Gartner Identifies Four Discrete Levels at Which IT Organizations Can Help Their Enterprises Optimize Business Costs

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STAMFORD, Conn., There are four discrete levels at which IT organizations can help their enterprises optimize business costs, according to Gartner, Inc. Gartner recommends that IT and business leaders use a cost optimization framework as a template when evaluating cost optimization initiatives.

Gartner’s Four Levels of Cost Optimization framework include the two lower levels — IT Procurement and Cost Savings Within IT — focused on the reduction of cost within IT, while the two upper levels — Joint Business and IT Cost Savings, and Enabling Innovation and Business Restructuring — involve IT and the business teaming up to reduce operating costs..

“Whether it’s due to an efficiency play, response to competitive action, meeting the needs of a powerful customer or dealing with an economic downturn, a sudden, renewed focus on IT costs can sometimes lead to ill-considered management responses,” said Barbara Gomolski, managing vice president at Gartner. “However, experienced IT leaders know that cost-cutting campaigns seldom leave the organization positioned well for IT-innovation-enabled and new-value-creation-based expansion.”

Where appropriate, each level of this framework explores cost optimization issues by technology, domain, technology role, supporting facts and quantifications, estimates of savings and risk, and, in some instances, vertical industry. The broad definitions of the four discrete levels are given below (listed from lowest to highest):

* IT Procurement — True partnerships with IT vendors mean that each party benefits in the good times and makes joint sacrifices in times of economic uncertainty. Each year, IT organizations spend billions of dollars for hardware, software, IT services and telecommunications services. The manner in which IT organizations approach procurement issues will affect how much they can reduce spending to meet business goals.
* Cost Savings Within IT — A priority for many IT organizations will be to identify opportunities to reduce baseline IT costs, not just move them to another budget center. Where IT organizations focus is where they will be successful with cost savings.
* Joint Business and IT Cost Savings — Consider that the average IT budget is roughly 3 percent of revenue, while total operating expenses are 80 to 90 percent of revenue. If the enterprise is looking to reduce costs in 2009, IT managers should try to join IT with the business to reduce costs in business operating expenses.
* Enabling Innovation and Business Restructuring — As economic uncertainty passes, cost optimization will refocus on efforts to implement long-term process improvement and enable business structuring and innovation.

Gartner recommends that the framework is used as an organizing structure in which to track cost optimization programs as well as communicating the impact of cost optimization to the business. Mapping out cost optimization efforts to the framework can help to determine whether an organization’s overall initiative is out of balance (all cuts coming from cost savings in IT, for example) or whether an organization has mixed IT costs with an appropriate amount of optimization techniques (such as innovation and business restructuring) that can prepare an organization for a return to growth.

“As the immediate needs of the business change in relationship to the macroeconomic climate, more optimization focus will be transferred to the higher levels of the framework, reflecting efforts to enable a return to growth,” said Kurt Potter, research director at Gartner. “As organizations focus on the higher-level cost optimization areas, they will recognize and communicate higher levels of business benefit aside from cost cutting.”

Organizations should differentiate between cost optimization and cost cutting. “IT cost savings often result from optimization, but IT cost savings are not a given when optimizing business processes,” said Mark Raskino, vice president and Gartner fellow. “In other words, optimizing the business may require spending more on IT in order to meet the service-level expectations of business and IT in the future.”

Arbitrary cost cutting often delays optimization, because investments that would normally yield better results in the long term are delayed. These are the challenges that IT and business leaders are facing in the current period of economic uncertainty.

“Across-the-board cost cutting may be a reality for organizations that are fighting for survival but should always be accompanied by measured and intelligent planning for the future and discussion around the IT and business trade-offs,” Ms. Gomolski said. “It is essential that IT leaders know their organization’s return-to-growth strategy and make certain that this strategy gets the funding and attention it needs in order to be ready when the time comes.”

Additional information is available in the Gartner report “The Four Levels of Cost Optimization.” The report is available on Gartner’s Web site at http://www.gartner.com/DisplayDocument?ref=g_search&id=860512&subref=simplesearch.

Gartner’s microsite “IT and the Economy” provides its clients with advice on IT and the economy and how to survive the current economic downturn and drive business recovery. The microsite, which can be found at www.gartner.com/economy, gives clients instant access to Research Notes that contain independent, actionable advice on the immediate steps that organizations can take and interviews with key Gartner analysts.

Gartner, Inc. (NYSE: IT) is the world’s leading information technology research and advisory company. Gartner delivers the technology-related insight necessary for its clients to make the right decisions, every day. From CIOs and senior IT leaders in corporations and government agencies, to business leaders in high-tech and telecom enterprises and professional services firms, to technology investors, Gartner is the indispensable partner to 60,000 clients in 10,000 distinct organizations. Through the resources of Gartner Research, Gartner Consulting and Gartner Events, Gartner works with every client to research, analyze and interpret the business of IT within the context of their individual role. Founded in 1979, Gartner is headquartered in Stamford, Connecticut, U.S.A., and has 4,000 associates, including 1,200 research analysts and consultants in 80 countries. For more information, visit www.gartner.com.