4 Big Holes in Your IT Budget and How to Plug Them

By Kim Addington

Chief Operating Officer, NPI

August 28, 2019

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As we blow past the mid-year mark, many enterprise IT and sourcing pros are going through the IT budgeting process. For most of us, IT budget planning is about as fun as a trip to the proctologist. There’s a lot of probing, inspection and inevitable debate about consumption. As it should be. All of that careful inspection and questioning is more important than ever given the state of IT spending today.

For starters, unsanctioned, off-budget IT spending isn’t abating. Gartner estimates that shadow IT accounts for 30-40 percent of IT spending in large enterprises. There’s also a lot more at stake than planned spend. IT vendors – especially old guard, legacy software types – have turned to software license audits to extract more revenue from clients and motivate them to migrate to newer offerings.

Finally, there are certain elements of IT spending that have become downright unwieldy to manage. Vendors may claim better cost transparency (a positive byproduct of a cloud-first IT ecosystem) but the real problem for many is volume. If you’ve ever read through your company or BU’s wireless bill, or tried to navigate Microsoft’s thousands of licensing SKUs, you understand.

Rethinking IT Budgeting

The current IT cost management environment is prompting companies to rethink how they budget IT. Not only are the key components of IT budgets evolving, the ways in which companies overspend are too. IT and sourcing pros need to take a more forensic and anticipatory approach to how they budget IT costs.

Take vendor lock-in, for example. The threat it poses has been amplified by the cloud especially when it comes to infrastructure. This article sums it up well:

“Moving to the cloud often means signing contracts with several vendors for subscription-based services. The problem with these contracts is that they can make your business less agile from an IT perspective. Many companies sign longer contracts than they need to thanks to volume pricing offers from vendors. If/when they wish to change vendors, getting out of those contracts is difficult — if not impossible. If you are using one vendor for multiple aspects of your IT infrastructure, your business may be even more strongly shackled to that vendor. Paying a little extra for shorter, more flexible contracts is usually the smarter option — as is balancing the push for simplification with the risk protection benefits of technology diversification.”

Note: With the right IT pricing intel and negotiation leverage, you don’t always have to “pay a little extra for shorter, more flexible contracts.”

4 Enterprise IT Budget Cost Pitfalls

Successful IT budget planning takes into account not just line item spend analysis but cost risk mitigation. Here are four of the biggest IT budget cost pitfalls and how they can be mitigated during the IT budgeting process:

1. Not anticipating (and mitigating) software license audits

Vendors like Microsoft, SAP, Oracle and IBM are auditing customers aggressively. Noncompliance fees have become a bona fide revenue stream for many of these auditors, including Microsoft whose audit teams now carry revenue quotas. As enterprises go through the IT budget planning process, it’s critical they identify areas where they may be at risk for a potential software license audit.

One tactic is conducting a license position assessment on your largest software estates – especially those with a renewal or true-up on the horizon or if it’s been a while since the vendor has conducted a formal audit or a SAM engagement (which is code-talk for “audit”). These assessments function as preventative maintenance and enterprises are increasingly turning to them to proactively spot potential audit risk instead of waiting until a vendor initiates an audit.

A license position assessment involves collecting your actual software deployment data and comparing it against your entitlements to identify usage gaps (over- or under-utilization). This gives you the runway to determine and execute remediation in advance of vendor involvement. It also gives you an accurate usage baseline for your next renewal.

2. Relying on old licensing and subscription choices to inform your budget

When is the last time you made sure you were paying for the best-fit licensing/subscription choices across your software portfolio? If it’s been a while, you’re not alone. It’s easy to go on autopilot. Unfortunately, this means there’s a good chance you’re overpaying for SKUs that no longer represent the best selection for your usage and business requirements.

To eliminate overbuying and over-licensing, companies need to regularly optimize licensing and subscriptions. This will help eliminate overbuying and over-licensing while building in maximum flexibility based on current and future-state requirements. (As mentioned above, a license position assessment provides great insight into actual usage.)

3. Overpaying for maintenance

This one is low-hanging fruit. Companies pay a lot to simply keep the lights on across their IT portfolio…and that cost is growing. It wasn’t too long ago that the average software maintenance/support cost was 15-18 percent of license fees. Today, 22 percent is the standard.

As companies budget for IT in 2020 and look for ways to fund more IT projects, maintenance spend inspection is a good place to start. First, don’t assume you’re paying the same price as your peers for maintenance and support – conduct IT price benchmark analysis on this element to identify opportunities for savings. Second, stop paying maintenance on unused or underused software. Third, consider third-party support options that offer a competitive level of service (or better) for a fraction of the cost – as much as 50 percent less in some cases.

If you’re looking for more guidance on how and why to tackle maintenance overspend, check out this resource.

4. Allowing telecom spend to stay on autopilot

If you haven’t optimized your telecom carrier agreements in the last 18 months, if you have grown significantly or if you have satisfied your minimal annual revenue commitment (MARC) with your carrier – you’re leaving money on the table. Now is the time to re-optimize your carrier contracts.

Similarly, it’s probably time for you to optimize subscription/service selection to determine the optimal selection of provider/vendor plans and services based on actual and forecasted usage and grooming of zero-use lines and services. While some businesses can get away with performing this exercise on a quarterly or semi-annual basis, it’s best done monthly for most enterprises.

The way we consume and purchase IT products and services has transformed over the last decade. Those changes require corresponding transformation across all elements of the IT sourcing process, including budgeting. If you’re still budgeting IT the same way you did 10 years ago, that only works to the vendors’ advantage.