The Transformational CIO: Leadership and Innovation Strategies for IT Executives in a Rapidly Changing World

Don't Chase Low Unit Costs

During the early days of outsourcing—back when it was still a buzzword—many CIOs succumbed to what I'll call “cost myopia.” When you have “cost myopia,” you only see the savings that are right in front of you, and you can't see the long-range effects of your cost-cutting tactics.

Stephen Gold, the CIO of Avaya, has lived through enough business trends to know that not every penny saved is a penny earned. If you try to save money by focusing solely on lower unit costs, your tactics might succeed—but your strategy can fail.

Since one of the easiest ways to reduce unit costs is by reducing labor costs, it seems like a no-brainer to outsource projects and services to markets where labor costs less. Sometimes these markets are domestic, in which case you are near-shoring, and sometimes they are foreign, in which case you are off-shoring. In either instance, you are likely to save money and achieve the lower unit costs you were seeking.

But here's where “cost myopia” can undo your success. “It's important to remember that unit cost is just a piece of the equation,” says Steve. “The real issue is determining the cost of a finished product. You will find that it's very much like a manufacturing process—there is not a clean, one-to-one correlation between unit costs and the cost of finished products. So the challenge now is minimizing the leakage and getting the most benefit from your labor arbitrage.”

There is also the question of value; as many of us have already ...