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IT Project Budget Allocations how to decide where to invest your budget

November 10, 2008

I put all my possible cost action programs into a simple matrix, illustrated opposite. Across the top of the matrix I estimate the potential cost impact, the expected value of future cost savings over a five- or ten-year period, ignoring the practicalities of implementation. Down the side of the matrix I add in the question of practicality. Can I get the savings quickly and easily? Or will I have to work away at them for years, tackling difficult obstacles: internal politics, labor laws, government regulation, joint-venture partners, long-term contracts.

Potential Cost Impact

Future Implementation

High Low
Fast / Easy XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

Slow/Difficult XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

The matrix helps clarify which ideas to pursue first and hard and which ones to put on the back burner:

1.       In the top left are the #1 priorities, the no-brainers: big cost benefits, quick and straightforward to implement.

2.       I then move to the top right for my #2 priorities: maybe not such big opportunities but quick results.

3.       Then I move to the bottom left: big opportunities, but ones where you could bash your head against a brick wall for a long time, so the strategy is to work away quietly and steadily at removing obstacles.

4.       Finally, any ideas that fall into the bottom right get put aside on a very slow back burner – you only start on them if there’s really nothing else left to do.

I had an IT client with three different head offices across the US. One handled data and network operations, one software development and support, and one all the commercial activities like sales and finance. We developed a list of cost-reduction options, each with an estimated five-year savings value, total $350m:

  • Consolidate the three central offices into one location, $50m.
  • Outsource data and network operations, $60m.
  • Take some percentage of development and support offshore, probably to India, $100m.
  • Take out some layers in marketing and sales, $10m.
  • Shift network purchases to a lower-cost pan-European contract, $20m.
  • Cut travel cost, $10m.
  • Change front-end development processes to reduce back-end cost (bug fixes, reinstalls, customer support), $50m.

We could get $140m of the $250m quite quickly and easily. We started working away on the two big-impact but hard-to-do ideas, working toward a future $100m saving. And we dumped the idea of cutting marketing layers.

When you do this kind of analysis, make sure you identify the key choices correctly. In the case above we had lots of minor options for cutting operations cost while still keeping it in-house. If we had pursued that logic we would have missed the big cost-cutting option, outsourcing the whole activity.

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