Traditionally, IT is considered to be a significant cost center and is typically one of the first to be affected when any cost cutting initiatives are implemented. The turbulent forces shaping businesses today have led to many changes in expectations and approaches of the CIO. The CIO today is constantly under pressure from the CFO to reduce IT spending to align with business volume. However, the challenge for the CIO is to make those cuts while minimizing impact on business value delivery.
There are several methods for IT cost reduction:
- Portfolio (Applications, Servers, Data Centers etc) rationalization and consolidations
- Core – Non-core analysis and outsourcing
The rationale behind these approaches is to execute necessary IT functions through people/organizations at a cheaper rate. But there is another alternative: one which ensures that costs follow the business rhythm so that no matter whether sales are going up or down, operating margins are always maintained. This method is called "IT Cost Variabilization."
Businesses operate on uncertain outcomes and are based on certain risks and rewards. This leads to uncertainty in terms of demand and strategic business planners can therefore only predict the optimum capacity. I consider this to be a critical issue for businesses, particularly if the capacity is overbuilt and exerts pressure on the bottom-line. Often products and services cannot match the market expectations in terms of pricing leading to lowered sales. However, if the capacity is under-built, the loss of opportunity can be costly and may affect the brand!
This interesting dichotomy has two parameters – variable revenue and constant cost. I strongly recommend that businesses link their "cost of capacity" to a critical business outcome. As the business outcome is variable, the "cost of capacity" would also become variable. This capacity can be taken as a service from a third party owner to variabilize costs.
While I shall discuss this 'Variabilization' concept in greater detail in my next blog post, CIOs can assess the readiness of an organization for variabilization based on three dimensions:
- Financial risk appetite and cultural acceptance index of the organization
- Business rhythm – whether the organization can afford to have captive units or variabilize costs
- Lifecycle – determining the phase the business is in: planning, expanding, rationalizing, optimizing, etc.
CIOs who want to do more-with-less and run the best in class CIO Office – stay tuned!