IT cost refers to the expenses associated with purchasing, maintaining, and operating information technology systems and services, including hardware, software, network infrastructure, and labor. Whether you have five employees or 500, they all need hardware and software to stay productive.
Your IT budget needs to account for things like network infrastructure, technical support, cybersecurity measures, and staff training related to information technology. These costs add up quickly, so you can expect to spend anywhere from 2% to 7% of your revenue on IT costs.
To reduce these costs, organizations can adopt strategies like streamlining processes through automation, migrating to cloud services for scalability and efficiency, negotiating better vendor contracts, and regularly reviewing and optimizing their IT infrastructure and software licenses to eliminate redundancies and underused resources.
If you want to optimize your IT spending, you’re in the right place.
What is IT Cost Reduction?
IT cost reduction is the process of identifying wasteful spending, unused resources, and IT investments with minimal impact on the overall IT budget. Also known as IT cost optimization, this process helps companies of all sizes save money. You can use the extra funds to reduce your IT budget or invest in new technology to expand your business.
Before you take out your red pen to IT resources, stop and think about what cost reduction means. It’s not about depriving employees of the tools they need to do their jobs. It’s the process of aligning your IT spending with the values of your business.
Does your mission statement include a desire to shake things up and be one of the most innovative companies in the world? Look around your office. Is it filled with outdated equipment? Do you regularly hear staff members complain that it’s tough to get things done because they don’t have the proper hardware or software?
If so, your IT spending isn’t aligned with your mission. Before you make any changes, you need to get clear about what you value. Once you know where you’re going, you can devise a plan for how to get there.
IT Cost-Reduction Strategies
As digital transformation has accelerated in recent years, CTOs and other IT leaders have faced continuous pressure to balance financial prudence with the growing business demand for technological innovation, leaving them with limited chances to reassess their IT budgeting and financial strategies.
Use these strategies to eliminate waste without reducing service quality.
Scrutinize IT assets
Before eliminating unnecessary IT assets, you must know precisely what you have. The next time you do inventory, look for assets in these categories:
- Software: Check your contracts to determine how many software licensing agreements you have. If you’re still using physical media, put someone in charge of creating a list of all the discs on the premises.
- Hardware: Count the computers, printers, servers, mobile devices, external hard drives, authentication keys, and USB storage devices in your company’s possession.
- Infrastructure: You need electricity, office space, and other assets to ensure your IT infrastructure works as intended. Make sure you include these items in your assessment. For example, if you have an air conditioner in your server room, the A/C unit should be on a list of IT assets.
- Information: Take note of how many spreadsheets, documents, PowerPoint presentations, and other information you have stored on physical media or in the cloud.
Asset levels change over time, so it’s critical to perform regular IT audits. It’s also a good idea to use asset management software and other tools designed to help businesses.. There are many helpful IT asset management tools on the market.
Eliminate Unnecessary IT Assets
The easiest way to do this is to eliminate redundancies. If you’re using three tools for payroll management, pick one tool and stick with it. There’s no need to maintain all three, especially if you’re paying for ongoing cloud access.
Once you eliminate redundancies, perform a cost-value analysis. This type of analysis helps determine if the benefits of using a particular tool outweigh the costs of maintaining it.
Regular audits are an essential component of successful IT asset management. Once you complete an audit, you can move forward with a plan to reduce your IT costs.
4 Areas to Eliminate Waste and Reduce IT Costs
CFOs, CIOs, and other IT leaders know how important it is to reduce waste, but department managers and other employees may not know how to slash costs without reducing service quality. To reduce your hardware costs, software costs, and cloud costs, focus on these four key areas.
One of the best ways to reduce IT costs is to reduce the number of vendors you use for different items. For example, if you’re buying hardware from three or four companies, you’re probably not getting the best price on each one. Consolidating vendors allows you to take advantage of bulk discounts or negotiate more favorable contract terms.
If you need to consolidate vendors, follow these steps:
- Assess your situation: Determine how many suppliers you have, what contract terms you have with each one, and how much you need to order to qualify for bulk pricing.
- Eliminate redundancies: You already eliminated redundant assets; now, you must eradicate redundant suppliers. If two vendors are providing the same thing, choose one of them to continue meeting your company’s needs. Not only does this help reduce IT costs, but it also simplifies the procurement process.
- Negotiate better terms: Now that you have the correct number of equipment and service providers, you can negotiate better contract terms. Renegotiating allows you to secure lower prices or take advantage of better service levels. You may even be able to convince a cloud services provider to give you access to additional features at no charge.
Vendor performance reviews
Once you implement this strategy, you must make sure it’s cost-effective. Business needs change regularly, so don’t hesitate to request additional discounts or ask suppliers to offer shorter or longer contracts.
It’s also essential to conduct regular performance reviews to make sure vendors are delivering on their promises: track contract compliance rates, pricing, lead times, order accuracy, and defect rates. If a vendor doesn’t measure up, you may have to switch suppliers.
Now, it’s time to assess your tech stack. Regular audits make it easier to identify outdated or underperforming technologies. For example, if your labor costs have increased because your IT team is working overtime to compensate for malfunctioning equipment, it’s probably time to replace underperforming assets.
You should also measure the ROI for each technology in use. For example, if your company uses a cloud-based human resources information system, calculate how much you save on personnel costs related to HR data management. If the ROI of an asset is lower than expected, it’s time to rethink your needs.
Turnover and Staffing
The higher your turnover is, the higher your IT costs are likely to be. To make cost management a little easier, make sure employees get the right amount of training to feel comfortable with their duties. It’s also wise to look for ways to increase employee engagement. Engaged employees are less likely to leave your company, reducing operating costs.
In-house employees are a wonderful asset, but you may not need a full-time employee to handle certain IT functions. You can save money without sacrificing service quality by outsourcing non-core IT activities or hiring independent contractors to perform specific duties. When you hire consultants or contractors, you don’t have to provide benefits or incur other employment-related costs.
Cloud and Other Technologies
Many companies use cloud-based applications because they’re more flexible than on-premises solutions. Cloud service providers may also charge less than other suppliers. To keep your costs in check, choose the right service model for each cloud subscription.
- SaaS: The software-as-a-service model eliminates the need to download applications on individual devices. Cloud providers manage the physical servers, reducing IT costs and making it easier to adopt new technologies. Some vendors even provide open-source software, removing the necessity to pay for certain applications.
- IaaS: With infrastructure as a service, cloud providers host the infrastructure you need to run your business. This negates the requirement for companies to operate their own data centers, reducing procurement and maintenance costs.
- PaaS: Platform as a service provides a framework for developers to build, test, and deploy applications, streamlining the development process. Among the best cloud PaaS platforms are Heroku, Google App Engine, and Microsoft Azure, each offering unique features and capabilities to suit different development needs. PaaS gives you access to a flexible cloud platform, reducing provisioning and maintenance costs.
Think about the potential for incorporating emerging technologies into your existing processes. For example, artificial intelligence can help with automation. You may even be able to streamline cumbersome processes, increasing IT efficiency and reducing your long-term costs.
Improve Your Bottom Line
The need to keep costs in check is one of the biggest IT challenges. Fortunately, you can minimize expenses without sacrificing service quality. Conduct regular IT audits, renegotiate your contracts often, and choose the right cloud service model for your needs.