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It has become a necessity for enterprises to stay digitally updated to stay competitive in the market. As companies rely more on technology, IT has become the major focus of investment for companies more than ever before.
It is estimated that overall IT spending is 7.5% of the revenue. Organizations in America are allocating approximately 8.5% of their revenue to IT as compared to those in Europe where this allocation is 6%. The figure below shows the breakdown of IT spending as a percentage of revenue by industry.
With the humongous budgets, organizations’ focus is now shifting to optimizing the costs. To put it in simpler terms, IT leaders are now focusing on cutting costs, which we all know is a tricky process.
With this paradigm technological shift, 80% of companies have embraced digitization with a vision of transforming their businesses. However, only 16% of the larger organizations believe that they have the right people to get the job done, and only 13% of the organizations quote that they have the right processes in place.
This concludes that despite having a robust information system and talent in place, most organizations still doubt that they can compete with digital pioneers. This leaves an impression on CEOs that the IT department is costly. To ensure the optimal value add, the CIOs keep searching for new ideas to eliminate waste and reduce overall expenditures, which are easier said than done.
Having said that, there are some proven strategies that can lead to IT cost reduction. We will discuss the same in the article.
Most of the IT costs seem fixed and assumed that they cannot be compromised. Breaking this myth, mentioned below are some of the costs that are not fixed and can be reduced.
Publishing a metric on monthly savings from IT cost-cutting initiatives will greatly influence the team’s behavior and encourage them to focus on cost reduction strategies.
When assessing the IT budgets, the personnel costs are the primary expense. The growth of employees along with the organizational growth leads to an increase in the number of employees at the higher level, making the department top-heavy, over a period of time. This just happens unintentionally, especially in IT organizations. With an intention to get the work done easily, the organizations end up hiring experienced employees. This adds up to the overall IT cost
The general practice that the organizations opt for is regular laying off employees to optimize the department cost. This leaves angst in the organization leaving negative consequences for the organization. The leaders, too, have to face the trauma of the layoff.
To overcome this challenge, the organizations can strategically hire people with lower-level employees as replacements unless not required in an exceptional situation.
By hiring new graduates every year, the resources can be hired at a lower salary budget as compared to the existing experienced employees. Hiring interns for projects is also a value proposition.
The personnel cost can also be reduced by hiring a lesser number of offshore resources. It was initially started as an IT cost reduction strategy, however, has been overused. The other error that the organizations make is calculating the complete cost based on the offshore costs presuming the savings accordingly. For example, if 30% of the work is outsourced, the calculation might be done on the remaining 70% on-site on a similar scale. The travel cost is the additional cost that might be incurred by getting the offshore services on board.
Hiring outsourced staff is another way to implement a cost reduction strategy. Many organizations outsource their digitization services as the cost is based on the project deliverables. Having a complete in-house strength will have higher cost impacts as the organization might have periods with a lesser number of projects. You will be required to pay the salary to employees even during this period when the team is overstaffed as you need to retain them for a busy period.
Hiring offshore staff, in many scenarios and in a calculated manner, too can help in saving costs.
A business study states that companies experience IT cost reduction of 25-40% by outsourcing their IT staff and services. As the smaller enterprises have limited IT budgets, 78% of small businesses use freelance services to gain an edge over their competitors.
Additionally, companies can save costs by outsourcing the infrastructure services on a pay-per-use basis, security-as-service, backup-as-service, and much more.
Recruiting and training a new employee incurs significant costs. Thus, it becomes important to ensure lower turnover rates. The replacement cost may be as high as six to nine months cost of the employee who is parting ways.
Start with having a robust and stringent recruitment process in place. This will ensure that you get the right candidate for the required role and designation. Improve the organizational culture such that the employee enjoys coming to work. Value their contributions and recognize their efforts every now and then. Ensuring a good work-life balance, opportunities for growth, and effective learning path are some of the ways to keep the employees motivated.
The basic thought process behind virtualization is to replace physical hardware with virtual counterparts. Traditionally, every application had a dedicated server along with test servers. But not all the servers were optimally used.
By compartmentalizing these low-usage servers, you can save considerably on hardware costs. Companies even have the option of moving completely to the virtual servers by completely shunning the requirement of the physical servers, thus reducing the energy and hardware costs.
Cloud storage is the most popular way of saving IT costs as the companies are not required to spend on hardware, thus reducing the business costs. Cloud storage works as one of the most effective IT cost reduction strategies as you pay only for what you use.
The scope of managing cloud operations has grown significantly. Studies have shown that 63% of the companies will increase their usage of cloud services. Of the companies that will work with Managed Service Provides (MSP), 100% of them will benefit from the services. 80% of the companies that have adopted the cloud approach state that they are saving money, achieving better productivity and security.
Many organizations have benefited from cloud computing services as they have helped in boosting productivity along with IT cost savings. For extra security, companies can opt for hybrid cloud solutions by distributing their workloads between private and public cloud environments.
As the word standard means uniform, ensuring consistency across different hardware and software applications will contribute to IT cost reduction initiatives. This can be as simple as providing all the employees with similar types of computer systems and operating systems.
Training everyone on the same technology is not only time-saving but also reduces the cost. By having a diverse infrastructure, the training cost and time will increase substantially adding to the overall business cost.
Open-source software provides free software, access to source code, and community support to help your business. Getting licensed software comes with a substantial cost. Companies can save up to 3% with such a software cost reduction strategy.
There are additional advantages that one can benefit from by adopting open-source software. As the code updates are made by developers from various companies, it improves faster, and you will have multiple support options available for assistance, whenever required, relieving you of dependency on a single software provider.
IT costs can be broken down into operational costs and capital costs. The operational costs are predictable expenses that are required for normal business operations. However, capital expenditure is the one that includes fixed assets.
The operational costs include inventory cost, rent, equipment, and similar expenses, whereas the capital expenditure includes the capital required to maintain, upgrade, and attain technology, equipment, building, and other physical assets.
The predictable costs are comparatively lower and can be budgeted, however, capital expenditures are fixed and have a bigger impact on the overall budget. Thus, a thorough analysis of the requirements must be done when choosing the right technology and equipment. Right decisions will lead to long-term usage of the assets thus incrementally saving costs.
As the word says, consolidation means combining multiple processes into a single unit. Streamlining several information technology solutions together requires a lot of effort, but once done, it helps businesses run smoothly. Consolidation also helps in saving time and space along with reducing IT costs.
This will also help in improving the efficiency of the processes by making small, but critical changes in particular instances. However, ensure to test these changes before actually implementing them so that the regular business processes do not get hampered and the effectiveness of the changes can also be tested.
Negotiating, re-negotiating, and thoroughly exploring the options available to replace your current hardware is also a strategic IT cost reduction initiative. Opting for less expensive hardware can help in huge IT cost savings. For example, buying a Mac as opposed to a PC can prove to be a cost-saving idea as the residual value of a Mac is much higher than that of a PC.
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We take pride in stating that our experts have helped many companies by providing our services that have helped businesses transform digitally by outgrowing our clients’ expectations.
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It is estimated that three-fourths of the allocated IT budget is eaten up for maintenance and services and the remaining one-fourth is used for innovation. It is necessary to reduce infrastructure costs, and CIOs need to come up with innovative cost-saving ideas so that the budget for IT innovation can be increased.
The cost-saving strategies listed above will help you save IT costs to a large extent. However, little effort, research, and planning are required to successfully implement these IT cost reduction strategies.