IT Strategy: Reducing Expenses

Okay, so a couple of days ago, I wrote about the effects automation should have on a business. More investment in technology yielded greater automation, reduced or diminished the impact of labor, increased productivity, systemized the business to transform it from a job and into an asset, and increased profitability.

And in that discussion, I promised you that I'd discuss three strategies that business can use to apply their technology investments. One of the three strategies, Reducing Expenses, is the easiest to understand and the most obvious.

Greater investments in technology automates the business, improves productivity and efficiency, and reduces operating expenses. Tech investments allow you to do more with less. That, in turn, improves profitability.

It's a Great, Basic Strategy ...

Reducing Expenses is the easiest, most basic strategy for applying IT expenditures. It's the first place we look to when trying to measure a Return on Investment (ROI) associated with technology investments.

In calculating an ROI for this kind of strategy, you'd approach it in four steps:

1. Measure the cost of doing nothing - add up how much it terms of labor and materials to do the existing business process.
    
2. Measure the time involved for doing the existing business process.
    
3. Apply the technology investment.
    
4. Now compare the new cost of labor and materials, and, the time it takes to get the business process done.
    
5. Divide the dollar amount saved against the amount spent on the technology investment.

Example:

Let's say that a business process took $6,500 and 16 hours in labor and materials and time. In investigating the business process, it's determined that $2,000 in technology spend can help the employees work smarter. After deployment, new measurements are taken. The new process is $3,900 and takes just 11 hours to perform.  That's a $2,600 savings from $2,000 worth of investment, or a 130-percent ROI. Plus - and a big bonus here - we're saving five hours. Gosh, more time! What's that worth?

... But You Can't Reduce to Zero

Pretty cool, huh? Well, it's cool for the first couple of go-arounds anyway. Eventually, we'll run up against the limits of what current technology can offer us. We can only reduce expenses so far. We can't make the business process operate at $0.00 dollars and at zero expenses taking zero time. That's impossible!

It's the Law of Diminishing Returns at play - over time, we can only reduce expenses just a little bit more, just a little closer to zero (but not actually reaching zero), until there's a huge shift or change in technology - which means every incremental investment returns less and less time and money.

That makes Reducing Expenses a common, basic strategy but an insufficient play in the long-term. It has to be paired with other techniques to obtain even higher returns from technology spending. Next time, we'll talk about another approach: Containing Expenses.

R