Are you regularly faced with cost optimisation challenges?
Trying to identify costs that you can eliminate without doing damage to the business?
Or even aspirationally seeking ways to increase output, productivity and delivery, without breaking the bank?
Well, you’re not alone.
Many organisations perennially struggle with these very challenges. With only a few being able to accurately quantify the value of their buying decisions. And even fewer being able to successfully optimise these costs.
Last month, I wrote about how you can Reduce Your SaaS Costs by Using a Total Cost of Ownership (TCO) Analysis. After receiving such positive feedback about the importance and relevance of a TCO Analysis, I decided to dive deeper on the subject and provide (what I believe to be) a practical stance on how YOU can optimise your current IT and SaaS related spend.
This month we are delving into a subset of a TCO Analysis, a close relative if you like, Cost Optimisation. Specifically Cost Optimisation for IT and Cloud Based SaaS technology (this approach can also be applied to on-premise technologies).
Strategic cost optimisation must be an ongoing discipline that is culturally ingrained throughout technology practices.
Gartner 2024
Diving into the trending topic with me is digital tech expert, long time friend and Chief Digital Officer of MasterStart, Devaan Parbhoo.
To begin, let’s look at the concept of cost optimisation.
What is cost optimisation?
Simply put, cost optimisation is the strategic process of reducing expenses while maximising the value and effectiveness of business operations. Instead of simply cutting costs, it focuses on finding the most efficient way to allocate resources, ensuring every cent spent delivers maximum return.
Here’s why cost optimisation is important:
- Improved Profit Margins: By reducing operational costs without sacrificing quality, businesses can increase their profitability.
- Enhanced Competitiveness: Companies that manage costs efficiently can offer better pricing or invest more in innovation, giving them an edge over competitors.
- Sustainable Growth: Cost optimisation ensures that financial resources are allocated to areas that drive long-term growth and success.
- Agility: Optimised costs make it easier for businesses to pivot, adapt to market changes, and invest in new opportunities without financial strain.
- Risk Mitigation: By focusing on essential expenditures, companies can reduce financial risks and ensure better cash flow management.
- Resource Efficiency: It promotes the efficient use of resources, such as labour, technology, and capital, leading to increased productivity.
“The price of light is less than the cost of darkness.”
Arthur C. Nielsen
Ultimately, cost optimisation helps businesses balance efficiency and growth, positioning them for success in both stable and uncertain times.
Why is it challenging to achieve cost optimisation?
Achieving cost optimisation from your digital and data ecosystem presents several challenges.
Key factors that contribute to this complexity include; balancing immediate cost reductions with long-term efficiency gains, maintaining alignment between IT investments and business value, and navigating vendor relationships and contract negotiations.
Firstly, organisations often face pressure to cut costs in the short term, which can lead to reactionary measures such as freezing projects or reducing standards. These actions, while effective in reducing expenses quickly, can harm the long-term technological foundation of the business by reducing productivity and limiting the scope for innovation.
For instance, cuts to IT budgets may lead to the deferral of critical upgrades, thus compounding your technical debt and ultimately increasing costs in future periods. Strategic cost optimisation, on the other hand, requires structured improvements and ongoing efforts to eliminate inefficiencies, which demands both time and resources.
Moreover, it’s important to point out that aligning IT spending with business value is a persistent challenge. Often, businesses struggle to identify and measure the value delivered by IT initiatives. Projects that seem to offer immediate cost savings may fail to deliver tangible business benefits if they do not align with broader strategic goals. The complexity is then heightened by the need to measure not only direct financial savings but also softer outcomes such as enhanced productivity, customer satisfaction, or risk mitigation. At the moment, this is a core focus for many organisations, worldwide.
Lastly, vendor management emerges as a significant hurdle. Only a small fraction of leaders consider themselves experts in managing third-party vendors. Contract renegotiations and vendor relationships must be carefully managed to optimise costs without compromising service quality. The timing of contract renewals, the need for co-terming, and the clarity of technical risks are all critical factors that must be navigated to extract value from vendor partnerships.
Therefore, achieving cost optimisation requires a balanced approach that integrates immediate cost management with strategic, long-term investments. It also demands cultural change within organisations to embed cost-saving practices across teams and functions.
How do you conduct cost optimisation?
Let’s take a practical look.
With any theoretical concept, if you can’t use it practically then it’s largely useless. Like many analytical concepts, reaching a worthwhile outcome begins with asking the right questions.
Here are a few of the right questions you can ask in order to get you closer to the cost optimisation outcome. We have broken them down into four distinct categories; business need, capacity, scoping and implementation. There are two questions in each category.
1. Business Need
- Which areas of our business operations incur the highest costs, and are we achieving maximum value?
- Are we using the right mix of technology and tools, or are there cheaper or more efficient alternatives available?
2. Capacity
- Can we streamline or automate any processes to reduce manual efforts and operational inefficiencies?
- What is our capacity to handle more with existing resources, and how can we improve it without increasing costs?
3. Scoping
- How do our current suppliers and vendors compare in terms of pricing and value, and are there opportunities for renegotiation?
- What are the core activities essential for our operations, and can non-essential activities be scaled down or outsourced, without disproportionately impacting their benefits?
4. Integration
- How can we integrate automation and digital solutions into our workflow to reduce overhead costs?
- What metrics should we track to continuously monitor cost efficiency and identify areas for further optimisation?
These categories will help you structure your approach to cost optimisation, focusing on critical areas of the business.
“Beware of little expenses; a small leak will sink a great ship.”
Benjamin Franklin
Cost optimisation vs ROI
Cost optimisation focuses on reducing unnecessary expenses, enhancing efficiencies, and aligning IT spending with business value.
The goal is to rationalise costs while maintaining or improving the performance of the business. This involves eliminating waste, improving demand management, and making structured, programmatic improvements to reduce costs without sacrificing long-term business capabilities.
On the other hand, ROI measures the financial returns gained from an investment in technology relative to its cost. While cost optimisation is about making the best use of existing resources and reducing expenditure, ROI evaluates how investments—particularly new or ongoing initiatives—generate financial value or returns. A cost optimisation strategy is essential to ensure that resources are allocated efficiently, which in turn can improve ROI by enhancing the effectiveness of IT investments.
“Cutting costs without improving the ability to grow is like stepping over dollars to pick up pennies.”
Anonymous
In summary, cost optimisation improves the efficiency and impact of IT budgets, which enhances your organisation’s ability to achieve higher ROI from its technology investments.
How a cost optimisation framework helps in opportunity identification?
Gartner 2024 provides a Universal Cost Optimisation Framework.
A well-structured cost optimisation framework is crucial for identifying opportunities for cost savings and efficiency gains.
This framework provides a systematic approach to analyse IT costs across various domains—such as software, hardware, vendor contracts, and human resources—and assess where inefficiencies lie.
Key components of the framework include:
- Eliminate Waste: Identifying areas where overprovisioning, underutilisation, or redundancies exist, such as unused software licences or underutilised infrastructure.
- Standardise and Simplify: Streamlining processes and standardising IT assets can reduce maintenance costs and enhance scalability.
- Automate and Centralise: Automation of repetitive tasks and centralising IT resources can drive productivity gains, reducing the need for manual intervention and fragmented systems.
- Renegotiate and Rationalise: Reviewing vendor contracts and renegotiating terms based on current needs ensures better value from external partners.
“It’s not about having the right opportunities. It’s about handling the opportunities right.”
Mark Hunter
By using this framework, businesses can systematically uncover opportunities to cut costs while ensuring that IT spending continues to align with business value. Additionally, it helps ensure that cost-saving initiatives do not compromise service delivery or long-term strategic goals.
