6 strategies for achieving IT cost optimization

Enterprise technology is evolving faster than ever, and so is the price tag. With global IT spending set to reach USD 5.74 trillion in 2025 (up 9.3% from the previous year), CIOs and CFOs are under increasing pressure to deliver high-performance systems while controlling expenses.¹ As a result, IT cost optimization has become a top strategic priority for business and IT leaders.

IT cost optimization is the process of regularly evaluating IT spend to identify and eliminate unnecessary expenditures while supporting operations. When done right, IT cost optimization efforts combine best practices, strategies and software tools to help balance cost reduction with maximum performance and value.

That said, the practice of IT cost optimization comes with notable challenges, including tackling escalating expenses tied to emerging technologies such as generative AI (gen AI). In an IBM Institute for Business Value (IBV) report, the average cost of compute is expected to climb 89% between 2023 and 2025, with 70% of executives surveyed citing gen AI as a key player behind this increase.

IT cost optimization is not to be confused with IT cost management—the process of monitoring, analyzing and reporting on IT costs to ensure they adhere to budget allocation. In contrast, IT cost optimization goes beyond tracking costs and focuses on implementing strategies that minimize IT expenses while boosting the value obtained from IT resources.

Without a structured framework, business leaders can face difficulty achieving IT cost optimization strategies that drive long-term sustainable change. According to Gartner research, only 11% of organizations maintain cost savings for 3 consecutive years.²

An IT cost optimization framework provides a step-by-step approach for analyzing an organization's IT expenses (for example, hardware, software applications, cloud computing, vendor contracts, data storage) while maintaining efficiency and achieving broader business objectives.

An effective framework should include the following steps.

Engage stakeholders from all key business units (for example, operations, finance, customer service) to ensure buy-in and achieve informed decision-making. Each business unit has unique technology needs and spending patterns that can reveal optimization opportunities.

Align IT cost optimization efforts with broader business goals, focusing not just on cost reduction but on achieving operational efficiency, innovation and profitability.

For instance, if your business aims to improve customer satisfaction, the IT team might focus on optimizing business processes and customer service tools to enhance overall performance.

Conduct a comprehensive assessment to obtain visibility into current spending, resource allocation and inefficiencies. Integrating IT spending data with business performance metrics (for example, revenue growth and customer acquisition costs) can reveal areas where IT investments are underperforming and are not yielding expected returns.

CIOs and other IT leaders must identify potential cost-reduction strategies that won't compromise performance or value. Migrating applications from a high-cost, on-premises data center, for instance, to a more cost-effective hybrid cloud solution can reduce both capital and operational expenses while improving scalability and flexibility.

IT cost optimization initiatives can begin once an organization has established a framework. In this article, we explore 6 IT cost optimization strategies that can drive greater return on investment (ROI) from technology investments and provide a competitive advantage.

Consolidate your IT assets to reduce both costs and complexity. Redundant systems and applications, old hardware and underused software licenses can create IT sprawl—an overly complex, decentralized IT landscape that can lead to shadow IT. Besides breaking down IT silos, consolidation makes it easier to manage workloads and streamline operations.

For example, virtual machines (VMs) have transformed IT operations, allowing businesses to run multiple applications on a single physical server. Yet, while VMs provide greater flexibility and scalability, VM sprawl—the excessive and uncontrolled expansion of virtual machines—can result in underused or forgotten VMs.  

Establishing IT governance policies with standardized processes for creating, maintaining and decommissioning VMs can prevent VM sprawl. Additionally, investing in virtualization management platforms to oversee the entire VM lifecycle helps reduce resource waste and alleviate management complexities.

Today, most enterprise organizations invest in a hybrid multicloud model, which offers both flexibility and control over workload deployment. However, this modern IT infrastructure model comes with complexity. The more clouds that you use—each with their own management tools, data transmission rates and security protocols—the more difficult it can be to manage your environment. A lack of visibility into cloud usage patterns, for example, can result in excess expenditure on underused services.

In a recent study, enterprises are wasting billions of dollars on their public cloud infrastructure due to inadequate management, with more than 3-quarters of respondents estimating that between 21% and 50% of their cloud spending is wasted.³

Cloud cost management, also called cloud cost optimization or cloud cost governance, manages and reduces a business's cloud spending. When implemented effectively, cloud cost management strategies enable FinOps, an evolving cloud financial management discipline and cultural practice that aims to maximize business value in hybrid and multicloud environments. FinOps can help an organization proactively identify and reduce unwanted spending, scale cloud resources and automate cost control policies.

More cloud optimization techniques include: 

• Rightsizing: Over-provisioning resources (for example, compute, network bandwidth, cloud storage capacity) is a common problem that organizations face in cloud environments. Rightsizing, the process of aligning the type and size of cloud computing instances with workloads, can improve cost efficiency by ensuring that an organization purchases the right amount of cloud instances. Cloud cost management platforms allow businesses to track resources and adjust their usage to achieve cost-cutting measures.

• Reserved instances (RIs): Organizations can buy reserve instances (RI) to save money and maintain flexibility. Reserved instances are purchased upfront, usually at a discount and are typically used during peak periods such as flash sales.

• Spot instances: Cloud customers can use spot instances to purchase unused computing capacity at a lower price from a cloud service delivery provider. Spot instances are best for short-term tasks such as batch jobs or background processing since providers can interrupt or terminate these instances with little notice when the capacity is needed elsewhere.

A significant portion of an organization's purchasing goes toward software, yet challenges frequently arise when tracking usage. A study conducted by Productiv found that only 47% of SaaS licenses are used over a 90-day period on average.⁴

To optimize software-related expenses, conduct a thorough audit to assess usage versus license and subscription purchases. Consider adopting open source software where possible to deliver similar functionality at a lower cost.

Investing in software asset management (SAM) processes and tools can improve efficiency, reduce risks and make the most of your software investments. SAM helps track usage such as data storage for SaaS and cloud services. By analyzing this usage data, businesses can set benchmarks to optimize their subscription plans. For example, these benchmarks can ensure that the software isn’t under-licensed (which could lead to compliance problems) or over-licensed (which could result in wasted spending on unnecessary licenses).

Organizations can boost business performance and gain a competitive advantage by using automation tools and AI-powered intelligent workflows:

• Automate routine tasks: Routine IT operational tasks can absorb significant resources and labor when carried out manually. By automating these processes, organizations can free up IT teams for more strategic activities while reducing the risk of human error. IT automation can handle repetitive tasks such as software patching, infrastructure provisioning and routine maintenance. Automated monitoring systems can detect problems before they impact operations, allowing for timely intervention and cost-saving opportunities.

• Improve cost visibility and control: AI-driven tools can provide real-time insights into IT spending, identify cost anomalies and generate reports to assist IT leaders in understanding and controlling costs effectively. Today, organizations are also tapping into generative AI capabilities to build predictive models and forecast future IT costs.

• Optimize cybersecurity: Cybersecurity plays a critical role in IT cost optimization initiatives. IBM’s Cost of a Data Breach Report 2024 showed that the global average cost of a breach rose 10% from the previous year, reaching USD 4.88 million, the highest increase since the pandemic. Automation and AI tools help optimize cybersecurity by enabling rapid threat detection and response, reducing the time it takes to identify vulnerabilities and mitigate risks.

Agile methodologies and DevOps practices can lead to better resource usage and more cost-effective IT management when applied to IT operations.

Agile and DevOps foster close collaboration between development, operations and business teams, which helps ensure IT resources are used effectively across departments.

• Infrastructure as Code (IaC): IaC is a practice where infrastructure is defined and managed through code rather than manual processes. This capability can lead to more efficient and predictable provisioning of IT resources, reducing the risk of over- or under-provisioning, thus cutting costs.

• Generative AI: Generative AI tools can improve the software development lifecycle (SDLC) by automating code generation, assisting in software development and even helping with IT documentation. This capability improves efficiency and reduces development expenses.

IT infrastructure, especially data centers, can consume vast amounts of energy. Sustainable IT is an approach to enterprise IT that aims to minimize the environmental impact of IT operations and its contribution to climate change.

Sustainable  IT procurement policies can help organizations prioritize the use of environmentally friendly equipment and hardware (for example, servers, cooling systems, solid state drives) with high energy-efficiency ratings such as Energy Star certifications. Tapping into power contracts with renewable energy sources, such as solar, wind or hydropower, can also significantly reduce the environmental impact of IT operations and provide cost savings in the long term.

As businesses contend with ongoing technological change, IT cost optimization must be an ongoing process rather than a one-time fix. The key to managing this complexity lies in adopting the right tools and strategies to strike a balance between cost-efficiency and performance.