January 07, 2011

Reducing costs at all costs…

My last post talked about people rushing to the cloud and why that’s something to think about rather than just blindly doing it. The next topic is cost savings. It’s sort of the same theme, focusing too much on just reducing costs can have damaging effects. We boil this down to “Good IT saves you money, but saving money doesn’t get you good IT.”
In one of my previous companies, we had an HR department who felt their role was to reduce costs. They would congratulate themselves when they got someone in cheaper than expected; of course as soon as the economy picked up all of their employees got better offers and left.
Now we never focus on reducing costs, but if you compare our IT costs as a percentage of revenue to what the analysts say is comparable for our industry we are typically 10-12% less. This metric is always tricky since many people just hide IT projects everywhere but in IT to make the numbers look better, but if used correctly it can be a good tool. Of course, we get a good price on our networking gear, (I know what you are thinking) but we also replace ours more often than most since we are always beta (or alpha) testing our latest technology. In short I think it balances out.
Though we don’t focus on reducing costs, we have year over year consistently reduced our expenses. We do it by only investing in things that really add business value. If we can’t explain why it makes business sense, we stop doing it.
There are two examples I want to share. The first is tape storage. We used to pay close to a dollar a tape to store them offsite. We have a lot of tapes, so it cost us a lot of money. When we looked into it, we realized that other companies were only charging $0.10 a tape, or 10 percent of the cost. We called our premium vendor in to ask about this. With such a big price difference I wanted to make sure we were comparing apples to apples and not missing something obvious. I asked “Why are you guys ten times more?” The answer was “Well we are the biggest”. Um, OK, if that’s the only reason, I’ll save the money and go somewhere else. I did and it has worked out great.
The second example was a company that helps with data cleansing. We had them for years and everyone knew we needed them, but the more we looked into it, the more we realized that we didn’t. Again we had then come in and explain why we needed them. They explained that for a company that sends out millions of catalogs they were able to reduce the duplicates and save 10% of their costs, which was a lot of money. My boss asked an obvious question, “Since we don’t do direct mail, why does this apply to us?” When they had no answer we canceled the contract and have never looked back.
Many times CFO’s push for cost reductions and while this is a noble goal, it needs to be put in a better context: spend what makes sense, and stop spending on extra stuff. For example, we still refresh our workstations on a regular basis; in fact we try to refresh the “field folks” more frequently than every 3 years, but some other people get on a 4-5 year rotation.
Spend where it makes sense and helps drive the business, stop spending everywhere else. Then make sure you have a list of what you saved that you proactively go over with the finance folks. When it comes time to cut, they will already know what you did…
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