Managing IT spending using the cost optimization model
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According to Gartner, worldwide IT spending was projected to grow 8.6% year-over-year to $4.2 trillion in 2021—and in many cases, “IT spending is accelerating ahead of revenue expectations.”
That said, this doesn’t mean that organizations should cut IT spending, as the outlays often lead to positive outcomes. But it does mean that organizations have a lot to gain by optimizing their IT spend.
Want to know how to optimize your IT business costs? Read on to learn how.
What is cost optimization?
Cost optimization is the process of continually maximizing the value that you generate from your business spending. To optimize IT business costs most effectively, you’ll need real-time insights into your spend.
The overarching goal of business cost optimization is ROI. Spending more money can be a form of business cost optimization, as long as there is a high projected ROI. Cost-cutting can also optimize business costs, but be sure not to cut costs for the sake of doing so. Every decision should be rationalized and proactive, not reactive.
How to to optimize IT costs
As stated earlier, business cost optimization happens in real-time—it’s not a one-time investment. By using financial management software, however, you can create a cost optimization model that is driven by automation. Here are five ways to optimize IT costs:
1. Closely track IT spend
As your business scales, it becomes more challenging to track your spending across vendors, which is why a vendor management system can be a game-changer for your company. This type of system allows you to measure vendor performance, ensuring that you are getting an excellent return on your spend with each of them. A vendor scorecard is another valuable tool for monitoring vendor performance over time.
You should also track your P&L statement over time, as you may be able to connect changes in your profitability to changes in your software stack.
2. Create a good procurement policy
A procurement policy enables your organization to efficiently maximize the business value of purchases. A good procurement policy is digitized and easily referenced by employees. A bad policy, on the other hand, is not officially recorded and leaves employees with more questions than answers.
3. Implement spend controls
Spend control allows you to monitor and manage your company’s purchases, determining whether or not a purchase is beneficial to your organization. You can manage your spend control by implementing the following strategies:
- Automate expense reports and spend policies
- Approve spend ahead of time and use multi-level approval
- Get savings alerts
By implementing spend controls, you can avoid going over budget and racking up unnecessary company debt.
4. Negotiate with vendors
Are you looking to sign a contract with a new vendor? Or is a contract with a long-term provider coming up for renewal? In either case, you can negotiate the terms of the agreement.
Your business probably has several vendors, but even if you can only negotiate better terms with one or two of them, it can make a big difference.
5. Outsource when it’s more cost-effective
You should consider outsourcing if:
- You have tasks on your to-do list that are outside your core competencies
- You don’t have enough work for one full-time employee.
Say you have a SaaS subscription service, and you have 10-15 hours of bookkeeping to do per week. In this case, you have met both of the conditions for outsourcing, so it is likely to be the right decision.
5 challenges businesses face with cost optimization
Many companies get tripped up on the path to IT cost optimization. The majority of problems can be tied back to not having systems in place or a shortage of resources. Here are five challenges businesses face with building a cost optimization model:
1. Lack of transparency into spend
Not sure how you’re spending money? This is a common issue for companies, as many measurement systems don’t properly classify and report spending on a consistent basis.
To optimize IT spend, you have to start with a deep knowledge of all of your business purchases.
Say you are spending tens of thousands of dollars a year on a solution that is offering no discernible benefit to your organization. Without the right systems in place, it would be easy to overlook this spending.
2. No clear or accessible expense policy
Without a clear and accessible expense policy, your employees are forced to choose between two less-than-ideal options: guess what is and isn’t an approved expense or ask a manager. The former can lead to a lot of wasteful spending, while the latter is extremely inefficient—taking a manager away from higher-value tasks.
3. Higher risk of expense fraud
A company that relies on manual expense management is more susceptible to expense fraud, as it’s difficult to catch every fraudulent transaction when you don’t have an automated solution flagging suspicious activity. According to Accounting Today, expense fraud accounts for 21 percent of fraud in small businesses and 11 percent in large businesses.
4. Poor tail spend management
Tail spend is low-value expenses that typically account for 80% of the average company’s transactions and 20% of total spend. Pareto Principle adherents often prioritize issues that have the opposite profile; in this case, that would be the 20% of transactions that account for 80% of the average company’s spend.
But it’s possible to reduce tail spend without expending a large amount of resources—more on that in a bit.
5. Higher likelihood of human error
According to CFO Innovation, human error is the biggest problem with tax and accounting mistakes. A higher number of tax and accounting mistakes leads to an inaccurate picture of your IT spend, making it difficult to optimize that spend.
In many cases, companies have humans performing tasks that software could do faster, better, and more cost-effectively.
Take back control of your IT spend with Ramp
You may be overwhelmed at the prospect of creating an in-house business cost optimization model. You can instead turn to Ramp, a finance automation platform, and get a partner to help you solve the challenges listed above and optimize your IT costs. Here are a few things Ramp can do for your company:
Auto-categorize all spending
A big obstacle to optimized IT spend is a lack of transparency into your spend. With Ramp, you have the ability to auto-categorize all of your spending.
You can easily import your chart of accounts and create mapping rules for accounting fields. Ramp can take that information and auto-categorize and sync transactions to your GL—this includes that pesky tail spend.
Implement a digital expense policy
Your employees are guaranteed to encounter a wide variety of scenarios, so a digital expense policy that covers all of those possibilities is a necessity. Ramp allows you to create and implement a digital expense policy, collecting all of the information you need to categorize each expense.
Digitize & match all receipts or invoices
Tracking your expenses in real-time is time-consuming if you don’t have an excellent system in place.
Enter Ramp—you submit receipts by text or email and the software does the rest, automatically collecting, verifying, and reconciling over 90% of receipts to automate employee expense reports.
A company can optimize IT costs by closely tracking IT spend, creating a good procurement policy, implementing spend controls, negotiating with vendors, and outsourcing certain tasks.
Business cost optimization is important because IT spend makes up a large percentage of expenses for many companies. A few seemingly minor improvements can have a significant impact on the business, as a whole.
Wasteful IT spend is often caused by a lack of transparency into spending patterns. By not knowing where your company is spending money, it’s difficult to identify unnecessary spending. This allows wasteful spending to stick around on your P&L.