Evaluating Savings Opportunities

When evaluating potential opportunities to cut IT costs, there are a number of factors to consider. Of obvious concern is whether the level of time and money required to realize savings is worth the investment. This straightforward evaluation is based simply on whether the savings will exceed the required investment as well as any other opportunities that compete for the same time and money.

In many cases however, the specific levels of investment required for any given (or combined) IT efficiency effort are difficult to accurately calculate until the effort is initiated and some progress is made. Similarly, the savings themselves may be difficult to even estimate until some level of assessment or review is performed. Given this reality, it is often helpful to look initially instead at other attributes that indicate general levels of expected investment and return. In the case of IT savings opportunities, typical dimensions impacting investment and savings levels include implementation complexity, general savings potential, the savings horizon, and whether the savings stem from a single event or delivered continuously, as summarized in the figure below.

Common attributes for assisting in the evaluation and selection of IT savings opportunities.

Common attributes for assisting in the evaluation and selection of IT savings opportunities.

Implementation Complexity

The complexity of implementing the changes necessary to realize savings represents a significant dimension impacting the decision whether to pursue a particular opportunity to cut IT costs. A simple framework for examining implementation complexity is established by looking at this dimension as three potential levels:

  • High - The effort will require significant levels of internal resource time, substantial monetary investment, and/or substantial organizational changes to its structure or culture.

  • Medium - The effort will require some internal resource time, some monetary investment, and/or some level of organizational changes to realize savings.

  • Low - The effort will require little or no resource time, monetary investment, and low or no levels of impact on the organization’s structure or culture.

Implied in these general levels of complexity are the associated levels of risk that accompany increasing complex initiatives. Potential issues such as sustained sponsorship commitment or continued availability of resources and funding will greatly impact the success of increasingly sophisticated and lengthy efforts and must be weighed accordingly when evaluating opportunities.

Savings Potential

Identifying highly accurate quantitative savings estimates is often almost impossible for IT cost cutting initiatives unless the scope of evaluation is extremely narrow. For example, estimating savings from using one versus two servers for a particular project is fairly straightforward to quantify. However, the savings from consolidating a large data center into fewer numbers of servers is significantly more complex based on a wide range of potential technical limitations that won’t be uncovered until some level of review and effort is underway. In cases such as this, using a scale of ranges is helpful:

  • Very High - Potential savings greater than $2.5M.

  • High - Potential savings between $1.5M to $2.5M.

  • Medium - Potential Savings between $500K to $1.5M.

  • Low - Potential savings of less than $500K.

The number ranges are generalized and will likely change up or down depending on the size and scale of a given organization’s annual IT budget. However, for any organization, even opportunities with low savings potential may be ideal, or indeed high priority, if they are simple to realize and recurring in nature.

Savings Horizon

Of often equal importance to savings potential, is the time frame under which the savings would likely be realized. A simple set of high-level categories for an opportunity’s savings horizon includes:

  • Longer Term - Savings are likely realized after 18 to 24 months from initiation of the effort.

  • Mid-Term - Savings are likely realized in 6 to 18 months from initiation of the effort.

  • Shorter Term - Savings are likely realized in 0 to 6 months from initiation of the effort.

Depending on the goals and objectives of any given organization, savings horizon may be a critical selection factor. For example, many organizations begin to focus heavily on IT efficiency not because IT isn’t delivering its desired value, but because other factors are emerging, such as constrained budgets, falling revenues, or cash flow issues.

Savings Frequency

Another important consideration is whether the savings from a particular opportunity will be continuous or result only in a one-time savings. For example, consolidating several call centers into a single call center might result in a continuous savings of several million per year over the previous approach. However, an invoice audit which finds several thousand in recoverable overpayments will only save the thousands that one time.

  • Continuous - Savings are realized on a continuous basis

  • One-Time - Savings are realized as a single event

The frequency of savings represents a vital attribute as even small savings, when continuously realized, may represent an equal or better opportunity than a larger opportunity that may only result in a one-time savings.