The Covid-19 pandemic as well as Russia’s onslaught on Ukraine, demonstrate how fast disorders can happen and leave organizations with no choice, but to deal with them.
Early 2020, the COVID-19 lockdowns unexpectedly changed many business operations and economies, severely affecting revenues and markets.
Fast forward to early 2022, and the Russian invasion of Ukraine is furthermore having a financial and business essences on all enterprises, more so those with material operations or revenue generation in the concerned regions.
Enterprises that don’t take fast action may not survive this disorder or may experience delayed recovery. In times of crisis, the tendency to make quick decisions must be tempered with a thoughtful appreciation of reprioritization, divestment, and even strategic investment.
Here are the six strategic cost management strategies for CIOs to implement to protect their institutions from financial anxiety amid geopolitical disputes, like the Russian invasion of Ukraine. According to CIODive.
1. Lower or Even Pause Spending
Gartner has talked to IT leaders who, in the early days of a provided crisis, have started with no idea how to survive the situation and worked with the business to reprioritize provisions and set spending levels that the enterprises can pay for. This was a popular exercise when the pandemic hit.
CIOs have been victorious in lessening IT spend rates by categorizing actions into the following groupings:
Can/Must Lower: This category comprises vendor/supplier pacts and payments that can (and so must) be delayed, deferred, or even ceased.
Could/Should Lower: This group encompasses those that could be ceased, postponed, or delayed. For these, choose the specific spend reduction actions (like, deferring an upgrade, or delaying a project) and related risk mitigation efforts that will be needed to execute them.
Can’t/Don’t Lower: Comprises those that should not be ceased, postponed, or delayed due to their significance to the business.
Within this practice, contemplate what transpires if the vendor fails to accomplish or terminates services. This will be particularly important for smaller vendors and those with higher levels of debt.
2. Evaluate Prevailing Investments
In-flight, projects must be instantly reviewed and divided into two categories: namely, noncritical and critical projects.
Their definitions speak for themselves, but the critical projects can be drilled further to determine if any aspects within such can be immediately reduced.
Where possible, CIOs may reduce the current project scope or keep a much closer eye on scope creep. Other options include migrating fewer users to new software products or delivering fewer features in critical development projects, deferring the “nice to have” ones.
3. Postpone Any New Spend
There happens to be no room for new IT spending when crises arise.
As geopolitical disorders persist, money will become increasingly significant to affected organizations. Postpone or discontinue all uncommenced and uncommitted spending on assets, projects, staffing, or software or hardware boosts.
Let go of any retained third-party resources, and the infrastructure or service costs, related to these. Postpone any future or planned expenditures.
4. Reevaluate service delivery spend
Past handling the greatly discretionary project portfolio, it is also significant to address the new service portfolio.
Here, you should specify opportunities to:
- Provide a lower service level, like, help/service desk or end-user support
- Reduce hours of service to core business hours
- Reduce the number of software applications available to users and,
- For a reason, consume less.
- Examine present consumption and spend levels on all variable operating expenses, like infrastructure as a service (IaaS), platform as a service (PaaS), software as a service (SaaS), and voice and data communications.
On a service-by-service basis, either eradicate or control the activities to lower enterprise-wide consumption levels by inhibiting or governing supply and renegotiating contract terms as necessary.
In regards to cost savings from headcount, it’s crucial to ensure that personnel deductions are performed carefully across temporary and permanent staff, and only once if possible.
5. Negotiate consumption
The remaining executive team members will have to help decide on major changes to operations. Like, such as discontinuing services or applications, or motivating users to work in different ways to lessen variable operating costs and potentially the fixed costs of the business.
When reducing consumption, ensure core business results are protected. The actions proposed should not harm ongoing revenue and cash flow.
6. Foresee Spending Increases (And instigate Decreases)
Another thing CIOs can learn from the pandemic and apply to unfolding geopolitical situations is how IT spending changes while remote working increases.
For example, in case offices or work locations are partly or vacated due to disorders, can office-based or enterprise utilities, communications/access, infrastructure, and services be postponed or deferred? Will costs of personnel remote working and well-being, including collaboration software, go up?
Foreseeing and planning for increased costs will affect the IT budget, therefore CIOs have to communicate this to CFOs in advance to ensure they can be fulfilled and proactively identify what can be lowered and how.
Evaluate and manage risk through informed decision-making. Even though decisions must be made quickly, a pragmatic assessment of organizational dependencies (risks) such as technology, workforce, and service providers can create valuable insight.
With the Russian invasion of Ukraine, particularly, end-users and service providers with IT services delivery headquarters in these regions are skeptical about service continuity.
Gartner states that there are over 1 million IT professionals in Russia, Ukraine and Belarus put together, of whom almost 250,000 work for consulting or outsourcing companies that serve clients beyond the region.
The imposition of sanctions against Russia will heighten the complexity for many businesses and service providers with IT staff and local IT operations in Russia and other affected countries.
Paying wages, expenses, and invoices to regional suppliers, moving staff in and out of the region, and regulating site security will all become largely more difficult.
Whereas leadership will be forced to select winners (preserve/invest) and losers (cut/divest) throughout every factor of organizational operations, procedures, and objectives, they should take care to make informed judgments that do not needlessly mortgage the future.
In such an environment, the priority for CIOs is always to recognize the risks that are intrinsic in the decisions they have made. They can then busily work on mitigating those risks, while also doing all they can to attain their primary objective of cash-flow protection.
Cost Management Concepts
Here are the concepts:
Concept of Costs in terms of Traceability
- Direct costs
Direct costs are related to a specific process or product. They are also called traceable costs as we can directly trace them to a particular activity, product, or process.
They can vary with changes in the activity or product. Examples of direct costs include manufacturing costs relating to production, customer acquisition costs about sales, etc.
- Indirect costs
Indirect costs, or untraceable costs, are those which do not directly relate to a specific activity or component of the business. For example, an increase in charges of electricity or taxes payable on income. Although we cannot trace indirect costs, they are important because they affect overall profitability.
Concept of Costs in terms of the Purpose
- Incremental costs
These costs are incurred when the business makes a policy decision. For example, change of product line, acquisition of new customers, and upgrade of machinery to increase output are incremental costs.
- Sunk costs
Suck costs are costs that the entrepreneur has already incurred and cannot recover again now. These include money spent on advertising, conducting research, and acquiring machinery.
Concept of Costs in terms of Payers
- Private costs
These costs are incurred by the business in furtherance of its objectives. Entrepreneurs spend them for their own private and business interests. For example, costs of manufacturing, production, sale, advertising, etc.
- Social costs
As the name suggests, it is the society that bears social costs for private interests and expenses of the business. These include social resources for which the firm does not incur expenses, like atmosphere, water resources, and environmental pollution.
Concept of Costs in terms of Variability
- Fixed costs
Fixed costs are those which do not change with the volume of output. The business incurs them regardless of their level of production. Examples of these include payment of rent, taxes, interest on a loan, etc.
- Variable costs
These costs will vary depending upon the output that the business generates. Less production will cost fewer expenses, and vice versa, the business will pay more when its production is greater. Expenses on the purchase of raw materials and payment of wages are examples of variable costs.
Concept of Costs in terms of the Nature of Expenses
- Outlay costs
The actual expenses incurred by the entrepreneur in employing inputs are called outlay costs. These include costs on payment of wages, rent, electricity or fuel charges, raw materials, etc. We have to treat them are general expenses for the business.
- Opportunity costs
Opportunity costs are incomes from the next best alternative that is foregone when the entrepreneur makes certain choices.
For instance, the entrepreneur could have earned a salary had he worked for others instead of spending time on his own business. These costs calculate the missed opportunity and calculate into them that we can earn by following some other policy.
Cost Management FAQs
Here are the frequently asked questions about cost management.
What is Cost Management in Project Management?
Cost management is the process of estimating, allocating, and controlling project costs. The cost management process allows a business to predict future expenses to reduce the chances of budget overrun. Projected costs are calculated during the planning phase of a project and must be approved before work begins.
As the project plan is executed, expenses are documented and tracked, so things stay within the cost management plan. Once the project is completed, predicted costs and actual costs are compared, providing benchmarks for future cost management plans and project budgets.
Why is cost management important in project management?
Cost project management is vital to an organization’s project planning process. Global services company Accenture believes sustainable cost management should be “part of the company’s DNA.”
Without an explicit budget, you cannot effectively map out the resources needed for your project. For instance, if you are renovating an office building, you need to hire an architect, pay for construction materials, and agree upon hourly rates for construction workers. To do this, you need to accurately estimate all costs and ensure you have the budget to cover them.
What are the benefits of cost management in project management?
Project managers should not underestimate the business advantages of effective cost management. Here are three of the key benefits:
Prevents overruns: By allotting costs in the early planning stages, project managers ensure they don’t overspend on specific areas.
Avoids risk: A good budget will have a risk allowance to ensure project success is not compromised if unforeseen costs arise.
Aids future planning: Cost reports can help with resource optimization. This can lead to more accurate budgets in the future.
What are the challenges of cost management?
Cost project management can be tricky. Here are three challenges that frequently crop up:
Lack of resources: If a project budget is too small, it can be difficult to secure the required labor, materials, etc., to complete the project successfully.
Inaccurate estimation: Poor forecasting can occur when a manager is inexperienced or doesn’t fully understand the scope of the project. This can lead to cost overruns and affect overall profitability.
Outdated technology: Project managers need access to intuitive, up-to-date technology and tools to manage costs accurately.
Who is responsible for cost management in a project?
Project managers are responsible for cost project management. As part of their role, they must estimate total costs, plan the budget, monitor spending, and prepare for potential risks. A project manager must remain vigilant throughout the cost management process to ensure they stay within budget and improve profitability.
Which project tools help with cost management in project management?
Many tools can aid cost management in project management. The best option is to choose a versatile project management platform with a variety of tools so that you can tailor the software to your specific project needs.
Here are some of the most important tools:
Budgeting: For effective cost project management, you need an accurate budget. This requires a budgeting tool to track costs using custom hourly rates and tailored financial fields.
Time tracking software: This is particularly useful when trying to estimate resource costs. When team members log hours using a task timer, project managers can use this data to determine how long a certain task takes, and allocate resources accordingly.
Reporting and analytics tools: For real-time insights into their cost management process, project managers should generate weekly reports with detailed charts and graphs. Analytics dashboards can also be created for a project portfolio overview
Conclusion
In case you were searching for the information concerning cost management strategies, concepts as well as the frequently asked questions about it, now you have it all. Implement it and enjoy the outcomes.