IT Cost Savings, Cost Avoidance and Cost Optimization – What’s The Difference?
Without a doubt, CIOs have defined strategies for 2023 that include next-gen technology, cloud usage and innovation, data management, and sustainability. These are areas that will drive their organizations into the future. Every organization will have its own unique core values and concerns but for many, the careful management of IT spend will also be on the agenda.
Managing IT spend to reap rewards can be done in a number of ways, each measurable using different metrics and time frames, but each delivering the same end-goal.
Some of these cost reduction strategies include the following:
Cost Savings
Cost savings are the benefits achieved through actions that reduce the organization’s overall spend on items that directly impact the bottom line.
Example: The negotiation of lower prices with suppliers or improving efficiencies. Through a better understanding of a software vendor’s license agreements, IT cost savings can be achieved by renegotiation of a contract based on actual usage of the software.
Working with an outsourced service provider will add the extra layer of expertise required to make informed decisions. They will have a much better handle on benchmarking your requirements and, knowing all the nuances of each vendor, where to achieve savings through cost reduction strategies.
Measurement: These savings are reflected in financial statements and the next year’s budgets.
Estimate your IT cost savings potential with our online calculator
Cost Avoidance
Cost avoidance, put simply, is action taken to reduce the amount of money spent. This could involve spending now to avoid incurring larger costs further down the line. While this appears to increase spend in the short term, it reduces overall costs.
Example: A company implementing new automation technology to improve productivity or reduce manual or repeatable processes will achieve cost avoidance. This may take longer to produce benefits but removes the need and cost for a larger workforce over time. Equally, proactive management and monitoring the use of software to ensure sure you are compliant can avoid substantial costs from software audits that don’t end favorably.(There are some great tips for this in our on demand webinar – Navigating software audits)
Your Software Asset Management (SAM) Managed Services provider can work with you to understand the current and future requirements of your business. This information can be used in contract negotiations with your vendor (tooling or software), supported by an extra layer or experience and expertise, to ensure these solutions are incorporated into your software license agreements with the best prices and terms to deliver on the required outcomes.
Measurement: Cost avoidance doesn’t appear in financial statements and can only be seen by comparing the outcome of one action against another that could have resulted in higher costs.
Cost Optimization
Cost optimization is an approach focusing on cost reduction initiatives that reduce IT costs and spend while delivering maximum value to the business. This value will vary from business to business.
Example: Cost optimization can be achieved through streamlining processes, eliminating waste and cutting expenses wherever possible, or obtaining the best commercial and contractual agreement on a software renewal.
You will benefit most from an MSP (Managed Service Provider) who possesses in-depth product knowledge and keeps up with the constant changes to license metrics and usage rights.
Measurement: There are multiple factors to examine when measuring the results of cost optimization including the impact on revenue, profits, sales, and productivity.
Why does this matter?
Understanding each of the above will enable you to understand which will be most suitable for your business’ requirements based on the financial or operational goals you are looking to achieve. There will always be ways to cut costs, but ensuring that these cuts don’t have a negative impact on your business, customers, or partners is vital.
It is important to prioritize your business values – what matters most – to make sure that the cost saving strategy you choose will result in the desired outcome.
Our SAM and ITAM experts at Anglepoint can develop a Cost Savings Workshop for you and work with you and your team to define required outcomes and identify the KPI’s that will be used to measure success. We will deliver the following:
- Key drivers and concerns
- Stakeholders and requirements
- Opportunities and quick wins
- Strategy and roadmap
