5 Core Spending And Cost Reduction Strategies
The specific elements of a cost optimization strategy are central to success. The first of these strategic cost optimization approaches are linking your company objectives with operational approach efficiency.
Link company objectives with operational efficiency
This article includes suggestions and best practices for using cost optimization to get the most out of your money. However, it is imperative that you also reflect upon other priorities before you get started.
Reducing company expenditure will, of course, positively affect market growth. However, it’s crucial to remember that IT’s objective is also to promote top-line expansion. In the digital age, IT is usually the leading innovator in reducing lead times and promoting creativity.
Companies constantly seek to grow revenue, so it’s vital to review optimization against that metric. “Optimizing” cost means finding the correct cost, not the lowest.
Relying solely on IT will be beneficial as it suggests that IT is not concerned with meeting the overarching needs of the business. It is essential to get approval from the company for your plans; this can be done by sharing your reasons and justification for the changes. Without support, even the best plans may fail.
Suppose you move away from a transactional relationship and interact more frequently. In that case, you will also be able to optimize your standardized offerings and minimize costly non-standard requests by shaping their infrastructure needs early.
Having a successful and lasting cost optimization requires both parties to agree on priorities.
Make your hybrid IT infrastructure more visible
To optimize the cost of IT services, organizations need complete visibility into all the components that go into delivering those services. Unfortunately, it’s common for companies to need more clarity. With hybrid IT – a mix of public cloud and on-prem data center operations – becoming the norm for nearly every organization, gaining insight has never been more critical.
Out of necessity, we launched many public cloud services to support various components across the board. The placement was opportunistic (due to provisioning lead time and cost) rather than part of a larger strategy. Now individual business services are spread out over multiple platforms and service providers.
To gain insight into how your hybrid services are functioning, you need a tool that provides unified visibility and analysis for every aspect of your environment. It helps to base chosen management tools on a thorough hybrid IT strategy. These only monitor elements of the environment or focus on one technology, giving a narrow view.
Being restricted by silos hampers data gathering and slows down analysis.
Determine how much each project or product will cost
An optimization program needs to have a never-ending calculation of financial impact to avoid becoming simply technical and losing focus on its primary goal of reducing costs. To calculate cost savings correctly, you first need to figure out the cost structure of your operating environment. By separating the cost into different categories, you can more easily compare various options and ensure that money is always a top priority.
The process of third-party cloud services (IaaS, PaaS, or SaaS) is relatively straightforward: You must base the subscription terms and business agreement on the cost per instance, transaction, or user. This point also applies to setups where a third party has outsourced hosting and operations. In both cases, the agreement may have parameters—like volume-based discounts or term commitments—that it needs to reflect in the structure.
You’ll need to do extra preparations if you have traditional infrastructure stored on-premises in your data center. To find the cost of running a system or resources dedicated to it, you need to include the costs for the following:
- OS and hypervisor
- Maintenance and admin effort
- Dedicated hardware components
To get a more precise estimate, you could add eventual costs for network connectivity via shared resources, facilities (power, cooling space), and software licenses. Out of these three, typically, the big-ticket items are what you should focus on first. But it’s crucial not to get caught up striving for the perfect structure– begin with something basic that can be enhanced by adding new layers later.
Many companies limit their options to a set of usual configurations, where the overall price can be predetermined for each configuration, considering the listed factors.
Eliminate inefficiencies safely
Each company aims to avoid over-prioritizing infrastructure, but this is challenging. The first aspect of the challenge is estimating the best resources for new workloads and applications. Despite best efforts, the figure is only partially accurate.
In situations where you get it right immediately, conditions in which you use the applications change over time for several reasons:
- Workload intensity varies across business seasons.
- Business changes mean that processes must adapt to satisfy service demand.
- Base resource allocation on predicted demand outcomes.
Therefore, you must reevaluate and optimize or eliminate overused resources regularly. As you try to locate unnecessary allocations, use enough historical data from each workload to include an entire business cycle in the analysis.
If you want to reduce how much you’re spending on your public cloud, right-sizing is vital. Automating the process should be part of your regular management routine.
On-premise infrastructure generally has a combination of capital and operational expenditures. The impact will be less direct and come with somewhat of a delay. Considering you can’t recover the CapEx component as the sunk cost, you need to look at it optimistically.
The cost of repurposing will depend on if you can successfully reuse the identified excess and replace or postpone other planned investments. The recovery process and new demand for resources may not happen simultaneously, resulting in a delayed bottom-line impact. But that’s no reason not to try. Most modern architectures built on hypervisors and pools of virtual resources usually offer suitable mechanisms for effective resource control and ensuring each investment is the right size.
Estimate costs by creating a budget for each project
So far, we have focused on designing a process that corrects non-optimal provisions. By frequently analyzing allocated resources and determining corrective actions, you can considerably reduce the amount of waste.
Without a cost for IT resource usage, there’s a chance a business unit will continue to use more resources than necessary. Doing so harms other areas of the company that also need those resources. To ensure each unit only uses what they need, charge each one according to their consumption.
Public cloud resources make this easy to do.
Charging each cost center for their use is a fundamental part of the framework. This way, business units are held accountable for their choices and can work to optimize their cost. This action will help reduce the total amount spent by all businesses.
For those with data centers not on the cloud, it may be more complex and require new processes:
- You need the proper instrumentation to monitor customer activity, especially when multiple customers share resources.
- This action also includes correctly calculating the total depreciation cost for capital investments that cover the resources you utilize.
- Additionally, if your organization has generally looked at IT as an internal expense, you’ll need a plan to break down cultural barriers toward internal charges.
If you find these requirements negatively impacting your timeline, try to look for ways to boost project efficiency.
Designing a good allocation policy enables business transparency regarding cost and drives better decision-making for the whole company. Implementing this requires minimal extra effort, but it should not be your only measure. The continuous right-sizing efforts described in steps 2-4 should supplement this policy, not replace it entirely.