The CIO in a Fortune 650 company nearly got fired for cutting costs. Under pressure from their CFO, she cut IT headcount and expense budgets. As a result, clients saw dramatic drops in her organization's level of service and her staff failed to deliver many of the promised projects.

Being a technology-based outsourcing company, this threatened their ability to do business. Rallying together, business unit leaders convinced the CEO to push this CIO aside and re-build corporate IT. Meanwhile, they quietly expanded their decentralized IT staff.

Okay, times are tough and you've got to cut costs. But there's a good way and a bad way to do so. Cross-the-board edicts and high-level SWAT teams that make "surgical strikes" are the bad way. Sure, they reduce spending; but they also decimate a company's ability to get anything done.

Instead, cost cutting should focus on narrowing the number of things a company does, while ensuring that it devotes the resources needed to do those fewer things well.

Cost cutting means reducing corporatewide spending on a function such as IT. It does not mean reducing the size of the corporate IT provider by capping their operating expenses and headcount. With clients' demands unconstrained, this traditional approach only sets the organization up to fail, while driving clients to other, generally higher-cost providers such as decentralization and haphazard outsourcing.

In short, it does no good to cut supply without constraining demand.

In the short term, minor gains might be found in scrutinizing indirect costs (such as overhead). But the organization is only as productive as it is; cutting its budget won't magically make it more productive. The only way to significantly cut costs is to reduce its deliverables.

RESULT:
Improving value
Managing demand

Leaders must sift through the function's projects and services and decide which the corporation can and cannot afford to buy. This should be done in a businesslike fashion, with consideration of ROI and impact on the business.

With a bit more time, an organization can make investments that improve its productivity. This is not as simple as a one-time cost study or outsourcing decision. Long-term costs savings are produced by ongoing processes that continually improve value.

RESULT:
Continual value optimization

Benefits

An investment-driven approach to cost-cutting has the following advantages:

• Indirect costs are trimmed carefully, without undermining the sustainability of the organization.

• Leaders cut low-payoff deliverables, without threatening the business or the organization's reputation.

• Entire deliverables are cut, to avoid demanding results from one group while its support groups are cut and can't help.

• Costs are not driven underground (eg, to decentralization and outsourcing) by arbitrary caps on the size of the internal service provider's organization.

• Relations between an internal service provider and its clients remain businesslike, a foundation for delivery of strategic value.

• In the long-term, ongoing, continual improvements deliver far more value than one-time slashing or across-the-board outsourcing.

Fundamental Components

1. Short-term: Cost study and demand management

There are two components of short-term cost cutting: trimming indirect costs carefully, and eliminating low-payoff projects and services.

Both are based on a model of the organization's budget -- not formatted as the traditional expense codes per group, but rather as the total cost of deliverables (projects and services).

The cost model is built based on clear delineation of the lines of business within the organization, and the products and services of each.

Indirect costs are clearly defined, including the traditional sustenance activities within each group plus "unbillable time" (training, product research, working with clients), services one group within the organization does for another, and overhead.

All indirect costs are carefully scrutinized during the construction of the cost model. Then they're amortized across the appropriate deliverables. Costs are then summed across all groups in each project team to get the full cost of each project or service.

By knowing the full cost of the organization's products/services, corporate leaders can analyze which projects and services they'll have to do without to achieve cost-cutting targets.

2. Long-term: Outsourcing via extended staffing

A one-time decision in favor of outsourcing may appear to save money. But in the long term, it costs more money to pay other shareholders a profit to do what staff could do as well.

To get the best of both worlds, internal staff should utilize vendors and contractors as extensions to their own capabilities whenever it's economical to do so. This requires an entrepreneurial culture, where staff manage businesses (not cost centers) and continually strive to offer best value.

3. Long-term: Judicious investments

In the budget, staff propose "ventures" which are investments in their capabilities and infrastructure to improve their productivity and value. These proposals, like any projects, are evaluated based on potential returns.

4. Long-term: Organizational structure

Significant long-term savings can often be found through a rationalization of the organization's structure. This eliminates redundancies, consolidates similar lines of business, streamlines processes, and improves teamwork.

5. Long-term: Business-based metrics

Managers are measured based on profit-and-loss statements (revenues versus expenses), not the traditional metrics that measure their spending versus plan, without regard for what they produce. They're also measured by competitive benchmarks of rates. These business-based metrics focus staff on producing value.

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