8 great tips for reducing your IT costs

The pressure to limit IT spending is as strong as ever. Before resorting to the usual cost-cutting strategies — such as canceling projects and reducing headcount — try some of these money-saving suggestions from technology industry executives and analysts.

In Summary:

Global economic pressures and leaner business models have companies of all sizes striving to eliminate waste from their operational processes, including IT. Thus, even though IT analyst firm IDC predicted in November 2006 that IT spending would rise just over 6 percent in the following 12 months, reducing unnecessary spending remains a perennial concern for IT executives.

Fortunately, IT executives at midsize companies and technology industry experts can recommend some cost-cutting opportunities you may not have explored yet.

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1. Create an inventory of your software assets

Take stock of the applications your company runs to expose low-value systems that you can safely eliminate. Asset analysis may also reveal redundancy within your portfolio, such as two divisions using separate customer relationship management (CRM) products. While there may be solid business reasons for using two largely identical systems, companies that consolidate applications can reduce their development, support, and maintenance outlays by 25 percent or more, according to an IT cost-cutting study from the Stamford, Conn.-based IT research firm Gartner.

Software asset management tools, such as those available from Microsoft, can help you build a complete list of all your applications. Using that information, you can assess how much value each system adds and how much overhead it generates. Any system that subtracts more from the bottom line than it contributes is a good candidate for elimination.

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2. Switch to Web-based applications where appropriate

More and more application vendors these days offer "software as a service" (SaaS) versions of their products. Such solutions do not require you to own expensive servers, which ends up reducing your up-front costs and simplifying deployment. Maintenance costs also are lower, since the vendor handles upgrades and other fixes. At the National Aquarium in Baltimore, for example, administrators found that the cheaper licensing terms made switching to a Web-based version of its budgeting application irresistible. With the money it is saving, the Aquarium has added more users at no extra cost, says chief technology officer Hans Keller.

Of course, SaaS is not always the right answer. Such systems are often harder to customize than traditional, on-premise systems, so they may be a poor fit if you need specialized functionality. But in many cases, SaaS is a money-saving alternative that is worth investigating.

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3. Consolidate and virtualize your servers

Look for opportunities to combine services and applications on fewer, more powerful servers. Companies that consolidate even part of their server infrastructure typically save 20 percent on hardware-related expenses, according to Gartner's cost-cutting survey. Server consolidation initiatives can be as simple as replacing three small servers performing the same task with a single larger server. Or you can use virtualization software, such as Microsoft Virtual Server 2005, to run multiple applications or even operating systems on a single host. Either way, fewer servers usually mean lower infrastructure expenses. Drug maker Purdue Pharma LP, in Stamford, Conn., trimmed $580,000 from its IT budget by virtualizing its UNIX and Windows-based servers. "We reduced our maintenance costs and our licensing costs, and avoided having to purchase new hardware," says vice president and chief information officer Larry Pickett.

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4. Consolidate your vendors

In the same vein, managing fewer technology and service vendors can lower your costs in two ways: by reducing your management overhead and by allowing you to negotiate volume pricing with your primary vendors. For instance, Purdue Pharma has initiated a "smart sourcing" initiative aimed at shortening its partner roster. "We are hoping to drive a couple million [dollars] out of our budget over the next two years through this strategy," Pickett says.

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5. Become a customer reference

As any marketing expert will tell you, brands have value. Yet too few companies tap into that value when negotiating deals with technology suppliers. Serving as a customer reference in exchange for reduced rates on licenses, maintenance, or services can be an excellent way to save money. Vendors are often willing to reward their customers for participating in case studies, talking to prospects, or joining early adopter programs. The trick, Keller says, is figuring out what is important to your vendors and then using that knowledge to propose mutually beneficial agreements. The value of doing so can be substantial. In the last two years alone, the National Aquarium in Baltimore has parlayed reference activities into more than $375,000 worth of vendor discounts.

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6. Improve your IT management processes

Labor accounts for as much as half of the typical IT budget, according to Barbara Gomolski, a research vice president with Gartner Inc. Adopting standardized IT management processes, such as those defined in the Information Technology Infrastructure Library (ITIL), can generate significant savings by helping you use labor more efficiently. For example, implementing rigorous change management controls can keep IT staffers from making ill-conceived system modifications that inflate support costs later. Adopting process frameworks such as ITIL can take three years or more, Gomolski says, but companies can also cut their operating costs by 20 percent to 30 percent over that period.

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7. Invest in IT employee retention

Recruiting new employees takes time and money. To keep turnover low, Pickett gives the IT staff at Purdue Pharma plenty of opportunities to acquire new skills and take on new responsibilities. Plus, helping employees expand their expertise pays a second dividend: IT departments composed of generalists often survive with fewer people, according to Gartner research, because they can redeploy current employees when new demands arise rather than add specialized roles or hire consultants.

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8. Spend now to save later

Sometimes the best way to save money is to spend some first. For example, managers at United Water, a water and wastewater services provider based in Harrington Park, N.J., used to rely on the IT department for their reporting needs. Now, a self-service reporting tool allows employees to gather data on their own. The new system, developed by Resolute, a Microsoft Gold Certified Partner in Bellevue, Wash., not only delivers information to decision makers more quickly, but also has spared United Water from hiring additional report writers.

Similarly, replacing a packaged sales-force automation solution with an in-house system is saving Purdue Pharma more than $1 million a year. "The systems available in the marketplace are very large and complex," Pickett says. "We designed something that exactly meets our needs, so it is a lot more streamlined." The company's simpler custom application has reduced training costs and help-desk calls significantly, and has eliminated licensing costs completely.

Whatever you do to cut IT costs, though, try not to cut too much too soon. Excessive reductions, in response to a temporary business downturn, for example, can cost you in the long run if you do not have the proper systems, partners, or skill sets to keep up with the competition. "When things turn around, you can find yourself pretty far behind the curve," Gomolski notes.

Drastic cuts are sometimes unavoidable, but companies that make cost containment an ongoing business objective are less likely to require them in the first place.

Rich Freeman is a Seattle-based freelance writer specializing in business and technology. He has more than 14 years of strategic marketing and communications experience in the IT industry.

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