10 Rules for Rapid IT Cost Cuts

Before considering individual cost-cutting initiatives, establish and document your cost-reduction fundamentals:

• Outcome/Need. Collaborate with finance leaders to define required savings in hard numbers. Set clear cost targets — clarify whether the focus is on reducing operational expenses, minimizing overhead or meeting budget/forecast targets.

• Timeframe. Determine when savings must be delivered. Urgent cost-cutting typically spans six months or less. 

The combination of need and timeframe determines the approach, but CIOs should also establish the enterprise’s readiness to “spend to save” or “invest for growth” — though these options are rarely feasible under rapid cost mandates.

Prioritize actions that directly affect cash for immediate impact, not just noncash accounting treatments like depreciation. Savings in SaaS or infrastructure as a service (IaaS) costs have real cash impact, unlike fixed costs tied to owned hardware or perpetual software license depreciation. 

CIOs must also weigh the risks and consequences of cost-cutting activities. It’s helpful to think of the two primary ways to meet immediate IT reduction targets: 

1. Stop or postpone spending: Avoid or delay costs by halting projects or services. 

2. Address underlying costs: Negotiate, rationalize or increase efficiency.

While reducing underlying costs is ideal, business requirements or contractual commitments may restrict feasibility. Don’t waste time on spending that can’t be reduced short-term. Clearly communicate the impact of decisions if budgeted spend is key to business success.

Example: If a $20k replacement server is budgeted, you can delay the expense by not purchasing it, but the underlying cost remains $20k ($4k annual depreciation plus maintenance charged to your budget over five years). Alternatively, you might negotiate the requirement down to a $15k server, reducing the underlying cost by $5k ($1k a year). But to make rapid cuts, variable cost items such as cloud server capacity are often the only immediate option until contract commitments come up for renegotiation.

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A rules-based approach helps CIOs avoid common missteps, such as:

• Reducing IT costs that reappear in other budgets.

• Freezing costs instead of eliminating them.

• Making insufficient initial cuts leading to more reductions.

• Overlooking opportunities to renegotiate or terminate contracts.

• Focusing only on operating expenditures, while ignoring capital spending.

• Compromising strategic objectives with knee-jerk cuts in growth projects.

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After planning cost reductions, communicate internally to IT, impacted business units, and the CFO/CEO. Outline the financial impact, investment required, timeline and risks for each action. Align cost reductions with business outcomes to build understanding and buy-in. 

Clear communication reduces resistance, minimizes disruption and ensures focus — all essential when executing rapid reductions at scale.