The 20% cut: Tech cost cutting trends

The background: The tide is going out

For companies that are not building underlying generative AI models and hardware, we can see a quick shift from “Oh look at the amazing AI product that you are using.” to “We are hitting a downturn and I need you to take 20% out of your cost base within 6 to 12 months.”

AI is a bubble. A load-bearing bubble, but a bubble. Don’t build a house on it if you can avoid it. Even if your business is another AI grift, you probably only need to import openai. ― Ethan McCue

The task: The economy may ebb and flow, but the cost cutting target always seems to be 20%

A large number of business transformation, change, business process outsourcing, and technology projects are implemented because a senior executive is instructed by their manager to reduce the costs in their part of the organisation.

The executive engages management consultants who analyse how their part of the business is run. The consultants come up with a plan that reduces costs by about 20%. It always seems to be about 20%.

The general consensus seems to be that this happens because 20% is a ‘safe’ number. All transformation projects involve expense and risk and are usually not with pursuing if the savings will be lower than 20%. And any higher number may risk seriously damaging the business.

The process: Technology has changed over time but the process to cut costs by 20% … has not

Stripped down to basics, companies seem to approach the 20% cut in the same way that they did so 20 years ago.

Companies look at the following:

1. (People and processes) What are their people costs, and how much of what the company does is insourced (i.e. employees) and how much is outsourced (i.e. to contractors and third-party suppliers).
2. (Technology) What are their technology costs, and how much of this is insourced (i.e. run by employees) and how much is outsourced (i.e. run by contractors and third party suppliers).
3. (Pain points) What are their biggest pain points? In other words, which functions within the organisation are inefficient and expensive relative to their peers and switching from insourcing to outsourcing or vice versa.

The past: Technology used to be local

In the olden days (i.e. the 90s) companies either ran their own computer systems or hired outsourcing providers to do so. There was no hybrid model.

If we wanted to outsource our finance function, for example, we either required an outsource provider to run the outsourced technology as well as the service, or required all of the staff of the outsourcing provider to work at our premises.

The internet wasn’t fast of stable enough to run critical computer systems remotely.

The present: Technology is now global

This is now changed. Technology is now truly global.

Transformation projects are now run based on the assumption that knowledge workers can work from anywhere. The internet is fast enough to not require most knowledge workers to work together in offices.

The current and future trends: Boring is best

We can see the following trends in cost cutting transformation projects:

1. (Using expert Software as a Service providers) The continuing move from running software in-house to using expert software as a service (SaaS) providers of HR, finance, and other systems. (Using global hosting providers) The continuing move from hosting computers on-premise to using global hosting providers like Microsoft, Google Cloud Platform, and Amazon Web Services.
2. (The move away from lift and shift) Many transformation programs still involve replacing employee teams with an outsourced service provider, with the outsourced provider’s employees doing exactly the same work as the existing team in exactly the same way. However, we are seeing a continuing move away from this approach.
3. (The move towards remote access) Knowledge workers can now work remotely. While we complain about internet speeds in Australia, internet access is now fast and stable enough for most work performed by most knowledge workers.
4. (The move towards burning it all down and starting again from scratch) Best practice is now to pay an expert outsourcing provider to run the service (HR, finance, technology, etc.) in the same way that these providers do for all of their other customers. Using a common technology platform means that all customers benefit from a best of breed service that is continually updated by the supplier in a way that shares costs amongst all customers.
5. (A slow move to flashy (e.g. AI) but not to cut costs, at least not yet) AI may eventually become the leading way to cut costs but we are not there yet.
6. (The move towards boring) In the meantime, customers still seem to be focused on their people and processes, their technology, and their pain points. It may not be as exciting as just starting a new AI project, but this is still where costs can be saved.