CIOs know that technology is more central than ever to business competitiveness. To that end, they are investing in critical new technologies, spurred on in some cases by the return of employees to offices and their demands for better tech to serve customers.
At the same time, they are reducing costs in anticipation of a possible recession while also facing inflationary increases in hardware, applications, and people costs. Most have already made the easy cuts; now they need to wrestle with difficult trade-offs among cost, service quality, risk, and strategic investments.
Compounding the challenge, most cost programs fail to reach their targets. Bain’s research finds that while 90% of companies have run tech cost programs in recent years, three out of four didn’t achieve their cost productivity targets. Nearly half missed their targets by more than 50%. And costs that are saved often creep back in, leaving the need to go back to the well and find more savings a year or two down the line.
Our work with clients across industries affirms that successful cost transformations can have a positive, long-term effect on spending and can prevent costs from returning. They can help CIOs balance investments in business needs while dramatically improving the efficiency of the tech function. Companies that achieve these savings in ways that support and strengthen their long-term strategic goals tend to share a few habits (see Figure 1).
Effective technology cost transformations show five traits
Combining visibility, in-year savings, a savings roadmap, execution discipline, and ongoing cost management creates a virtuous cycle for the IT function. Trying to tackle all of this at once can be impractical or unaffordable, and not every situation requires a deep dive on every component. Deciding where to focus depends on ambition, cost constraints, and technology maturity.
Cost visibility and ambition. Enhancing visibility can mean different things, depending on the company’s starting point. For some it involves getting a full picture by synthesizing tech spending across the organization, including “shadow IT” staff that don’t sit within the tech function but spend time on tech projects. Shadow IT can represent significant additional costs, not just in direct spending but also in its vulnerability to cyberattacks and in accumulating technical debt from point solutions and a lack of architectural alignment. In companies that already have a comprehensive view, the next step may be drilling down to understand the real causes of spending.
Comparisons with market and competitor benchmarks can be instructional, but also require context and thoughtful interpretation. Finding the right benchmarks, taking into consideration the industry mix, size, and peer group, can help companies set the appropriate ambition. Top-quartile cost reduction may not be the right goal for a company that relies on technology for strategic differentiation. In some spending categories, “best-in-cost” might be the right target, while in others, “best-in-class” should be the aspiration.
Benchmarks can also show where organizations have too few or too many of certain roles. Analyzing role ratios, for example, the number of testers per developer, can sometimes reveal opportunities to rebalance the workforce (see the Bain interactive “A Critical Ratio That Every CIO Should Be Thinking About”). Outsourcing nonstrategic commodity work and shifting roles to lower-cost locations remain effective tactics to dramatically reduce IT workforce costs.
This top-down and bottom-up visibility helps CIOs understand performance and identify savings opportunities. For example, bottom-up cost analysis helped a major financial services player identify disproportionate spending on a set of end-user devices by correctly allocating labor and support costs. Similarly, a life sciences company that obtained a view of the total cost of its enterprise resource planning (ERP) platform benchmarked it to market norms and identified a 25% savings opportunity.
In-year savings. CIOs can be required to make rapid, in-year cuts to alleviate immediate financial pressure in a tough trading period or to fund a more profound cost transformation. The urgency and depth of savings dictate the level of risk they must assume. What differentiates leading CIOs is their ability to take a holistic view of risk and balance near-term considerations, such as business and execution risks, and long-term ones, like strategy and reversibility.
- Business risk: What risks would this cost-cutting initiative expose the company to, and what would be the downside internally and externally? How will this affect our customer experience, revenue-generating operations, and reputation?
- Execution risk: Will we realize value from this cost-cutting initiative in the required time frame? Can our teams manage the change and absorb any new requirements?
- Strategic implications: Does realizing these savings today jeopardize our strategic ambition for tomorrow? Where are we relative to our competitors, and what would this change imply?
- Reversibility: Can we reverse course if financial conditions improve? At what cost? For example, it’s much easier to flex capacity with third-party labor than with internal talent. But there are still costs to onboarding vendor talent and managing the knowledge transfer from one vendor to another or to the company.
Less complex, quick wins are the first step. These are easy to execute with minimal investment or performance degradation—for example, eliminating underutilized contractors, stopping discretionary projects, and extending refresh cycles. Many companies have already implemented these tactics and are turning to more aggressive actions (e.g., reducing headcount or cutting strategic programs), which can deliver deeper savings but also cut into the organization’s strengths. One insurer facing double-digit percentage cuts for its in-year budget had to “break the glass” when the quick wins were exhausted. With a focus on protecting business and execution risk, leaders first adjusted previously untouchable commitments such as cybersecurity. They then prioritized reversible actions like eliminating contractors and paused their cloud migration, while protecting projects linked directly to revenue. In doing so they achieved their cost target without disrupting core business operations.
Savings roadmap. In-year savings can solve a budget gap, but often represent only a small portion of the full efficiency potential. Steadily increasing needs for shifting “run” spending into “grow” means CIOs need an executable portfolio of initiatives across time horizons, complete with required timelines, trade-offs, and investment commitments. These initiatives can be clustered across three waves: reducing costs with short-term actions, replacing technology with more efficient options, and rethinking architecture and operating models to make long-term sustainable change.
- Reduce (less than 12 months): These initiatives can be carried out quickly and show results by the year’s end. Many of these are business decisions (freezing hiring, pausing nonstrategic projects, tightening spending), while others are technology decisions (squeezing higher utilization rates from servers and storage). Managing demand is key to any reduction program.
- Replace (12 to 18 months): These medium-term replacements swap out technology costs for lower-priced alternatives and lead the organization to buy better—for example, replacing on-premise software with SaaS applications or optimizing vendor spend.
- Rethink (18 months or more): These long-term changes reimagine the business, often changing processes, technology architectures, and sometimes operating and business models to deliver more efficiency, spend better, and drive sustainable cost savings.
An energy company built a plan for 20% overall IT savings over two years, with immediate savings through a 20% cut in spending on managed services with its two largest vendors. Longer-term savings came from setting up a process to identify and retire redundant and duplicative apps—an App Kill Factory.
In a similar vein, a life sciences player identified about 15% overall IT savings over three years, doubling its insourced staff count to drive savings and reduce reliance on vendors, optimizing its application and cloud spending, and refining its approach to vendors.
Execution discipline. Even the best-laid plans can fail to yield results without a robust program structure and processes to ensure effective change, as evidenced by the high failure rate referenced above. These include a lack of leadership alignment, accountability for execution, disciplined decision-making drumbeat, and proactive risk mitigation.
Leaders must align on the ambition of cost programs and take ownership of initiatives, establishing clear sponsorship, accountabilities, and targets. This paves the way for Agile governance structures with a clear decision-making drumbeat. Initiatives should be paired with clearly defined targets and key performance indicators (KPIs), enabling tracking and focused change management to deliver results. Proactive efforts to surface and mitigate risks limits firefighting and the preventable disruptions that otherwise undermine the initiative.
This disciplined approach in turn kicks off an ongoing pipeline of savings opportunities that allows steady prioritization and action to deliver the ambition. The energy company pursuing a longer-term savings roadmap paired its initiatives with a new managed-service governance structure to sustain long-term cost savings efforts. In parallel, the company established a capability transfer within the enterprise architecture team to run and scale the App Kill Factory program while identifying risks along the way.
Ongoing cost management. At many organizations, costs creep back in despite these efforts. Traditional budget programs lack the continuous improvement discipline required to address this problem, creating room for bloat by overlooking underlying spending drivers, enabling funding of projects with low strategic importance, and not having sufficient spending controls to catch errant spending on shadow IT. Funding processes should improve clarity and accountability to ensure that every dollar spent serves the broader business strategy.
The most successful programs start with ongoing cost discipline in mind. Formats can vary based on organizational structure, such as zero-based budgeting or an Agile funding model for product-led organizations. A zero-based approach focuses on cost drivers, starting the budgeting process at zero, aligning incentives across profit-and-loss centers and project owners, and tying every dollar to clear objectives. Over the year, performance is measured against granular KPIs to ensure accountability and monitor spend. In turn, an Agile funding model ensures accountability, flexibility, and autonomy in its allocation of funds by installing a clear business case, stage-gating funds, and enabling reallocation tied to progress against key milestones. Installing cloud-based cost management tools like Apptio and its Cloudability platform, either on their own or with a budgeting process, can provide the ongoing spending visibility and detailed cost per unit needed to drive accountability.
There is no one-size-fits-all approach for cost transformation, as it must be tailored to an organization’s starting point and level of ambition. This requires CIOs to delicately “tune the dials” across a range of considerations about where to focus and at what depth. By focusing on the areas of highest priority, CIOs can make the right set of hard choices and ensure that those savings stick.