11 ways to reduce your IT costs now

IT leaders have always needed to exercise fiscal responsibility while meeting business demands for technology. But as digital transformation efforts have intensified in recent years, CIOs have had fewer opportunities to pause and reevaluate IT’s financial situation.

“Some organizations have been innovating, transforming, and growing so fast that they haven’t had time to clear up older cost structures that start getting in the way,” says Stewart Buchanan, research vice president on Gartner’s CIO team. “The net result is that some organizations’ technology debts are growing faster than anything else and robbing them of their budgets and ability to innovate.”

Today’s CIO is not just a technology leader, but a business executive. “That means taking a long hard look at costs and ensuring their spend is focused on the future and not just maintaining the past,” says Jay Upchurch, EVP and CIO at SAS.

The need to reorient IT’s budget toward future opportunities is one big reason CIOs are reviewing their IT portfolios now. But it’s not the only one. Economic uncertainty, increased competition, sustainability concerns, shareholder expectations, and regulatory challenges are also top of mind.

“While it’s critical to control costs continuously, it becomes even more imperative during times of economic pressure,” says Jon Pratt, CIO at security managed services provider 11:11 Systems. “Keeping a tight rein on the budget allows the company to have flexibility in making strategic decisions when needed for a new platform, project, or taking on growth.”

Even as they recognize digital transformation as the primary driver of business growth, many CEOs expect IT to do it all while keeping budgets flat. And with capital scarce, “the easiest way to find dollars that can be invested is to find costs that can be reduced,” says Marc Tanowitz, a managing partner at West Monroe. “Each dollar of operational cost reduction drips directly to the bottom line.”

Following are some actions IT leaders can take now to secure those funds for the future.

1. Check in on those cloud costs

“Highly scalable technology combined with increasing use and increasing costs leads to runaway spending,” says Mark Troller, CIO at telecom expense management company Tangoe, which estimates that its clients overspend on cloud by as much as 40%.

West Monroe’s Tanowitz agrees, saying, “There’s cloud spend where immature governance approaches have resulted in excess consumption that can be reduced when a holistic cloud architecture approach is taken.”

In addition to cloud consumption, there may be drivers at play. “Hyperscalers are raising their prices to recoup their investments in cloud and now genAI,” says Anil Cheriyan, former CIO and founder of Phase IV Ventures, who believes IT leaders need to ask some hard questions about their cloud costs, including whether certain past cloud choices are now more expensive than on-premises options, as well as what value they are delivering relative to that cost.

Companies taking a multicloud approach can experience ballooning OpEx numbers, says Barrett Schrader, managing director of the technology consulting group at Protiviti: “Organizations can take advantage of volume discounts with reduced complexity. In addition, this leads to simplified management and governance that can further reduce IT costs.”

FinOps is gaining popularity as a framework for maximizing cloud investments, adds Upchurch of SAS. “FinOps practices provide a significant cost reduction benefit by eliminating unnecessary cloud usage, streamlining needed services, and adopting cloud-native services when appropriate — for example, reserved instances, workload smart parking, and spot market pricing,” he says.

2. Revisit the project portfolio

Strong demand management is essential for sustainable IT cost optimization, says Anja Allen, principal in EY Americas’ technology consulting practice. Ensuring all IT spend is directly tied to business demand acts as an automatic cost optimizer.

CIOs should also periodically review projects in play to reprioritize them based on anticipated ROI and feasibility, says 11:11’s Pratt. “Evaluating if the project will allow the company to increase revenues or replace an aging system that will ultimately save costs over time is a necessary exercise in eliminating projects that don’t move the needle,” he says. “A leader also needs to factor in the probability of success of implementation. Money well spent only counts when the project can be executed to completion.”

Zero-based budgeting can be a good approach for discretionary spending. “While justifying technology expenditure can be tricky, IT leaders can discover what’s really critical by investigating their discretionary spending during budgeting and planning cycles so that they only include areas of breakthrough value creation and don’t assume or go by historical context alone,” says Nitish Mittal, partner at Everest Group.

3. Realign support levels

Support costs are another area where IT leaders can recoup funding, paying only for what’s required to meet necessary service levels for the business.

“With storage you might always want the best support plan to replace any failed components within a few hours or less,” says Pratt. “But looking at less critical network infrastructure or compute where there is adequate redundancy, a leader can opt for a more conservative support plan that costs less.”

4. Consider consumption-based contracts

One of the best ways to align IT costs with value-generating outcomes is with consumption-based pricing, although it may seem like a higher-cost option.

“Consumption-based contracts are self-optimizing,” says Gartner’s Buchanan. “Variable costs may be a little higher per unit than fixed costs, but they cost less in total if your business needs to use them less.”

5. Rethink sourcing decisions

It’s always worthwhile to revisit agreements with outsourcers and other third-party service providers, which are often among IT’s biggest expenses.

“Contractors and vendors should be treated like your car insurance,” says Pratt. “When it is renewal time, make sure to scrutinize and shop around.”

When it comes to contingent labor in particular, CIOs are often paying above-market rates or engaging with a more expensive class of contractor than necessary, says West Monroe’s Tanowitz, whose analysis has revealed opportunities to save between 6% and 30%.

Several methods can help IT leaders scour for value leakage in IT services deals. EY Americas’ Allen suggests performing vendor tail spend analysis, to identify unnecessary proliferation of providers; vendor spend Pareto analysis, to identify opportunities to consolidate vendors; benchmarking, to realign pricing with market conditions; and market skill set analysis, to identify what skills might be purchased at lower rates. Allen has seen IT leaders shave between 15% and 30% off their IT services spend using these techniques.

IT leaders may also find that some work can be insourced more cheaply. Jonas Hansson, CIO at Axis Communications, is a proponent of internal sourcing. “Outsourcing is always much more expensive and less flexible unless you can predict the future and are a very good procurer,” he says. “The best way to reduce costs over the long term is to cultivate internal skills and experience.”

6. Implement agile sourcing

Even the process of sourcing and making procurement decisions can end up costing IT organizations more than they bargained for. Some progressive IT leaders are adopting an agile approach to sourcing, breaking down the process into shorter, iterative chunksto mitigate cost overruns, delays, and misaligned outcomes.

In addition, engaging finance and procurement stakeholders earlier can help streamline the decision-making process, says Everest Group’s Mittal. “It also helps in cross-pollinating ideas to make the technology selection process more efficient in terms of negotiations, market best practices, and what other functions are doing in the organization,” he adds.

7. Take out the tech trash

Now is the time for CIOs to settle their technology debts to reduce costs and invest in new ways to generate value, Gartner’s Buchanan says.

“Extended support is an expensive way to pay for a lower level of service and security,” he says, adding, “Organizations can only safely spend less if they reduce their cost base by restructuring it. That means means taking out the trash, deprioritizing technologies that are past their use-by date and replacing them before they’re no longer safe, secure, and fit for purpose.”

CIOs can be reluctant to revisit spending decisions made decades ago, and business leaders are often in denial because there’s no easy ROI to writing it off. But one way to approach this is to put “a big scary number” on the technology debt and take that to the board, Buchanan says.

8. Audit all contracts

IT organizations almost always pay for more than the business actually needs for hardware, software, and networking. “Periodic checks on your IT spending can unearth hidden costs you might not be aware of, from unused software licenses to redundant services. These ‘small’ expenditures can add up to a significant sum,” says Vineet Arora, CTO at IT services firm WinWire.

Network spending is one of the most common areas of overspending as companies continue to pay for circuits no longer in use, says West Monroe’s Tanowitz.

Billing errors, overprovisioning of licenses, and changes in capacity are other things to look for. “Oftentimes, IT expenses become almost a routine spend and [there’s less] scrutiny over time,” says Joe McMorris, CIO and CISO at  Planview. “IT leaders must be open-minded and take a fresh look at all areas of the business.”

9. Rationalize applications

When it comes to software, it’s not just licenses or seats that need to be rationalized, but the applications themselves. Companies have seen a 71% increase in the number of applications they’re using over the past year, according to a Freshworks survey of IT professionals. “IT teams can’t go much longer without relentlessly cutting what isn’t driving efficiency,” says Freshworks CIO Prasad Ramakrishnan.

“CIOs must systematically review their tech stack with insight from frontline workers,” says Erik Bailey, CIO of IP management software maker Anaqua, who regularly assesses the company’s software stack, looking at integrations, security, and usage. “A major cost-cutting measure we’re undergoing is evaluating and consolidating vendors. We’re aiming to standardize on a smaller set of tools to ultimately reach cost neutrality but greatly improve operational efficiency, productivity, and employee workloads.”

10. Wring more value from existing technology

“I constantly pursue more value out of the spend we have,” Upchurch says, adding that SAS has made investments in core enterprise systems and his goal is to avoid buying overlapping or competing systems to maintain an efficient technology portfolio. “That means making internal customers justify why existing IT spend on solutions won’t meet their business needs,” he says.

Also important is continually educating employees about the tools available to them and offering training on the full range of their capabilities, says Anthony Walsh, senior director of global IT services at Onestream Software. “Most users are only aware of a fraction of the technology at their disposal, and they might mistakenly think they need access or budget for a new tool when they already have those capabilities.”

11. Automate IT

There are more opportunities to automate aspects of IT’s workload than ever before.

“Investigating ways to implement IT process automation can lead to reduction of labor costs and improved efficiency,” says Protiviti’s Schrader. Commonly automated tasks include system monitoring, patch management, and backups.

Keep cost-cutting in perspective

Whatever steps IT leaders take to reexamine costs, they must maintain a long-term perspective.

“Making decisions for the short term can put the business at risk with technical debt later that could be more costly and labor-intensive to overcome,” says 11:11’s Pratt. “A good leader will find the necessary balance between being conservative and positioning the IT organization to grow and enhance the business.”

Smart IT leaders will also understand that optimizing the IT budget while continuing to support and enable technology-driven business growth requires more than just fiscal prudence. IT cannot afford to be viewed as a cost center, Everest Group’s Mittal says. Thus, IT leaders need to continually make the business case for technology.

As Gartner’s Buchanan says, “The challenge isn’t cost management, but realizing value from cost.”