planning, because certain elements of your strategy may be turn out to be impossible due to legal obligations or unexpected costs.

3. Business

You need to understand your organization's business goals before you embark on a cost optimization strategy. Involving non-IT planners from across your company will ensure that you're on the same page when it comes time to set requirements for the future.

4. IT

It goes without saying that you'll need IT employees on board, but the cross-silo effects of most cost optimizations plans means that you'll want people who are experts in every facet of IT specifics. They'll be able to tell you the specifics of your company's infrastructure.

Establish Baseline Measurements

Now that you've assembled a team, it's time to measure and scrutinize the baseline state of your organization's finances and productivity. Good measurement is the foundation of an effective cost optimization effort: which areas are ripe for big changes, and which are already at or near optimal efficiency?

Expect to rely heavily on down-in-the-trenches team members who can locate and access all your IT operations metrics, as well as business value metrics. This will help you plan for the risk-minimizing portion of cost optimization, by showing you the haziest parts of your company's future.

Once you've located your data sources, you'll need tools for pulling and analyzing the data in a way that lets you predict the benefits of different cost optimization strategies. One extremely useful tool for this goal is a Business Value Dashboard. As the name implies, a BVD can sift through and analyze data to provide information regarding the costs and benefits of different IT strategies before you put them into practice.

Below is an example of a high-level Business Value Dashboard report providing information on IT costs and the revenue being generated by the business units incurring those IT costs.

 

Reports like these and the drill-down details beneath them can form the basis for the formulation of cost optimization strategies, as well as the baseline against which you can measure progress.

Start Strategizing

Once you've armed yourself with data, your team is ready to brainstorm for changes that will move you towards the three goals of cost optimization. Remember, you want to minimize cost, minimize risk, and maximize business value.  Next, determine the relative difficulty of each idea versus its potential payoff.

Payoff, of course, will be measured in monetary units with a limited time horizon. It makes sense to formalize your difficulty/risk metric using monetary units and probabilities. Your team member with finance skills will come in handy here. You'll also need to make some subjective judgments regarding risk. Some factors to consider:

• Project complexity: Projects that are complex from a technical, process, or organizational point of view should be considered riskier and more likely to fail. At the same time, they could offer potential for greater rewards.

• Management support: For a variety of reasons, many of them political in nature, some projects will be more likely than others to gain the support needed to implement them. Consider your degree of confidence that your business case for an idea will override a manager's personal commitment to a project. This is a great juncture to consult with executives outside of IT and see where their priorities lie.

• Money: If there is no money available, it may not matter that you can show that an investment in IT will generate revenue. It can be hard to drum up support for new projects when there's a shortage of resources, even if those new projects will save more money in the long term.
  

Use caution when setting your time horizon for payoff. Although long-term projects can offer the biggest rewards, risk grows as you get further away from the present and unknown variables pile up. As we know, conditions in the IT world tend to change rapidly.

At the same time, you don't want to focus exclusively on the short term, particularly when it comes to spending cuts. These can hamstring your efforts to get more efficient moving forward. Like with every stage of cost optimization, balance is key.

Now that you've laid the groundwork, your implementation can begin in earnest. Remember, the steps you take at the beginning will shape every step of the cost optimization plan, including its eventual results -- successful or not.

About the Author

Rich Razon is Head of Business Development at TeamQuest, an enterprise software company focused on IT Service Optimization. Rich has over thirty years of experience in IT Service Management and has overseen the deployment of transformative IT metrics solutions in some of the largest and most complex IT organizations in the world. Prior to TeamQuest, Rich co-founded PureShare, a company focused on real-time and business-value metrics for IT.