Today’s IT departments have a wide range of responsibilities, ranging from performing the most pedestrian maintenance functions to exploring the frontiers of machine learning and artificial intelligence. It’s hard to think of an important business function that does not touch IT or require the involvement of a CIO or CTO.

But a smart CIO knows that profitability is always king and budget controls are always smart whether times are good or bad. Here are 15 ways that IT executives — and business leaders at growing companies that don’t have a designated department — can reduce costs while maintaining the tactical and strategic services their companies need.

What Is IT Cost Reduction?

The world of IT moves fast; new technologies, new techniques and new skills arrive seemingly every month. Similarly, the demands on IT are constantly growing. IT departments, once considered mere “data processors,” have become the heartbeat and lifeblood of corporations. The smartest companies see their IT operations as key strategic assets that help their people work better and allow for better decision-making.

But with that growth comes higher cost: more people, more infrastructure, more cloud and software costs. And even though IT is now considered a core business function, IT sprawl threatens to swamp business budgets. Smart IT managers need to understand and proactively take hold of their spending, lest their departments fall victim to the next round of company cost-cutting.

Key Takeaways

  • The first step to reducing IT costs is to analyze current expenses.
  • Depending on business demands, IT contractors can be either an advantage or a drag on costs.
  • Move to the cloud as much as possible. Virtualize and containerize what can’t be moved to save on hardware.
  • Sharpen your pencil on software licenses and other vendors.
  • It costs less to retain good employees than to find new ones.

15 Ways to Reduce IT Costs

Whether a business or IT department is looking to make major cutbacks or just digging around for spare change in the budgetary cushions, it’s helpful to think systematically. Here are 15 places to look to economize on IT spending, starting with the simple and progressing to the transformational. They might not all apply to every business, but each one warrants careful consideration if you intend to trim your IT budget.

  1. Audit your tech stack.

    The first step to taking a realistic view of your budget is to understand where you’re already spending money. It’s not uncommon for IT expenditures to have grown in an ad hoc manner because of once urgent needs, one-off projects or initiatives that turned out to be dry wells. Maybe you’re paying for two services or applications that do pretty much the same thing. Or perhaps you’re using multiple tools when you could be using just one.

    Simply stated, you need to know what you have before you know what can be cut. Take stock and prioritize. You’ll probably be surprised.

  2. Align with company strategy.

    Assess whether the projects underway or under consideration are in sync with business goals. If you want to increase sales conversion rates on your ecommerce site, it makes sense to devote a lot of your budget to solving that problem. Building an HR intranet, for instance, could maybe wait.

    The closer you can align your department to prioritizing activities that are essential for the business, the better off you’ll be at budget time.

  3. Manage IT contractors.

    Look carefully at how you resource people. Contractors are an important part of any IT effort because they can be brought in during peak periods or they have skills not available internally.

    But just as you may be spending money on unnecessary technology, evaluate whether you’re spending on outside contractors who have outlived their usefulness. Is your once overwhelmed internal staff now underutilized? Are the unusual cutting-edge skills that you once needed to outsource now commonplace? Do you have any ongoing blue-sky initiatives that can wait for another day?

    Alternatively, maybe contractors and their skills are exactly what you need for project work, rather than hiring head count. In those cases, contractors may be the less expensive alternative.

    Contractors can add capacity and skills when you need them. In leaner times, take care to decide how many you need.

  4. Renegotiate with vendors.

    Look closely at your vendor contracts because there may be more than loose change lurking there. If a contract calls for paying for 100 seats, but you only need 25, or for twice the data storage you actually need, don’t be afraid to call your sales rep and discuss adjusting the contract. Odds are you won’t be the first, and you may well find wiggle room that saves you real money.

    From the vendor’s standpoint, it’s typically better to trim its revenue for a while than lose it entirely. And if in the future you need those extra seats or storage after all, they’d be happy to take your money again.

  5. Reduce turnover.

    It’s expensive to recruit and hire new employees. If you’re already running lean, the departure of a team member may mean having to hire an expensive, short-term contractor to fill the gap while you go through the considerable time and expense to launch a search, sift through resumes, conduct rounds of interviews, negotiate an offer and bring the new staffer up to speed.

    Think about what you can do to keep staff from leaving in the first place. A certain amount of turnover is healthy and inevitable, of course. But spend some time and effort delving into job satisfaction issues: flexible work arrangements, training opportunities, time to pursue passion projects and, yes, even pay raises. Don’t forget that upskilling your own management chops may help people decide to stay, too. It may seem expensive, but it’s probably cheaper than replacing staff.

    People stay where they feel valued, so concentrate on finding ways to accommodate your people. But things like foosball tables? That’s so 1990s.

  6. Take a hard look at staff.

    As hard as it may be — and as priorities change — it may be time to eliminate positions to reduce costs. Long-tenured people may no longer have the skills you need (and they’re expensive). Perhaps a few roles are redundant and can be consolidated. Perhaps wait-and-see underachievers have run out of time to prove their worth.

    Although it can be an unpleasant, uncomfortable task, downsizing staff is often necessary in order to maintain the financial stability and long-term viability of the business.

  7. Move to the cloud.

    For most applications, the cloud-vs.-infrastructure debate is over, and cloud computing has won.

    It may be that your business’s particular needs require maintenance of its own hardware, maybe for legal or regulatory purposes, so those applications have to stay in-house. But otherwise, especially if you haven’t penciled it out lately, look again at moving your data centers to the cloud.

    This may not be a short-term win; it takes some time and care to do a cloud migration right, and you may have some amortization or contractual issues to work through regarding your servers. But over the mid- and long term, odds are good that the flexibility and scalability of the cloud will make more economic sense than staying locked into your own hardware. Moving from your own servers to cloud-based, on-demand services lets you move capital expense (CapEx) to operational expense (OpEx); depending on your balance sheet, that may make sense for your business.

  8. Virtualize servers by using containers.

    Not all applications and databases require their own servers. In fact, with virtualization and container technologies, very few do. Using containers, a single server can run multiple applications under a single operating system (usually Linux) but protected from each other; they share the same processor, storage and memory, working fully independently of each other. But because all those containers sit on the same hardware, the cost savings can be considerable.

    Cloud services work the same way, incidentally. When you buy space on a cloud server, your application and database sit on the same piece of hardware as those belonging to other customers. Each “computer” you buy from a cloud vendor is a virtual machine or container sitting on one of their servers.

  9. Decommission out-of-date licenses.

    Since you’ve done your IT audit, you probably found some cruft that you don’t need. Just as you located unneeded contractors and vendor contracts, you may well have found some software licenses that are long past their expiration dates. Maybe you needed the license for a long-since decommissioned project or for contractors who haven’t been around for a while. Or maybe the license is for an older software version that isn’t supported anymore. These things happen, but that doesn’t mean they have to keep happening. If you don’t need the license or it’s out of date, decommission it.

  10. Virtualize databases.

    Most modern companies generate an ocean of data. Managing it and gaining insights from it are major IT challenges. By virtualizing (or “federalizing”) databases, it’s possible to query several databases at once without having to duplicate the data on multiple servers or manually combine databases.

    Virtualizing your databases speeds and simplifies queries, reduces bandwidth and storage demands and makes data management easier for end users and DevOps — the developers who administer your servers and cloud. There may be some heavy lifting to create a map of what data lives where, but the payoff can be considerable.

  11. Do it right the first time.

    It’s as true in IT projects as it is in carpentry: Measure twice, cut once.

    All the cost-saving initiatives in the world won’t matter if you cut the wrong thing the wrong way or build something incorrectly. It’s expensive to replace contractors or employees you fired but later need. Putting in place employee retention plans that don’t address the real underlying problems can actually drive people away. Giving back cloud software licenses that you actually need is, at best, embarrassing.  

    It’s important to save money, of course, and you shouldn’t delay an important project needlessly. But be deliberate. Take the time to do things right with your hardware, software and coding initiatives. Be in a hurry but not in a rush. Having to do something twice because you didn’t think things through the first time is usually more expensive than not having done it at all.

  12. Stop worrying about sunk costs.

    It’s a fallacy to think: “I’ve already spent a ton of money on X, so even if it doesn’t work so well, I’ll have lost all that money if I do something else instead.”

    True, spent money is gone and nothing you do will get it back. But spending existing budget on mistakes from an old budget only compounds the old mistake. Rather than continuing to invest in solutions that don’t work the way you need, focus your spending on things that will benefit the business going forward.

  13. Assess variable and fixed costs.

    When you put everything into a financial statement or plan, you’ll find some costs are easier to manage than others. Expenses like rent, payroll, equipment leases and corporate overrides will be the same month after month and are probably difficult to reduce in the short term and without pain.

    Variable costs may be easier. Items like the amount of cloud data storage you’re using, the number of software license seats you’re paying for and the consultants you work with are all likely to change month to month, depending on your immediate needs. When things get tight — or if you’re trying to get ahead of the budgetary curve — your variable costs should be an early place to look.

  14. Assess discretionary and nondiscretionary costs.

    It may seem easy (if painful) to go through your budget, cut all your discretionary spending and call it a day, but resist the temptation. If some discretionary money is going toward new strategic projects, for example, it’s money well spent. By the same token, spending that seems nondiscretionary at first glance — such as infrastructure, operations or cloud/software licenses — may be a fruitful place to trim a few dollars.

  15. Don’t forget automation.

    Most IT departments do a lot of unglamorous, routine and utterly necessary work: employee onboarding, software updates, end-user hardware imaging and replacement, creating (and deleting) cloud accounts and managing email. The tasks are not as sexy as a major cloud migration, but business would stop without functions like those being performed in a timely manner.

    Most of those functions could easily be automated, but many IT shops somehow never get around to it. Automating the routine functions will serve your clients better and free up staff to do more strategic work — possibly replacing some of your pricey consultants.

Manage IT Budgets All in One Place With NetSuite

Planning and budgeting are labor-intensive processes, best performed on a dedicated platform that automates functionality. NetSuite Planning and Budgeting is a cloud-based software solution that lets finance teams quickly and easily produce budgets, financial projections and what-if scenarios, as well as generate reports. Instead of spending time on manual processes, teams can replace time spent on low-value activities, such as data entry, with high-value strategic analysis.

In addition, data synchronization gives all teams access to the same real-time data, allowing better control of information and creating a single source of truth. Stakeholders are connected in a single environment, improving participation and accountability. And any changes automatically flow through to reports and dashboards. NetSuite Planning and Budgeting also provides collaborative budgeting capabilities so that teams can work together on budgeting and planning activities.

Even in smart companies that regard IT as a strategic asset and not a cost center, IT budgets do not grow to the sky. When times are tough, there’s likely to be a business mandate to slim down. But even in good times, a smart IT director or business owner should always be looking for efficiencies that will allow them the flexibility to trim expenses on things that don’t matter so they can deploy resources on those that do.

The key to staying strategic is being able to demonstrate that the IT function is worth far more than it costs. The more efficiently you can manage the costs, the easier that will be — and the more value you can bring to the table.

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Reduce IT Costs FAQs

What are common IT budget challenges?

IT departments are responsible for routine tactical functions, like provisioning end-user machines and software, and sophisticated strategic initiatives that affect product decisions and business direction. As IT’s responsibilities have increased, so have its budgets — and its sprawl. Typically, IT budget challenges include controlling personnel costs; managing software license, bandwidth and storage expenses; and using the latest technology advances to maintain a company’s strategic edge while keeping an eye on costs.

How have IT priorities shifted, and why?

As the internet has grown and computer technology has become ubiquitous, IT departments’ priorities have become central to company operations. More and more, data has become corporate lifeblood, and it falls on IT to enable companies to maximize the value of that data. Far from the old model of “data processing,” IT operations and infrastructure have become strategic assets. Companies that do IT well have a business advantage over those that don’t.

What does an IT budget include?

An IT budget can generally be broken down into capital expense (CapEx) and operational expense (OpEx). CapEx includes items like servers and end-user devices — long-term items that can be amortized over time. OpEx includes payroll, software licenses and cloud services — items that can be easily managed and controlled in the short term based on annual budgets.

How do you reduce IT costs in 2023?

Reducing IT costs in 2023 means first understanding what you’re spending money on — from personnel, contractors and licenses to capital expenses. Once you know where the money’s going, you can align that to the importance of existing (and future) functions and projects.

Reduce your spending on things that just don’t matter anymore — unneeded staff, underutilized consultants, excess licenses, servers that would be better in the cloud. But make sure that the places you cut won’t have a deep impact on larger business priorities.

How does ITIL reduce IT costs?

ITIL — the IT Infrastructure Library — is a service management framework that outlines best practices for IT operation and management. The guiding principles include focusing on value, iterating change, collaborating across the company, simplifying operations and optimizing and automating.

Following ITIL principles properly will help professionalize IT operations, with the benefit of reducing cost while improving service and customer satisfaction.

What is the meaning of reducing cost?

Reducing cost for an IT operation means trimming operating and capital expenses in places where legacy initiatives can be de-emphasized and strategic projects can be made more efficient. The goal is to spend less money but have a greater positive impact on the greater business strategy and operations.