Wednesday, January 13, 2010

Levels of Cost Optimization

If an organization wished to optimize its costs, there are numerous ways it can go about it. The question is which method of optimization will bring about beneficial results in the long term and which methods are knee-jerk reactions that bring about a short term benefit (and even a long term loss).

Gartner provides us with a framework of cost optimization that consists of four levels, each at a higher level of maturity and benefit. The broad categorization of these four areas is:

  • IT Procurement: which consists of smarter procurement techniques and buying from cheaper and better vendors etc. This is also the least “mature” of the techniques and only provides very low level benefits that have little lasting impact.

  • Cost Savings within IT: which consists of identifying opportunities to reduce IT costs. This usually ends up being lay-offs or outsourcing. While these are valid steps to take, they are again not “high maturity” decisions that will have long term and strategic benefits to the organization.

  • Joint Business and IT Cost Savings: This is one level more strategic than the previous method, where IT confers with business to come up with areas of cost optimization that will have minimal negative impact on the business.

  • Enable Innovation and Business Restructuring: This consists of encouraging innovation, implementing process improvements and restructuring business to align with customer demands. This is by far the best technique to bring about cost optimization with long term strategic benefits.

Organizations, however, rarely take the long term, visionary approach and approach cost optimization with the attitude of haggling with vendors and laying off people. This kind of cost cutting will rarely result in lasting benefits.

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