Six Strategies to Reduce Software & IT Costs in 2023

There’s no denying we’re currently in a tough economic climate. Inflation is currently soaring to the highest levels seen in decades, while high interest rates are leading many businesses to cut spending. Many companies are facing stagnant sales, declining revenue, and higher borrowing costs, leading them to look for ways to reduce costs and generate more revenue.

For tech companies, product and engineering departments usually make up the bulk of expenses on the balance sheet. Poorly planned or unsuccessful software ventures can exacerbate financial challenges. To put things in perspective, unsuccessful software projects cost companies $260 billion in 2020, while operational failures in software systems totaled $1.56 trillion in losses.

Now more than ever, companies that can reduce expenses and increase the runway of working capital are positioned to outperform their competitors. In this article, we’ll discuss the importance of creating a realistic and comprehensive budget, and share 6 recession-specific tactics for optimizing your budget in challenging times.

Scroll to the end for an infographic of the tips!

Strategy #1: Develop a Comprehensive and Realistic Software Development Budget

Many companies underestimate the cost of software development. This is true for startups building their first market-ready product, but it’s also possible for established businesses launching new features. 

There are many reasons costs can grow more quickly than expected: “hiccups” in the development process that lead to longer timelines, unforeseen business or technical complexities, or subscription fees for cloud services, for example. As teams grow, data can also become scattered across various places, making it challenging for leaders to gain full visibility into their expenses. This can cause leaders to allocate funds to unused or duplicated software and systems.

Some of this can be resolved with a centralized system for managing expenses. But unforeseen expenses that crop up during development can be more difficult to plan for and mitigate. A comprehensive budget is truly your best defense against being unprepared for potential risks and challenges in software development. 

This means taking the time to go through your product roadmap and identifying: 

• “Must-have” and “nice-to-have” products you’ll have to pay for
• Forecasts that factor in the best-case scenario along with the expected and worst case. 

Here, it’s helpful to have leadership across departments involved: there’s often more overlap between teams (like development and marketing, for example) than we realize upfront.

Set Aside a Safety Net for Those Just-In-Case Moments

When it comes to software development, a bit of padding in the budget can be a real lifesaver. It’s pretty common to run into unexpected issues, whether it’s a sneaky bug, a feature that’s trickier to implement than we thought, or just plain old project hiccups. That’s why it’s a good idea to allocate around 20% of your budget for these unforeseen expenses. It gives us a bit of a safety net, so if something does pop up, it’s not the end of the world. 

At Scalable Path, we’ve got a strong track record of giving accurate project estimates because we really dig into the project and look at it from all angles, following a process that’s stood the test of time. But hey, we’re all human, and sometimes things just don’t go as planned. Having that extra cushion in the budget means we’re ready for whatever comes our way, and if all goes well, we might just find ourselves with a little extra at the end of the fiscal year.

Strategy #2: Optimize Your Costs by Reviewing Subscriptions and Cloud Costs

This seems like a simple one – but many companies may put off the task of auditing and reviewing costs. It’s understandable: it’s a time-consuming process, and we can always justify doing it later.

Think about your personal subscriptions: how often do you look through all of the music, streaming, and other tech subscriptions you have? Many of us only review these when we’re doing annual budgets, or happen to see a subscription charge on a credit card.

Audit your subscriptions

Get together your leadership team and have them list all of their active subscriptions, ranging from development tools and software libraries to third-party services. Go through past statements or monthly numbers if you can – you might be surprised at some of the monthly expenses your team has. 

Once you’ve done your audit, identify any redundant subscriptions. Different teams may be using multiple tools with overlapping functionalities. In such cases, choose a single tool across teams (if it’s realistic) to cut your monthly costs.

Then, identify any subscriptions that you might be overpaying for. Particularly for tools in competitive industries – like task or project management – you may be able to make significant reductions in expenses by negotiating or switching providers. Many providers are open to concessions, especially when they know that account cancellation is on the table.

Monitor your cloud costs

A lot of times, companies end up biting off more than they can chew in terms of cloud resources—they get more storage and more of everything, just to be on the safe side, and end up not using half of it. 

But that’s not the only thing that can make your cloud bill go through the roof. Don’t forget to regularly clean up your databases and backups. Getting rid of old or duplicate data is a double win—you cut down on costs and make everything run smoother. On the topic of reviewing your data, pay particular attention to video hosting. Videos are typically one of the biggest users of cloud space, so it’s important to be smart about how you store and stream them. Compressing videos and using adaptive streaming can help you use your resources more wisely, keeping those costs down even when the economy’s not doing great.

In general, make sure someone on your team understands it’s their responsibility to keep a close eye on fluctuations in costs based on usage patterns. When you do your audit, look at the plan you’re on. Cloud service providers like AWS, Azure, and Google Cloud offer discounts for long-term commitments, which can lead to significant savings.

Strategy #3. Plan Your Feature Roadmap According to Market Demand and Revenue Potential

Knowing what the market wants – and more specifically, what your users want and will pay for – will save you money down the line. Why?

Because developing features before conducting market research is a risky business. When you start with research – interviews, market research, etc – you significantly reduce the risk that you’ll spend weeks or months developing features you ultimately scrap. And, you’ll likely generate more revenue because you did the work to understand why your users want.

The foundation of this tip lies in gathering and analyzing feedback. Personally, user interviews are my favorite route. I find getting users on a 15-minute video call the most efficient way to get to the route of their pain points, desires, and challenges. But interviews aren’t always possible (or necessary).

Surveys, questionnaires, and platforms like usertesting.com can facilitate low-effort feedback collection from both existing customers and new market segments, which can help you quickly validate demand for a product or test usability of a newly built feature. 

For more high-risk efforts – like a new subscription offering – focus groups or user studies with your existing customer base can help you gauge demand and willingness to pay. If there’s a strong demand signal and a clear indication of market appetite, it’s a promising sign to proceed.

Whatever route you choose, user research helps de-risk costly software development that may ultimately lack a place in the market.

Understanding customer priorities in a recession

It’s harder to sell your product in a recession. Why? Because customer priorities undergo a noticeable – and understandable – shift. 

Consumers become more budget-conscious, focusing on essentials while delaying non-essential purchases. They want increased value for their money and often gravitate toward bundled offerings, promotions, or discounts. Just think about your own practices when money is a little more tight: do you get rid of subscriptions that aren’t essential, or bundle together streaming/music services to save a few bucks a month?

In a recession, some companies may consider more flexible pricing, discounts, or payment plans for their loyal customer base. While it’s not always our favorite thing to reduce subscription costs for users, paying users are better than churned ones.

Strategy #4. Adopt of Improve Your Agile Software Development Practices

Agile practices enable your team to respond effectively to uncertain economic environments. Designing software in stages and breaking down complex projects into manageable components bakes flexibility into your company culture. With agile, your team is prepared for change, and can quickly adapt without the need for complete overhauls, minimizing the risks associated with large-scale development endeavors. By building in sprints or stages, you can iterate rapidly – speeding up the development process while enabling you to identify and rectify issues swiftly.

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Agile practices emphasize gathering feedback throughout every stage of development, not just at the end. By continuously seeking and integrating feedback from stakeholders, you ensure that your software aligns with evolving market demands and customer expectations.

Must-Have vs Nice-to-Have Features

When it’s time to roll up your sleeves and start building, the key is to separate the must-have features from the nice-to-haves. It’s the MVP mindset: tie every feature back to the overarching business strategy and ask critical questions. These might be: 

• Will these features realistically generate revenue? 
• Are people willing to pay for them? 

Minimum Viable Products (MVPs) serve as a powerful tool for introducing new features or improvements. By prioritizing the core functionality and deferring nice-to-have features, you can get your product to market faster and gather real-world feedback. This approach positions you to make informed decisions about additional features based on actual user data.

Course Correct with Regular Check-ins

Checkpoints serve as opportunities to assess progress, identify challenges, and make necessary course corrections. By adopting or enhancing your agile software development practices, you equip your team with the tools and methodologies needed to stay nimble and responsive, even in the face of economic uncertainties.

Strategy #5: Re-evaluate Your Budget Regularly

Consider your budget as a dynamic entity that grows, evolves, and occasionally requires fine-tuning. Regularly stepping back to assess your budget keeps you in a proactive stance, ready to address changes rather than reacting to unforeseen challenges.

One of the key advantages of regular budget evaluations is the ability to identify vulnerabilities within your financial framework. It’s an opportunity to pinpoint areas where you might be overspending or not realizing a sufficient return on investment (ROI). By discovering these soft spots before they escalate into critical issues, you can take proactive measures to mitigate potential risks and financial setbacks. Having contingency plans at the ready ensures that you’re well-prepared to navigate any turbulence that may arise.

Iterative budgeting

Similar to agile development practices, adopting an iterative approach to budgeting is highly advantageous. Your budget should evolve in tandem with the project’s progression and changes. As your software development project unfolds and market dynamics shift, your financial plan should reflect these shifts, ensuring that your resources are allocated effectively and in line with your evolving goals.

Strategy #6: How Staff Augmentation Can Help You Reduce Software Development Costs

One way that many companies can reduce costs while maintaining rapid product iteration and fast growth is staff augmentation. Revenue from IT staff augmentation is on track to hit $460B by the end of 2023, demonstrating the demand for outsourcing services.

Staff augmentation presents several compelling advantages to businesses seeking to optimize their software development efforts. First and foremost, it enables organizations to streamline their operations and shift their focus towards their core competencies. By entrusting software development tasks to external partners, companies can free up valuable time and resources, allowing them to concentrate on critical business functions and strategic initiatives.

Flexibility in staffing is another notable benefit of staff augmentation. Collaborating with a staff augmentation contractor provides companies with the agility to adjust their resource allocation as needed. Whether you require additional engineers to meet project demands or need to scale down during lean periods, staff augmentation allows for rapid adaptation without the complexities of local hiring and layoffs.

Reducing costs is often a primary driver for companies seeking staff augmentation solutions. Outsourced teams, whether individual engineers or entire development teams, can often be secured at a lower cost compared to hiring locally. This cost-efficiency is particularly appealing when tapping into global regions renowned for their wealth of cost-effective and highly skilled software development talent.

In a world where cost optimization is paramount, staff augmentation emerges as a strategic avenue for businesses to access top-tier talent, streamline operations, and achieve significant cost savings. As the staff augmentation landscape continues to evolve, companies that leverage this approach effectively are poised to stay agile, efficient, and competitive in the ever-changing software development arena.

Final Thoughts on Reducing Software & IT Costs

Cost reduction is on so many business owners’ minds in 2023. But it should never come at the expense of the quality of your product or service. By cutting the right costs, and employing the right strategies, you can strike a balance between cost optimization and delivering a high-quality, valuable product to your customers. The objective is optimization, not degradation.

By implementing the tips outlined in this article, including developing a comprehensive budget, optimizing costs, planning your feature roadmap according to market demand, adopting or improving agile software development practices, and regularly re-evaluating your budget, you can position your technical software company for long-term success.