Insight

Why is IT Cost Optimization so important?

Published October 17, 2024

  • IT Strategy & CTO Advisory

Importance of Cost Transparency

Transparency is the foundation for sustainable cost and value optimization. It provides the data and insights to enable improved decision-making, manage costs, and demonstrate the value of IT to stakeholders.

Creating IT cost transparency typically involves moving from fragmented, ambiguous cost data to clear, accessible, and insightful data. ​This requires a clear and conscious effort to create insights, plus ongoing management & improvements.

 

The key activities needed: ​

  1. Identify Data Sources: This includes ERP systems, project management tools, spreadsheets, invoices, etc.
  2. Categorize & Allocate Data: Mapping out cost elements, adding data for insights, and allocating costs to specific services, components, and business consumers.
  3. Link Costs to Business Value: Mapping costs to specific business processes and outcomes.
  4. Continuous Improvement of Data Quality: Implementing governance structures and processes to ensure accuracy, relevance, and up-to-date cost data.
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  •  10-20%, it’s the improvement in cost efficiency in a year after adopting TBM practices.
  •  80% more likely to be able to align IT spend with Business priorities with IT Cost Transparency.
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Balancing Cost Optimization and Value Creation  

Cost optimization is more than relentlessly slashing budgets – it’s about taking a strategic, prioritized approach that focuses on achieving the best balance of service outcomes at the best cost for the business.​

 

We propose a two-pronged approach to cost optimization:

Identifying specific areas for optimization by scrutinising spend drivers, such as service duplication, excessive customization, or over-provisioning of service capacity and performance.

Five typical areas that help drive cost optimization opportunities in our clients:

  1. Optimize Demand: Rationalizing volumes, performance, features, capacities, and eliminating unused or underutilized services.
  2. Optimize Projects/Services: Validating and challenging the scope and performance levels of solutions, prioritizing portfolios based on business-aligned criteria, and reducing customization.
  3. Optimize Vendor Spend: Rationalizing, renegotiating, and testing contract value, consolidating vendors, and ensuring vendor accountability.
  4. Optimize Organization: Rationalizing the operating model, processes, sourcing boundaries, and location strategy, identifying automation opportunities, and challenging locations for best-shoring.
  5. Optimize Technology Estate: Identifying rationalization and re-engineering opportunities, migrating to standard solutions, and automating key IT processes.

Aligning IT with Business Goals

Shifting focus from purely reducing costs to driving value requires IT leaders to align their financial management strategies with broader business goals – whilst demonstrating that cost objectives are still met.  

This shift requires IT leaders to contribute directly to strategic business goals and demonstrate the value IT brings to the table beyond cost savings. A commercial mindset is needed within IT, where decisions are driven by value, cost-benefit analysis, and return on investment. 

By aligning IT with business goals and embracing a commercial mindset, IT leaders can position IT as a business enabler rather than a cost centre, fostering a more collaborative and value-driven relationship with the business.

  •  20%, higher profitability in companies that effectively align IT strategies with business goals.
  •  17%, more likely to be a top performing company in terms of revenue growth and profitability.

Technology Business Management (TBM)

Technology Business Management (TBM) is a framework that helps organizations manage the cost, quality and value of IT services. ​

By emphasizing cost transparency, accountability, and the use of data to make informed decisions, TBM helps businesses gain full insight into their IT costs, drive efficiency, and ensure that every IT expenditure is optimized for value. ​

But where does this start? We suggest by understanding core principles of TBM and understanding how these can support your organization. ​ The core principles of TBM are Cost Transparency, Value Optimization, Business Alignment, Cost Optimization, Performance Management, and Data-Driven Enterprise.

To achieve long-term value from TBM, we advise a sustainable implementation that focuses on:

  • People: Equipping teams with the right skills and mindset through training and fostering collaboration between IT and finance teams.
  • Process: Defining clear roles, responsibilities, ownership structures, and robust processes that integrate TBM principles into existing workflows.
  • Technology: Utilizing tools that provide comprehensive cost visibility, support real-time data access, and integrate with other business systems.

IT remains a strategic asset

By embracing cost transparency, aligning IT with business goals, and leveraging frameworks like TBM and FinOps, organizations can ensure that IT remains a strategic asset that delivers tangible business value while operating within sustainable cost parameters.

IT Strategy & CTO Advisory

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Why is IT Cost Optimization so Important?

Author

  • Michael Ward

    Associate Partner – UK, London

    Wavestone

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