CIOs have been cutting costs for years - and not seeing those savings coming back to IT. That's why you have to learn to cut strategically

Reader ROI?

• Where the savings are
• Separating the operations budget line from the innovation moneys
• Five rules for infrastructure rationalization

Two years ago, when Richard Toole became pharmacy service provider PharMerica, he faced two very tough challenges: reduce IT costs and earn the trust of the business. At the time, IT organizations all over the US were facing similar pressures. The country's economy was still stumbling after the double blow of 2001's terrorist attacks and the turn-of-the-century financial scandals. At PharMerica, the pressure was even greater. The IT organization that Toole inherited had little credibility within the organization, and had even less when it came to driving cost savings itself.

"We used to be called the 'helpless desk' when I joined," recalls Toole.

Toole knew that unless he changed his department's relationship with the business, IT would always be viewed as a cost centre, facing an endless stream of declining budgets dictated by others. So he was determined to demonstrate financial discipline by managing IT strategically, correcting inefficiencies to cut costs before he was asked to. That strategy paid off, and the trust Toole earned not only allowed him to determine the cuts and their nature but also permitted him newfound say in where the savings he reaped could be redirected.

"I wanted to not just cut costs but also build capacity for the future," he recalls.

First, Toole invested in building a help desk system so he could bring the poorly performing outsourced desk back inside the company. That addressed IT's most visible failure. He diverted some resources to creating an architectural team so IT would no longer be managed in silos, reducing redundancy while increasing agility. And he invested in increasing business, leadership and developer skills so his staff could deliver better service and applications with an eye toward adopting modern approaches such as service-oriented architecture and Web services.

Toole's experience is hardly unique. A CIO Executive Council survey in April found that 12 percent of the 51 CIOs interviewed faced what they called "very high" pressure to cut costs, while another 28 percent had "significant" pressure. "In a lot of cases, all the business expects of IT are tactical decisions. It's viewed as an order-taker, a big cost, just data processing," says Dennis Gaughan, research director for IT governance at AMR Research.

CIOs have already done a great deal of work cutting costs. But all too often the money they've saved has disappeared into the maw of the business, never to be seen again - at least not by IT. That's why CIOs can't just cut costs; they have to have a strategic plan to cut costs. And they have to leverage that plan to gain or maintain a seat at the organization's strategic table. In that way, the cuts they make can be transformed from a way of slowly bleeding IT to death to a way of adding value to the company.

Cut, but Cut Smart

"A lot of the [IT] cost savings in the last three to four years have been accomplished by shrinking budgets," says Greg Bell, a partner in the information risk management practice at audit, tax and advisory firm KPMG. In most cases, IT cut costs without determining whether those efficiencies increased costs elsewhere, increased business risk or short-circuited a potential strategic initiative for the business. For example, the management team of residential real estate company Crye Leike Group asked CIO Gurtej Sodhi to consider outsourcing the company's call centre. Sodhi declined.

"My call centre is one of the biggest advantages we have over our competition. The potential savings did not justify [outsourcing] it," he says. Sodhi saw the call centre as the customer's touchstone to the company, and he wanted to invest in it by taking better advantage of customer intelligence for cross-selling and targeted services. That's hard or impossible to do with an external, outsourced call centre, he says.

"CIOs may find themselves in a hole by not managing [cost cutting]," says James Kaplan, a partner at the consultancy McKinsey & Company. "Fortunately, we're seeing in the last 18 months more strategic direction from the CIOs on cost cutting." That's because optimism about future growth has turned the businesses' priority from cutting costs across the board to building long-term efficiencies that will permit IT to focus on helping the business grow.

"In 2002-2003, there was a need to reduce costs quickly," he says. That period, according to Kaplan, is over.

While CIOs will arrive at different conclusions about what costs to cut and how to make those cuts, there are several universally applicable strategies that Toole and other CIOs have found successful. They include making the IT costs of business technology demands clear to senior management so you're not stuck with supporting unfunded mandates long-term, separating IT operations from innovation initiatives, and making the infrastructure - which Forrester Research says typically consumes 76 percent of IT budgets - both more efficient and less complex.

The implementation elements of a successful long-term infrastructure reduction strategy are deceptively simple: standardize as much as possible to reduce complexity; get rid of hardware, data and applications you no longer need; and understand the cost and value of delivering each IT service so you can determine what to outsource, automate or manage at the appropriate level of staff.

But while these elements are straightforward, translating them into action can be hard. That's where your department heads and technology experts come in. With a clear strategy in place, they can choose the right solutions. And IT can then focus on delivering what the business really wants and needs, says Alex Cullen, principal analyst for IT management at Forrester Research, "not just be some general corporate overhead target".