Taking a radical approach to cost efficiency and optimisation
- Posted on February 25, 2016
This guest blog post was authored by Paul Brooks, Head of Delivery at CloudTalent, an Avanade company.
Whether you’re a fledgling start-up or a successful, established organisation, every business is, or will be under a cost challenge to some degree. Unchallenged legacy agreements and a build-up of unhealthy contingency costs, out-dated processes and legacy technology are just some of the common financial constraints. In many instances, people don’t even know they’re paying for a service they’re consuming!
The Danger of Short-termism
One particular cost efficiency issue is associated to the rate of churn; people often change roles and companies after a few years. So, of course, they want to make their mark whilst in their current employ. Unfortunately, this can lead to short-term objectives, which are more personal than commercial – make the numbers, get a bonus and progress. Agreeing an outsource contract that saves £X million a year on the books looks great in the short-term, but five years down the line, when that dealmaker / decision- maker is long gone, it can be a disaster.
Look to the Present Not the Past
So how do you make efficiencies? Certainly not by using traditionally pre-set budgets. Because these are semi-automatically based on past costs, people tend to let the same old services and contracts roll on, or at best challenge the peripheral cost of the service, e.g. Maintenance. What they should be doing first is questioning every service and then understanding and agreeing every penny of cost to provide that service. Understanding if the service you signed up for years ago is still what the business needs? Is there another provider who can provide you with a more optimal service? Traditional budgets are (literally) a thing of the past and, in my opinion, should be consigned to history.
Budget from the Ground Up
I recommend working along the lines of zero-based budgeting. This is where you start with a clean slate and it forces you to identify the true cost of a service in the here and now. So, people have to justify why they are asking for thousands of pounds for x, y and z. Budgeting this way allows you to do things holistically by analysing contracts, reviewing your processes, resourcing profiles and technologies..
In one of my roles whilst at a global financial services company, budget line owners would come to me and say, “My budget is this…” I would say, “No it’s not, please think about why your service costs what it does and forget about what it cost before.” We called it the 8-gates process. If you got through the gates you were awarded the money for the service and along the way, opportunities for increasing cost efficiency would be identified. That costs savings could be reinvested into more projects to make things yet more efficient.
And it really does work – I was once responsible for a company’s entire global infrastructure cost of one billion euros, and had to make efficiencies. I set up a programme that saved over 100 million euros in a 12-month period, resulting in a 20% tangible cost saving (from addressable spend).
The CloudTalent Approach
At CloudTalent, our zero-based budgeting approach actually sets you up for a rolling three years period. Once you’ve been through the process and authorised responsibilities have signed off the new costs, there is no need for the usual approval exercise year after year. Another output of the process is that you get a solid commercial business plan. This can be used to explain what each tower does, why they do it, who they do it for, what are the service levels, what are the costs, a book of work with programs mapped for the next three years etc.
It’s a very inclusive process too. Different departments are involved and understand what you are trying to achieve. These will include personnel from CIO, CTO, COO and CFO. In turn, we understand what their drivers are and how they’re approaching things. Procurement buy-in is particularly important – the CPO is highly receptive as the process creates a three-year category plan for each sourcing manager.
If you’d like to chat about how my colleagues and I could bring cost efficiency and optimisation to your business, please get in touch at firstname.lastname@example.org
As Head of Delivery at CloudTalent, Paul is responsible for the quality delivery of the company’s engagement portfolio of programmes and projects. He manages the programme office to ensure light-touch but best practice governance, and collaborates with key stakeholders to ensure accurate business planning and prioritization of the portfolio.