IT Cost Reduction: A Strategic Guide to IT Budgeting

We are now living in an era where technology has become an essential part of enterprise success. From agile software developers to the latest IoT solutions providers, it's just not possible for businesses to ignore IT and still be competitive in the current landscape. As IT advances, though, the old adage that there's never enough money for everything still holds true when it comes to IT. Consequently, hard choices have to be made about how funds are spent and there is no better way to make those decisions than by budgeting carefully for IT.

However, many organizations find that IT budgeting is a complex undertaking. It's difficult to predict how fast technology will change and how those changes will impact business operations. In addition, new technologies often come with high upfront costs that can make them difficult to justify in the short-term.

This article examines IT budgeting from a cost reduction angle, outlining the various strategies companies can use to bring IT costs down while staying competitive.

What is IT budgeting?

IT budgeting is the process of allocating financial resources to cover the costs of acquiring, developing and maintaining an organization's IT infrastructure. This includes hardware, software, staff hires, contract projects, as well as support and training. The goal of IT budgeting is to ensure that the organization has the necessary funds to meet its IT needs while also remaining within budgetary constraints.

This way, it's possible to create a balance between upfront investment and long-term return on investment. In order to do this, companies must carefully consider their current and future needs.

Benefits of IT budgeting

  • Better decision making: IT budgeting allows for proactive decision making. Instead of being caught off guard by unexpected expenses, IT budgeting allows you to plan ahead and make proactive decisions about where to allocate resources. This can help organizations avoid overspending and allow them to more effectively meet their IT needs.
  • Facilitates goal setting: By creating a budget, you are forced to think about what your goals are for your IT infrastructure. This can help you better align your spending with your overall business goals and ensure that you are getting the most bang for your buck.
  • Less wasted spend: A well-crafted budget can help organizations avoid wasteful spending on unnecessary or superfluous items. This can free up funds that can be better spent on essential items or reinvested back into the business.
  • Provides visibility into spend: Tracking spending through a budget can give greater visibility into where the money is going. This can help to identify areas where costs can be cut.
  • Improves communication around IT spend: IT budgeting can improve communication between different departments within the organization around IT spending. All key players are aware of the available funds and where they are being spent.

More for less: strategies for optimal IT budgeting and IT cost reduction

Accountants will tell you that the essence of budgeting is not just to allocate money. It's also to cut costs. A significant portion of the budgeting process should be dedicated to cutting costs.

The key IT costs normally revolve around the core technology costs, human resource and innovation.

Here are the main strategies that to help you reduce these costs:

How to save on IT-related human resource costs

Before you can even begin to harness the power of technology, you need to ensure that you have the right personnel in place. You can invest in the best technology in the world but it'll not deliver any result if you don't have the right people to run it. Unfortunately, these workers are in high demand and can be quite expensive to hire.

Use these strategies to save the labor costs related to IT staff:

1. Retain employees

For some companies, it can cost as much as over 30% of an employee's annual salary to replace the same staff. These costs come from a variety of sources, including the time it takes to post and fill the position, the cost of recruiting, and training the new hire. In addition, there is a significant opportunity cost associated with lost productivity while the position remains vacant. For all of these reasons, it makes good business sense to invest in your employees and create a workplace they would want to remain and thrive in. There are many ways to do this, but some basic steps include providing clear career paths and supporting professional development.

2. Manage talent acquisition costs

Hiring can be a costly process, especially for small businesses. One way to save money here is to use social media platforms to post job openings. This can help to reach a wider pool of applicants and avoid the fees associated with traditional job boards. Another way is to conduct video interviews, which eliminates the need for travel expenses. Finally, businesses can save money by partnering with local colleges and universities. This can help to identify talented interns who may be interested in full-time employment after graduation.

3. Outsource some projects

Outsourcing allows companies to contract with a third party provider to handle specific IT tasks, such as system administration, cybersecurity services, or IT support services. This allows companies to reduce their overhead costs by eliminating the need for specialized employees in some areas. It also allows them to tap into the expertise of a third party provider, which can help improve the efficiency and reliability of their IT systems.

4. Automate where possible

Many tasks in the IT department can be automated to eliminate the need for many administrators and free up IT staff to work on more complex projects. For example, email servers can be configured to automatically filter and route emails, and software updates can be automatically installed. Automatic backups can save time by eliminating the need for manual backups, and automated testing can reduce the number of skilled personnel required to test new software releases.

How to reduce core IT costs (hardware and software)

The hardware and software tools that organizations use on a daily basis can take a big bite out of the budget. This also happens to be the most unpredicted area of IT budgeting. Things can break without warning, new requirements keep emerging, and there is the constant pressure to keep customers satisfied.

Budgeting comprehensively around the core hardware and software can reign on most of the unexpected expenses and bring the needed operational sanity.

Use this mechanism:

1. Take advantage of open source solutions

Many open source programs are just as good as their commercial counterparts. In addition, open source software is often more flexible than commercial software, making it easier to customize to the specific needs of the organization.

2. Invest in remote working technology

Remote work is on the rise, having been accelerated by the COVID-19 pandemic. You can save a lot of costs by investing in remote working tech and transitioning some of your staff to the remote working model. This can bring down overhead costs and increase productivity. In addition, employees who work from home often have increased job satisfaction and retention rates.

3. Consolidate tools

Consolidating tools into a single platform can save money on licensing, support, and maintenance. This will help to reduce the amount of time and money spent on managing multiple tools, and it will also make it easier to track and analyze data.

When choosing a consolidation platform, it is important to select one that is scalable and easy to use. By doing so, businesses can ensure that they are able to meet their current and future needs without incurring additional costs.

4. Monitor licenses

By understanding how your licenses are being used, you can make sure that you are only paying for the licenses that you need. Many businesses find that they are over-licensed, and by tracking license usage, they are able to reduce their costs.

Close license monitoring also ensures that the licenses are being used in accordance with the terms. This can help to avoid potential fines or other penalties.

5. Virtualization and containerization

Virtualization allows businesses to run multiple virtual servers on a single physical server, reducing the need for expensive hardware. Containerization, on the other hand, allows businesses to isolate applications and run them in their own self-contained environments.

So what does this mean from a cost cutting perspective? Virtualization can help to reduce server costs by allowing multiple operating systems to be run on a single piece of hardware. Containerization, on the other hand, can help to reduce application development and deployment costs by making it easier to create isolated environments.

Further reading: The difference between containerization and virtualization

6. Prudent contract management

Proactive contract management can be a powerful tool for reducing costs and ensuring that contracts better meet the needs of your company. By setting lead time alerts on upcoming contract renewals, you can give your team ample time to consider alternative suppliers or terms.

Renegotiating existing contracts can also help to reduce costs and ensure that the contract is more aligned with the company's current needs. Not only will you save money, but you'll also have greater peace of mind knowing that your contracts are serving your company well.

You might be interested in: Managed Services Contracts Explained

7. Move to the cloud

The cloud can help to reduce costs in a number of ways. First, it can help to reduce the need for on-premises hardware. Second, it can help to reduce the need for on-site IT staff. Third, it can help to reduce software costs. And fourth, it can help to reduce energy costs. Moving to the cloud also improves organizational agility and efficiency.

With the cloud, businesses pay for only the resources they use, which can lead to impressive cost savings over time.

Further reading: Comparing the cost of cloud vs on- premise

How to save costs on innovation and new tech

Innovation has been proven to help organizations stay ahead of the curve. Unfortunately for many organizations, maintaining the current infrastructure takes almost the entire IT budget, leaving very little for innovation and new technologies. Yet without innovating and investing in new tech, it's easy to be left behind.

History is littered with examples of many giant companies that were punished because they were slow to move with the tide of new tech. Good examples include Kodak and Blockbuster, who failed to adapt to the changing world and were eventually pushed out of business by more nimble startups. Even today, we see many companies struggling to keep up with highly innovative competitors. The message is clear: if you want to stay in business, you need to be constantly innovating. That's easier said than done, of course, but it's the only way to guarantee that you won't be left behind.

To be consistently innovative means trying out new things, using new technology and bringing in the right people to drive futuristic initiatives. Sometimes you win, sometimes you lose. But what is important is that if you can act fast and make the right decisions, it's hard to miss out on the big opportunities.

The greatest obstacle around innovation investment in emerging technology is the huge amounts that these items can consume. So how do you reduce the costs around this important item while ensuring you are not too far behind your peers and new entrants?

1. Encourage sharing of ideas

Rather than relying solely on costly external consultants or outside sources of inspiration, organizations can encourage their employees to generate and share new ideas. This not only helps to promote a culture of innovation within the organization, but it also saves the organization the expense of always having to seek out new ideas from external sources. In addition, by encouraging employees to share ideas internally, organizations can develop a better understanding of the needs and preferences of their target market, making it easier to tailor products and services.

2. Use idea management technology

Invest in technology that supports collaboration and idea management. These systems make it easy for employees to submit and track ideas, enabling companies to quickly identify which initiatives are worth pursuing and which are not.

This not only saves time and money, but it also allows businesses to focus their resources on the most promising projects.

3. Offer incentives

Use incentives to encourage employee participation in the innovation process. For example, you can offer rewards for employees who come up with successful new products or services.

This not only saves the company money, but it also fosters a sense of ownership among employees.

4. Utilize partnerships

Companies can cut costs by partnering with other organizations that have complementary strengths. For example, a manufacturer can partner with a software development company to jointly develop a new product.

By working together, the two companies can share the cost of research and development, as well as tap into each other's unique areas of expertise. Partnering can also help companies to access new markets and reach a wider customer base at a lesser cost.

5. Participate in government programs

Many governments run programs to foster innovation among startups and small businesses. For example, the American government runs the Small Business Innovation Research (SBIR) program, which provides funding for small businesses to conduct research and develop new products or technologies. Such programs can save you substantial amounts that you would have spent on testing new ideas.

6. Keep tabs on tech trends

Organizations that are actively aware of the latest tech trends are able to take advantage of new developments and find ways to save money. By contrast, organizations that stay in the dark end up using outdated technology and are often forced to pay more for maintenance and support. They may also miss out on opportunities to improve efficiency and optimize their operations.

There are countless resources available online, and many of them are free! Some of the most eye opening developments in technology are constantly broadcast for all and sundry. Tech news websites and research portals are awash with what's new and exciting, what is working and what's not. Prominent tech experts as well as leaders of tech giants and disruptive startups are in social media platforms sharing insightful content. If you can keep tabs on all these, then you can cut a lot of costs that you would have ended up pouring into technology that does not work while staying in the dark about what works.

Conclusion

The importance of effective IT budgeting cannot be overstated in today's business environment. As more and more companies rely on technology to operate at scale, it is essential that resources are properly allocated in order to ensure that the organization remains competitive. Many IT executives, however, view IT budgeting as a shallow activity — something that they need to get through as quickly as possible so that they can move on to more exciting projects. This is the wrong approach, and it could ultimately cost the company dearly.

The budgeting process forces organizations to take a more strategic approach to their IT spending, and can lead to enormous savings.

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