During difficult times, edicts such as “all cost centers must reduce cost by at least 10 per cent in the next three months” are not unusual. As will be discussed at the upcoming Gartner CIO & IT Executive Summit in Toronto, many Canadian organizations are currently focused on cost cutting and business cost optimization with real savings in optimizing the business through the effective use of and investment in IT implementation.
However, when looking to optimize costs, a linear, across-the-company directive, such as the one above, is one of five avoidable cost-cutting traps. Oftentimes these initiatives, which look like acceptable ideas, are generally bad business decisions.
Pressure from an unstable and uncertain business and economic environment has led CIOs to embark, often blindly, on emergency cost-cutting programs. But the savings can be less than satisfying and the impacts on the business can be negative.
Trap No. 1: Be nice to everybody
Make business-blind, “politically correct” directives across the board.
The problem with this approach is that what one business unit can bear without major issues, for example, a total ban on overtime, might hamper a high-volume sales campaign in another department. As value-add depends on a complex network of process steps, evaluate the entire value chain to understand how and where value is added and which parts can be reduced.
Trap No. 2: People are expensive and visible
Save on people (and eliminate skills and talent).
The more people laid off, the more money saved. The more people who are laid off, the more intense the negative effects on business initiatives, performance and outcomes. Plus, it will later cost more time and money to restore the workforce. Ensure you maintain the critical minimum mass for resources and the minimum team to keep the business running, and use process design methodologies to assess minimum requirements for each process.
Trap No. 3: Focus on urgent problems and forget the rest
Sacrifice the future (nobody’s watching).
When it comes to saving money, it can be tempting to abandon long-term projects, processes or services in favor of more immediate, “plain vanilla” alternatives. However, it can be more challenging to derive business benefits from lower-cost replacements, and the company risks losing valuable business knowledge. Do not automatically sacrifice long-term initiatives just because they are long-term. Assess the business value that will inevitably be lost.
Trap No. 4: It’s not my problem
Put the monkey on your business partner’s’ shoulders (and compromise your business network).
When looking for ways to cut costs, switching business partners to a less-expensive alternative may seem like a good idea, particularly if the decrease in quality and efficiency has no immediate consequences. However, this type of switch will impact, on the other side, a partner who is also trying to cut corners, which will lead to problems down the road. There is no free lunch. Less-expensive partners means inferior services, which likely means less business value. Assess internal business risks that could result from a switch, and don’t forget to factor in the cost of switching, such as penalties from the old contract.
Trap No. 5: It’s “every man for himself”
Focus on your little corner of the world (and damage your business, maybe irreparably).
Cost-cutting campaigns often approach the situation by focusing on individual areas or individual business initiatives, instead of evaluating the business as a whole. But it’s important to assess the business value and the business risk as they affect the entire business, and allow leaders to focus on the potential negative effects of proposed cost optimization initiatives. Consider consequences such as damage to the brand, negative client perception, loss of critical resources or a sacrifice in terms of competitive positions. For each area or initiative, ask two questions: What business value is being delivered by this business activity and what business risk will ensue if cost optimization actions affect this activity.
Cassio Dreyfuss is a vice president at Gartner, Inc. He focuses on the business value of IT, the business role of the IT organization, demand management, and shared services.