The Benefits of Moving from Cost Optimization to Strategic Cost Transformation

By Joey Lei, Director, Service Development and Management at Synoptek

Reducing information technology (IT) costs is a misguided goal of most modern businesses. Many find themselves in this situation because they have inevitably over-purchased and underutilized traditional IT solutions that no longer match the customer demand for IT today.  Organizations that are serious about growth need to reinvest into a more flexible, cloud operational model and embrace a strategic cost transformation approach.

Why Attempts at Cost Optimization Often Fail

Despite the modern techniques and planned efforts of an enterprise’s management and technical teams, cost optimization initiatives continue to result in IT overspend. This can happen for a variety of reasons, including:

• Mistakenly focusing on short-term objectives rather than implementing long-term and sustainable cost optimization strategies.
• Concentrating on headcount reduction without a thorough understanding of how it will affect all parts of the business.
• Inadequate understanding of the business processes that rely on the IT infrastructure.
• Low buy-in from the senior and middle management.
• Making across-the-board cuts with unrealistic savings targets.
• Lack of project ownership and insufficient performance tracking mechanisms to gauge success.

Many organizations see cost optimization as a one-time activity designed to produce tangible financial results. In the constantly evolving IT world, approaching organizational cost savings in this way is destined to fail. A new and more strategic perspective promises to deliver better results that lead to actual cost savings while at the same time positioning an enterprise to thrive in the future.

Strategic Cost Transformation Offers a More Productive Path

A strategic cost transformation approach begins by evaluating an organization’s business objectives rather than simply looking for opportunities to reduce IT costs. Three main principles drive a strategic cost transformation initiative.

• Stabilizing the business by reducing costs across any declining business units.
• Maximizing the use of each dollar spent by implementing an elastic subscription model and optimizing the costs regularly to adjust to seasonal demands – a process of spending the least amount necessary to drive revenue.
• Developing an investment engine that promotes growth can position an organization to take advantage of evolving opportunities and continually grow the business.

Successfully implementing these principles is facilitated by decision-makers adopting the following four-step process.

1. Envision the objectives for the business and identify the required level of financial investment to achieve them.
2. Transform the current IT environment by eliminating legacy systems where possible and minimizing investment in declining business units.
3. Optimize costs to address the constantly evolving state of demand for IT resources.
4. Promote growth by regularly measuring and aligning business objectives with the level of spending required to meet them.

Achieving Value from Strategic Cost Transformation

Strategic cost transformation provides opportunities for both short and long-term value. The initial stages of a strategic cost transformation may be more complex and demand a greater degree of detailed planning than a simple cost optimization effort. This additional complexity will be handsomely repaid by the increased scale of operations and execution offered by strategic cost transformation.

Short-term value is obtained through the cost-cutting steps taken to stabilize the business and move on from obsolete legacy systems. These savings can be substantial, and there may be some reluctance to go beyond this step.  Many will find that the costs will rise back to original levels over time because the cost model was not transformed.  The real value to businesses engaging in strategic cost transformation comes from the long-term reinvention of technologies that increase operational scale. Examples include:

• SaaS CRM applications that help engage prospects and customers and document pain points that can be made visible to growth teams like product managers
• Cloud infrastructure that can grow up or down according to actual demand
• Unified collaboration or communication technologies that help foster a globally distributed workforce

Long-term value is achieved by transforming business processes, applications, and technology solutions that provide an organization with a competitive edge over market rivals. Methodically and continually addressing the evolution in how people, processes, and technology interact allows companies to be more flexible, agile and decrease the time to market or improve the outcomes of new products and services.

The short-term costs associated with strategic transformation will prove to be negligible compared to the potential long-term gains.

Keys to Lasting Cost Transformation

The key to a successful long-term and lasting cost transformation initiative is to have a thorough understanding of the business drivers behind the desired outcome. These factors need to be considered when addressing specific targets for transformation:

• Strategic enablers and growth levers that produce value for customers
• Risks that need to be mitigated to achieve the desired outcome (e.g., security, technology, or business risks)
• Underlying reasons an outcome may not be implemented optimally.

Having a firm grasp of these drivers will help an organization choose the appropriate actions to meet business requirements. Failure to understand them will often result in wasted time, money, and effort that does not provide the intended benefits to the business or its customers.

Cost Transformation and Digital Reinvention

Strategic cost transformation presents an inviting opportunity to engage in the digital reinvention of legacy business models and ways of working across an organization. As business models are analyzed, candidates for digitization will inevitably be surfaced. The majority of companies have only scratched the surface of the possibilities they can achieve through digital technologies.

Employing digital technologies allows businesses to provide enhanced customer experiences and quickly address emerging market trends. Efficiency gains can result in more capital available for growth and innovation. Data and metrics generated by digitized processes can be analyzed and machine-learned to identify areas ripe for further transformation and optimization.

Companies embarking on the path of strategic cost transformation should view it as an iterative process. Flexibility and resilience are required to handle the rapidly evolving world of business and technology. Working with an experienced partner who has successfully navigated these tricky waters can be instrumental in enabling an enterprise to transform their business to meet future needs.

About the Author:

Joey Lei is Director, Service Management at Synoptek. With over 14 years of experience in Engineering and Product Management, Joey is responsible for development and growth of the Synoptek Service Portfolio as well as solution development with strategic technology alliance partners. His generalist business acumen and technical software background allow him to drive business strategy and execute solutions that solve customer priorities up and down the technology stack.