THE BLOG
06/27/2010 05:12 am ET | Updated May 25, 2011

The Growing Season

In a timely nod to spring, that season of renewal, the economy is showing welcome signs of growth. The lean, dark days of winter are making way for a more hopeful outlook and as corporations emerge from these difficult times, it is important to take a good look at what has worked, and not worked, in your budgeting strategies. In the spirit of springtime, corporations have an opportunity to renew their commitment to eliminating unnecessary expenditures and realign priorities, particularly in the area of Information Technology, in an effort to take advantage of the newly budding economy.

Information technology is a large, critical, and very expensive cog in today's corporate machine, especially in industries such as financial services, media and entertainment, and e-commerce. As your company comes out of crisis mode and begins to explore investing again, this is no time to go back to old spendthrift ways. Now is your chance to do it right and make sure you get the biggest bang for your buck.

Within the IT category, approximately one-third of the company's costs will go to depreciation, overhead and corporate allocations, another third will be spent on services and licensing and the final third is people costs. A major part of these costs are not "compressible," or at least have significant inertia, which means that you cannot reduce them quickly. However there are ways to significantly reduce spending or if not "do more with less," then at least ensure you "do more with what you have".

It is not rocket science but it does require thought and planning. Corporate savings is as much about cost containment as it is about cost-cutting and when considering technology, in particular, your approach should be proactive, not reactive. You should be reviewing your cost management strategies on an ongoing basis and not scramble in a knee-jerk response to some external economic turbulence. Make it a discipline, a way of life - as you would with your physical fitness routine, for example. Before you start an exercise program, you must first know your weight; how much and where do I want to trim the fat? It is always more difficult to lose a few pounds before hitting the beach than it is to maintain good eating and exercise habits throughout the year. When it comes to fiscal fitness, it is equally harder to cut the fat from your business when the pressure is immediate than to manage and maintain good budgetary habits over the long-term. You will only wind up cutting the muscle instead of the fat. And though it may sound contradictory, don't track your numbers too often, unless you have to close a short-term budget gap. Just as you would never weigh yourself every day - it would become disheartening to hop on the scale that often and see no significant reduction - micromanaging the figures will only lead to frustration and discouragement. You do need to monitor your progress, just not every day.

In general, business costs can be viewed as two-pronged: mandatory spending to run day-to-day operations and discretionary spending for projects to help grow the business. And naturally, by reducing your so-called "run the business" expenditures this will allow you to reallocate this budget to more strategic areas and reinvigorate your newly energized "grow the business" strategy.

First, take a hard look at operational costs (again!) and where improvements can be made. Chief amongst operational costs are expenses generated by end-user demand. For example, a standard operation relies heavily on IT, including cell phones, Blackberries, printers, laptops, phone services, computer software, in short, all communications needs. Next, look into employee behavior; maybe people are printing when they don't need to print, thereby increasing costs on ink, paper, printer maintenance, etc. Perhaps cost savings can come from a minor change in basic policy. Only senior level employees are issued a Blackberry, for example, or allot one printer for every 40 people rather than for every 20, or set the printer to print recto-verso by default. A hidden but deeply felt cost is in data storage. We all have a tendency to save our emails but the money spent on buying disks for storage grows in direct proportion to the seemingly endless volume of data. Create, and enforce, an email retention policy whereby emails are automatically deleted within a reasonable amount of time. Storage is, in fact, the fastest growing element of IT due to increasingly larger sized documents and richer graphics therefore carefully evaluate your company's storage needs and how much information it truly needs to retain and procure your applications realistically (do you really need four gigabytes of storage space when two could be sufficient?). Finally in this demand area, review your spend with hardware, software and maintenance vendors: analyze your Enterprise License Agreements (conduct a quick benchmark as such databases exist and give you a good feel as to whether you have a good deal), question the level of support your organization really needs (do you need those expensive on-site dispatches within less than 4 hours everywhere in the world?), group your purchases (and wait close to the end of the quarter and vendor's financial year end to incite that eager sales person to give you a better discount!). We look at such areas from time to time but it is never enough and these costs relentlessly creep up on us.

Technology rationalization is a common but often overlooked savings strategy, because it requires significant investment and therefore delays the return... which explains why we would have put this area on the shelf during the recent crisis. Now is the time to take a new look at the technology you use and ask "can we do this better?" During the acquisition boom years of the 1990s, I worked with a very successful bank that acquired more than eighty smaller banks throughout the decade. Attention was paid to the obvious consolidation tactics, changing logos, aligning the workforce, etc., but given the rate at which they were consolidating these businesses, there were areas, particularly in technology, that they just didn't have the time to properly evaluate and re-architect. Huge savings were later realized by merging the scattershot computer networks into one single network connecting all the branches. Savings were there; it was just a matter of rationalizing the technology at the right time. Today, key technology rationalization efforts tend to focus on application portfolio rationalization, data center consolidations, improved use of virtualization, on-demand computing, and cloud computing, to cite a few examples.

As we saw all too frequently during the recent economic downturn, one of the fastest ways to reduce overall costs is by reducing head count. People lost their jobs in unprecedented numbers as a result of the race to balance the books. My strong recommendation is to view this as a last resort. Evaluate your corporate needs, reduce your demand, synergize wherever possible. If, in the end, you must reduce the workforce, then look to where you can automate some processes to require fewer people to do the same work and identify straightforward, procedural tasks that are easily translatable to off-shoring. The freed-up resources can now focus on more strategic projects and given that the economy is poised to get back on track, your organization might very well need to invest into new areas. And everything you can save in the other categories will reduce people impact... an incentive to encourage new thinking.

In terms of discretionary spending, there are several options. One, you can halt a project completely or put it on hold until you can comfortably finance it. Often, it is more cost-effective to change the scope and realign, accelerate, or automate the project to help rein in costs rather than abandon it altogether, along with the money you have already spent. It makes no sense to terminate a project in which you've invested $2 million; rather, realign the focus and salvage something from your investment. But while there are plenty of good ideas to cut costs, beware the hidden fees that can derail your savings. You may opt to shut down a project, but if you've already signed a contract for specific services, chances are you'll continue paying those fees regardless of whether you need the services any longer. Say you join a health club that features tennis, personal trainers, and yoga classes at additional costs. To save money, you decide you will give up tennis, you trainer and the classes. However, you've already committed to the club membership so even if you don't use it, you will still be paying your annual fee. Some savings are achieved but they may be much lower than your initial expectations. Here again, understanding what costs are compressible vs. not and within what timeline is key to manage expectations.

A thorough corporate spring cleaning can, and should, be done periodically throughout the year and not be limited to one season or shareholder's meeting. Just as the individual must know his weight before going on a diet so, too, must the company know its fiscal weight before responsibly and realistically trimming down the costs. And when beach weather finally arrives, everyone will be looking their best with extra energy to flex those newly developed muscles.