Good information technology (IT) is crucial, but it can come at a cost. But when budgets get tight, IT cost reduction may become a priority.
Here are 12 top tips for managing IT costs:
- Start with an expense review
- Focus on items which affect short-term cash flow
- Don’t dwell on sunk costs
- Aim for permanent cuts
- Eliminate fixed costs
- Reduce or eliminate variable costs
- Minimize discretionary spending
- Include capital expenditures
- Monitor cloud spending
- Avoid unnecessary software licenses, upgrades and audits
- Simplify storage and database management with virtualization
- Use a managed service provider (MSP)
Read on to learn how to put these IT cost-saving strategies into effect.
1. Start With a Systematic Review of Your Expenses
When reducing information technology costs, the place to begin is with a systematic review of your expenses. IT department costs typically include:
- Ongoing labor expenses, including:
- Recruitment costs
- In-house staff
- Ongoing hardware expenses, including:
- Networking infrastructure
- Desktops, laptops and mobile devices
- Service contracts
- Ongoing software expenses, including:
- Service contracts
- One-time project costs
This information should be itemized in your income statement (profit and loss statement). Your financial advisor can assist you with a systematic review of your IT budget. Meeting with your financial advisor regularly to review your budget can help you keep your IT expenses under control on an ongoing basis.
2. Focus on Items Which Affect Short-Term Cash Flow
If you’re concerned about how to cut IT costs, chances are that you’re struggling with cash-flow issues. When you’re in this situation, focusing on cutting expenses that affect your short-term cash flow can have the biggest practical impact on your budget.
Some IT cost-saving initiatives have a faster short-term impact than others. For example, cutting monthly software subscription costs will have a faster impact on your cash flow than reducing annual software license fees. As you review your expenses, look for cost-cutting opportunities that can have the most immediate impact on your cash flow.
3. Don’t Dwell on Sunk Costs
In accounting, a “sunk cost” is an expense that already has been paid for and can’t be recovered. For instance, if you’ve been paying a contractor to develop a software app, you can’t recover any costs you’ve previously paid them.
When considering future payments, business managers sometimes fall into what is known as the “sunk cost fallacy.” This is the idea that because you’ve already invested in something, you may as well continue paying for it until you recover the cost of your investment. The problem with this is that you may end up wasting money by spending on a less cost-efficient option.
For instance, if you continue investing money in outdated software because you already paid a license, you could end up losing more money than if you invested in newer software which allowed you to perform a task more efficiently. Base your budgeting decisions on an objective cost-benefit analysis rather than an emotional attachment to sunk costs.
4. Aim for Permanent Cuts
If you don’t do a thorough job of trimming your budget the first time you do it, chances are you’ll have to repeat the process in the near future. This wastes time and it can be disruptive to your business if it creates anxiety over staff cuts.
When you plan your budget cuts, aim to identify ways you can permanently reduce your expenses so that you don’t stay in a perpetual cash crunch. This can sometimes entail tough decisions, but biting the bullet now may help you and your staff avoid greater long-term financial pain.
5. Eliminate Fixed Costs
Different types of expenses call for different types of cost-cutting tactics. Fixed costs are expenses that don’t vary based on how much sales volume your business does. Examples of IT-related fixed costs include:
- Compensation for salaried employees
- Utility fees which are fixed rather than scaled to use
- Fixed monthly software app subscription fees
- Long-term software licenses
When cutting your expenses for fixed costs, seek to eliminate line items entirely rather than merely reducing them.
For example, eliminating an unnecessary staff position by outsourcing a task will be more cost-efficient than reducing the salary for that position. Eliminating an unneeded software app (say, one which does something that could be handled by another app you’re using) will save you more money than shopping for a replacement.
6. Cut or Eliminate Variable Costs
In contrast to fixed costs, variable costs may change based on your business activity. Examples of variable IT costs include:
- Outsourcing services priced by the hour
- Cloud storage space priced by usage
- Voice minutes
- Software licenses and subscription fees that vary based on the number of users
With variable costs, both reduction and elimination can be viable budgeting strategies. For example, with a software fee that varies by the number of users, both reducing the number of users and eliminating use of the software would serve to cut costs. Scaling down cloud usage would be another example where you can reduce an expense rather than eliminating it. Choose the tactic appropriate for a particular expense.
7. Minimize Discretionary Spending
Discretionary expenses are costs that aren’t necessary for running your IT operations.
For example, you may be able to run your general operations without upgrading to a new software version or developing a new app.
Expanding the scale of your cloud usage can represent another type of discretionary spending. When your budget is running tight, look for ways to minimize discretionary spending which is not essential to your operations.
8. Include Capital Expenditures
Not all spending goes toward covering your operational expenses. Some spending, known as capital expenditures, goes toward maintaining or improving your company’s fixed assets, such as facilities, equipment or technology.
An example might be developing a proprietary software app that will position your company to be more competitive in the future.
Some items can be classified as operational or capital expenditures depending on how you use them. Your financial professional can advise you on how to classify a particular expense. Don’t overlook opportunities to save on capital expenditures when reviewing your IT costs.
9. Monitor Cloud Spending
Migrating infrastructure and services to the cloud can be an effective cost-cutting measure. However, because cloud billing is scaled to usage, excessive usage can become a budget drain.
Failing to monitor how much you’re using your cloud resources can result in spending more than you need to. Make sure that you review your cloud usage regularly in order to keep your costs under control.
10. Avoid Unnecessary Software Licenses, Upgrades and Audits
Software vendors earn money from upgrades and often force them on their clients. As part of this strategy, vendors may run scripts on your network to audit your usage and ensure your compliance. Such scripts can represent security risks or otherwise disrupt your network, in addition to forcing expensive upgrades you don’t actually need.
Avoid getting locked into unnecessary fees by minimizing the number of licenses you use and adopting a software asset management (SAM) strategy for those you do use. SAM involves optimizing your provision and deployment of software by negotiating favorable terms with vendors and automating tasks such as monitoring license expiration dates. Review contracts carefully before purchase. Make sure you understand upgrade requirements and seek to negotiate undesirable provisions.
One way to discourage vendors from using auditing scripts is to request an unlimited liability agreement that covers any damages stemming from auditing scripts. Using automated monitoring to make sure you renew your license early also can help you avoid audits.
11. Simplify Storage and Database Management With Virtualization
Using multiple platforms, apps and vendors can help cut costs by enabling you to use the most efficient combination of resources. However, it also can result in your storage getting distributed across multiple resources, making storage complex and costly.
You can reduce this cost by using a metadata engine to manage your storage. A metadata engine provides a virtualized view of data which allows you to manage it separately from where it originally resides, so that you can integrate your management of data from multiple sources. You can similarly use virtualization for more efficient and less expensive database management.
12. Use a Managed Service Provider
Maintaining all the IT talent and equipment you need can be expensive if you handle everything in-house. A managed service can reduce your costs by allowing you to tap into their existing resources.
If you’re finding that labor or equipment costs are straining your IT budget, consider whether going with a managed provider might reduce your expenses.
Cut Your IT Expenses to Increase Your Profit Margin
Cutting your company’s IT costs can provide a path for not only reducing your expenses but increasing your bottom line.
With some IT cost-saving initiatives, you may see an immediate impact on your profit margin. In other cases, it may take time to see results, and in the meantime, you may need to take other steps to sustain your cash flow.
If you need an influx of cash until you get your IT costs under control, consider financing options such as a working capital loan.