The rise of digital transformation and the increased popularity of cloud computing helps companies deliver unique services to customers online and leads many organizations to consider themselves as technology companies. And technology budgets are rising commensurate to this new reality. IT spending is expected to increase to $4.6 trillion in 2023, an increase of 5.5% from 2022.
CEOs and CFOs are willing to invest in IT services and technology because they understand and appreciate their importance in building a modern business and delivering exceptional products and customer services. But they are also focusing on cost allocation and expecting greater cost discipline from their CIOs and IT teams, leading CIOs to face increasing pressure to justify their expenditures and keep track of spending.
The best way to accomplish this is through IT cost management, the process by which CIOs and IT departments project and control costs related to their organization’s technology spend.
IT cost management has grown in importance because cost control is top of mind for every organization across all industries. Simply put, IT leaders cannot afford increased project costs that lead to budget overruns.
There are several ways an organization’s IT department can inefficiently manage costs. They could build a state-of-the-art, on-premises data center, only to subsequently find out their costs would be halved if they ran everything on the cloud. Or they could migrate all of their data to one cloud provider and find out that there were long stretches of time where they were only using a fraction of their cloud footprint, yet were paying for the entire thing. Or they could license expensive project management software, only to find a fraction of employees were using it.
IT cost management is not just a function of cutting costs, it also entails making smarter decisions that can increase revenue and, ultimately, profitability. CIOs are increasingly given more business-related responsibility as executives and other stakeholders come to realize that technology is the next competitive battlefield.
CIOs can prioritize investments in specific areas that will drive incremental revenues. For example, moving to a modern customer relationship management (CRM) platform from spreadsheets and/or decentralized records may incur an initial cost, but it can increase efficiency and drive sales.
Ultimately, organizations are pushing for financial management across the organization, and IT departments would be wise to push for discipline and transparency within their operations to remain in lockstep with the rest of the organization.
How organizations should approach IT cost management
Organizations must have a clear, defined approach to IT cost management to ensure they can achieve their goals efficiently and ultimately produce the requisite cost savings:
- Start with a comprehensive cost analysis: IT departments must first benchmark for existing expenditures so they know how efficient or inefficient their current processes are, calculate how much unnecessary spend exists, and identify areas where they can cut costs or make other adjustments to improve the standing of their IT department.
- Establish clear objectives: CIOs have metrics to analyze their approach, just like every other business unit. IT cost management requires organizations to set clear goals and track their successes to ensure they are delivering upon their promises to executives.
- Accurately forecast their spend: CIOs can no longer survive letting their initiatives blow by budgets. They expect IT budget forecasts to contain actual costs with realistic delivery timelines and a good understanding of how the completed project will impact the business. Any modern IT cost management approach must include accurate cost estimation and detailed project budgets that account for any potential variances.
- Identify total costs of ownership (TCO): Every IT technology requires a cost analysis that provides a clear picture of how much their technology costs, analyzing IT operating costs, capital expenditures, migration, server upgrades, maintenance and other considerations.
- Train or reskill the staff: There is an indirect cost for IT services—whether or not an organization’s employees are using the technology it builds or licenses. Organizations should invest in helping employees maximize the value of that technology; otherwise, it will end up unused and become a component of the organization’s overall tech debt.
- Change the organizational culture: Successful IT operations are a collaboration between people and technology. Organizations that pursue IT cost management with intent must also upskill employees and influence the culture to focus on cost savings and driving efficiency. Organizations should encourage employees to identify software that is underutilized or not used at all, help devise ways to cut costs or boost efficiency, and think about ways to remove or avoid tech debt before it becomes too burdensome.
Six ways IT can create cost savings
Cost optimization is top of mind for any organization. IT cost management is not merely a function of cutting existing services but also maximizing their value. The right strategy and investment can increase revenues or, at a minimum, retain customers.
1. Cloud optimization
Cloud spend has risen approximately 20%-30% per year due to several factors, including delivering cloud migrations over budget or cloud transformations failing to drive the anticipated cost savings.
Cloud costs are rising for several reasons, including paying for unused capacity, lacking visibility into their spending or paying for additional storage for nonessential data. In general, organizations that move to the cloud and then “set it and forget it” are likely overspending. Cloud cost management is critical for any IT cost management program because cloud usage is bound to rise to the use of artificial intelligence (AI), especially generative AI, which McKinsey estimates could provide an increase of $2.6 trillion to $4.4 trillion in value annually. Cloud costs associated with generative AI will rise with usage, beyond whatever it will cost to license models and have humans manage or curate the results.
An increasing number of IT services can now be fully automated, including server provisioning and configuration, infrastructure management and software updating. Automation minimizes the need for human workers to complete manual tasks, freeing them up to focus on higher-priority tasks and strategies.
3. Server and desktop virtualization
Virtualization involves dividing the resources from a single computer (e.g., processors, memory and storage) into several virtual machines (VMs). Virtualization saves money by providing more efficient resource usage. Before virtualization, each application server had its own corresponding CPU, which would ultimately lead to several servers not running at capacity. Virtualization enables organizations to match applications with their own virtual machine and operating system on one physical computer.
4. Software licensing assessment
The rise of the software-as-a-service (SaaS) market means organizations can increasingly license technology from third-party providers to decrease their internal IT services costs. However, organizations potentially build up unnecessary or unused subscriptions over time, sometimes paying for a service they no longer use. Any comprehensive IT cost management strategy includes IT professionals consistently reassessing licenses to ensure organizations are only paying for solutions that they use and that produce value above their cost.
5. IT lifecycle and asset management
Increasing the lifecycle of software and other IT services maximizes the time the organization can use those services. Organizations need real-time visibility into their services and should consistently assess every part of their IT systems to understand every component of their infrastructure, how its performing and when it needs maintenance or replacement.
6. Upgrade to new technology
Purchasing or licensing new technology can help a company save money—as paradoxical as it may initially seem. Old technology often incurs technical debt, which is creating expenses that will take a toll in the future by making suboptimal decisions today. Examples of technical debt include engineering with hard-coded values, a temporary patch instead of fixing the root cause or selecting a less expensive platform that does not provide all necessary services. They all will create additional maintenance costs eventually, even if those costs are deferred today.
Investing in new technology, while incurring an immediate cost, can help an organization achieve greater efficiency, more readily create new customer solutions and avoid costly security breaches, thereby increasing revenues and cutting costs in the long run.
CIOs must manage costs while driving value
CIOs’ roles are increasing in importance within organizations, and they are expected to have a positive influence on the bottom line. Therefore, IT cost management needs to be a pivotal component of their remit so they have a handle on exactly how IT is increasing revenues while keeping costs at bay. CIOs that proactively and systematically track, analyze and communicate the financial health of their departments will be treated as valuable and equal partners in the C-suite and positively influence their organization, which undoubtedly depends more on technology than ever before in its history.