As the owner or leader of a business, there are some factors you need to consider and put in place for the smooth day-to-day operations of your business. Some of these factors include ease of pedestrian and vehicle access, quality and quantity of your products and/or services, customers’ request and review, security of your environment and customers’ information among several other factors.
However, there is one important aspect that is usually neglected by business owners, and this is cost governance and cost savings framework that guides the organization in spending. This explains why a lot of organizations spend a lot of money on unnecessary subscriptions and tools and later have nothing to spend or invest when a more important need arises.
There is no rule guiding or regulating their cost, they basically operate a “Spend at will” system. The reason they neglect Cost Governance is because they actually do not have a cogent knowledge of its many benefits, and if you are such a person reading this article right now, you are in the right place. Settle down as we take you through its importance, step by step, in the words of Gartner.
It is vital to every business that CIOs follow a cost optimization framework which will help determine the areas required to reduce IT and business costs due to the economic fallout brought on by the 2020 pandemic, noted Gartner.
Gartner who produced this analysis concluded that the COVID-19 pandemic has increased the regular amount of pressure on CIOs by 50% to do more with the little they have and make difficult decisions.
Cesar Lozada, a senior principal research analyst at Gartner, noted in a piece about the six step framework(1) that, “Cost optimization ideas are typically weighed almost exclusively on their potential cost savings, without considering the effects such proposed cost savings may have on the business” and this is particularly true for large organizations.
He said and we quote :- “This is equivalent to prioritizing new initiatives based only on their potential benefits without concern for their impact. Using potential benefit as the only decision criterion could result in a prioritized list of initiatives that could yield savings, but could also be risky, have negative impacts on the business or most likely fail,”
Chris Ganly, a senior research director at Gartner, also noted, “In order for companies to achieve the most sustainable business outcomes(2), executives must ensure that cost management reaches beyond mere cost cutting, spending freezes or staff reductions, as this is usually short-term thinking,” He further stated, “Organizations should approach cost management as an expansive effort that can have immediate and long-term significance to business performance. Cost management demands a mix of approaches and improvements that touch every part of the organization, if it is to truly serve the enterprise.”
Gartner has recommended that CIOs and IT leaders need to place emphasis and focus on six core areas whenever they need to evaluate costs, benefits, efficiency and viability of different cost optimization initiatives. These six factors are the reasons you should build and maintain a framework for your cost governance.
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Why You Should Build a Cost Governance Framework?
Potential financial benefit
You need to consider to what extent (whether small, medium or large and whether positive or negative) cost initiatives will affect the bottom line. The C.E.O and management is expected to ask vital questions such as:
- How much will the enterprise save if the action is implemented?
- How does the action affect enterprise cash flow?
- If this action is taken, how much will be available for the company to invest?
It will assist you to determine the level of impact(whether small, medium or large) an initiative will have on all of your employees and day-to-day business activities. So, you are basically on a stakeout to see if that initiative will have a negative or positive impact on productivity or a product launch.
Good things often take time and cost governance does as well. Bear it in mind that it will take time for the company to realize the cost savings and improved business value from cost optimization initiatives regardless of the method that is being used. The important question CIOs must ask is what that time frame looks like (weeks, months or even if it is across several years).
Though most organizations prefer months, it has been proven that a time frame that involves years usually brings more profits and long term benefits.
Degree of organizational risk
Do you know that the effectiveness and efficiency of the cost optimization initiative is partially dependent upon the ability of teams to change and adapt to the new reality? If the management of the company is capable of articulating the benefits of a solid cost optimization initiative with minimal changes to organizational processes, then they will be able to demonstrate how impactful business outcomes could be and provide a foundation for success.
Degree of technical risk
What about inevitable technical risks? Risk even in its smallest form will always be there but to mitigate technical risk, CIOs must make it a serious point to assess how a cost optimization initiative will be integrated within current operations and enterprise architecture.
Any kind of delay caused by or attributed to the initiative could likely result in a loss of service delivery, poor customer service or terrible output and productivity.
Before you embark upon any cost optimization project or initiative, the executive board must sit down, talk, support and agree to fund it. CIOs must make sure they present a business case showing how the cost optimization initiative will improve business processes, productivity, time to market and the like, as opposed to just continuing with the regular status quo.
It is important that the level of investment required be evaluated before any actual savings can be realized.
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For any business that is willing, not just to survive but thrive during this economic crisis that has seized the whole world, these six factors must be at the top of their list when they are considering building a cost governance framework.