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What’s the Best Approach to Cost Management? The Basics and More

Information technology (IT) solutions— such as cloud services, network security, help desk support, and communication platforms —are at the forefront of business success in the modern era. These vital services unlock new opportunities and efficiencies that allow you to stay competitive in today’s markets. But the problem that many procurement professionals face is navigating the complex market and impact of cost management for IT service providers and their products and services. 

How do you choose the right offerings that properly support your teams while still keeping within the budget? Do you have the right expertise and time to research vendors and negotiate contracts from hundreds of different options?

Overspending is such a widespread problem that companies are scrambling to develop stronger approaches to cost management, and for good reason.  A recent study discovered that 80% of businesses experienced an unexpected increase in Q2 spending.

That’s why businesses have started turning to IT procurement partners to help manage IT expenses. Here we’ll explore how to strategically approach cost management to maximize their limited IT budgets.

How Does Cost Management Work?

Cost management is exactly what it sounds like: estimating the expenditures required to undergo a project and maintaining the budget by keeping tabs on regular spending.

Cost management is about more than merely minimizing expenses. Projects need to realize their intended scope and requirements fully and be completed on schedule in order to generate the expected return on investment. To that end, procurement management plans need to choose solutions that deliver exactly what internal teams need to succeed while still keeping within the budget.

Additionally, cost management should also include ways for businesses to improve over time. The variance between the planned and actual expenses should be noted when making future business decisions. If overrun occurs (as it does 27% of the time)

The principles of cost management are universal enough that almost any industry uses them extensively, from technology to manufacturing to retail.

Techniques for Strategic Cost Management

There has been significant study into cost management techniques and various methodologies have been developed. A few of the most well-known ones are listed below.

  • Activity-based costing: As its name suggests, this approach notices that business activities are what generate costs. Simply put, controlling costs requires controlling activities. For each business activity, the related expenditures are recorded and used to help optimize the budget. You’ll often see organizations in the service sector using this approach.
  • Balanced scorecard: This technique aims to manage costs by looking at a few main aspects of running a business: process optimization, customer relations, accounting and finances, and learning and growth.
  • Business process reengineering: In a world where improvements in IT infrastructure become widely available, some companies are able to implement large-scale business transformations instead of just a few minor process optimizations. For example, in order to reduce the overhead with regular purchasing cycles and accounts payable procedures, some businesses aim for long-term contracts with a low number of reliable suppliers.
  • Just in Time: Also known as JIT, this form of inventory management cuts down on waste and minimizes inventory by only purchasing what’s necessary for the business at this moment. That is, new purchases are made “on-demand.” However, JIT certainly does not work for all organizations in all regions and depends heavily on supply chain reliability.
  • Target costing: Say your project is aiming to develop a new product that will sell for an expected market price and generate a certain profit margin. Subtract the profit margin from the market price to obtain the life-cycle cost (LCC) of the product. This figure will make sure that the business receives its intended profit while ensuring the product’s quality remains up to standards.
  • Total quality management: TQM looks at costs in terms of how they contribute to the customer experience. In a company that strives for total quality management, everyone is focused on gearing internal operations, product output, and overall corporate culture towards providing more value for clients.

Actually implementing cost management goes beyond studying the techniques and looks more into developing an overarching strategy.

Approaching Cost Management

Cost management should always be a formalized process conducted by dedicated specialists rather than an afterthought for the procurement department.

Manage More than Just Money
What we consider “cost” is more than just monetary value. Optimizing usage of time, inventory, and vendor risk are all indirect ways to get more out of your budget. For instance, you can train employees to manage their time more effectively to get more productive work done in the same amount of time, boosting productivity. Or you can watch over your warehouse stock closely so that you never run out of raw materials while you’re waiting for new shipments to arrive from suppliers. Vendor risk is an often overlooked aspect as well. While a supplier might provide a software solution at an excellent price, you need to consider how robust its customer service is in case you ever run into setbacks. And don’t forget to leave room in the budget for the unexpected. Unanticipated expenditures should be addressed with an emergency fund.

Reduce Spending Sustainably
Managing costs should be about maximizing value for the money, but there are instances where spending can be reduced without detriment to the workflow. Think about ways to consolidate project expenses by choosing a few major IT solutions to solve multiple problems. Or you might even outsource entire business tasks to third-parties to open up time in the schedule for your internal employees.

Develop Procurement Strategies
As previously mentioned, cost management is a formal procedure that often involves procurement teams sitting around a meeting table and comprehensively planning their approach for new projects. Discussion should revolve around:

  • Goals and scope of the project
  • Milestones to reach at certain times and amount of money spent on each one
  • Categorizing expenditures, such as whether they are fixed or variable
  • Risk management, particularly vendor risk

If the plans are for future activities, then strategies like target costing and milestone reviews are appropriate. Otherwise, variance analysis (to compare budgeted and actual costs) and trend analysis (for long-term changes in costs) work best for projects that are currently underway.

IT Procurement Consulting
The field of information technology is a special case for cost management. The software market for businesses is a complicated one, with multiple vendors selling similar solutions that often overlap in functionality and compete in ways that only someone with technical expertise could grasp. Software procurement is consequently a pain point for many businesses, as knowing what brands to trust and what solutions to use takes up too much time and effort with market research. It’s for this reason why businesses rely on procurement services to do the research for them and find that ideal contract quickly. In addition to IT cost reduction, you’re more likely to reach a compliant service provider that will bring value to your organization.

Offload IT Procurement for Better Results While Saving Time and Money

Imagine what it takes to go through the purchasing cycle of just one solution: you have to search the market for service providers, overview pitches and feature sets, view sales demos, and compare your options at the end.

Going through hundreds or even thousands of IT contracts every year takes up too much time in the day that could be used for other aspects of the job, and there’s no guarantee you’ll catch the fine print to ensure you’re getting a good deal.

Don’t let IT procurement slow you down. Work with an IT procurement partner like 3Quotes to quickly find quality vendors. We’re ready to use our IT expertise, industry contacts, and contract negotiation skills to put you in contact with the perfect solution without any fuss. 

Ready to transform your procurement process to improve cost management? Contact us today to explore how we can help.