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Cost Optimization Vs Cost Reduction

The document discusses the differences between cost optimization and cost reduction/cutting. Cost optimization is defined as a continuous effort to reduce costs while maximizing business value through activities like obtaining best pricing, simplifying processes, and automating operations. Cost reduction/cutting refers to one-time actions aimed solely at reducing expenses, such as reducing employee pay or headcount. The key difference is that cost optimization is long-term focused on reducing costs while preserving or enhancing value, whereas cost reduction/cutting takes immediate actions without consideration of business impact. Effective cost optimization follows best practices and proven programs, while cost reduction risks reducing revenue or quality in a rush to cut expenses.

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258 views3 pages

Cost Optimization Vs Cost Reduction

The document discusses the differences between cost optimization and cost reduction/cutting. Cost optimization is defined as a continuous effort to reduce costs while maximizing business value through activities like obtaining best pricing, simplifying processes, and automating operations. Cost reduction/cutting refers to one-time actions aimed solely at reducing expenses, such as reducing employee pay or headcount. The key difference is that cost optimization is long-term focused on reducing costs while preserving or enhancing value, whereas cost reduction/cutting takes immediate actions without consideration of business impact. Effective cost optimization follows best practices and proven programs, while cost reduction risks reducing revenue or quality in a rush to cut expenses.

Uploaded by

rudy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Cost Optimization Vs Cost Reduction

Name: Ruwaid Inamdar Class: SYBcom Div: D Roll No.: 5813


Email ID: [email protected]

What Is Cost Optimization?

Cost optimization is a business-focused, continuous process to control expenditure and cost


reduction, while maximizing business value. It includes:
 Obtaining the best pricing for all purchases.
 Simplifying all processes and services related the business.
 Automating and digitalizing IT and all other operations related to the business

What Is Cost Reduction?

Cost reduction is the process used by companies to reduce their costs and increase their profits.


Depending on a company’s services or product, the strategies can vary. Every decision in
the product development process affects cost. Companies typically launch a new product without
focusing too much on cost. Cost becomes more important when competition increases
and price becomes a differentiator in the market.

What is the difference between Cost Optimization and Cost Reduction?

1. Cost Optimization VS. Cost Cutting


Cost Optimization is defined as a continuous effort, specifically designed to drive
spending and cost reduction while maximizing business value while Cost Cutting refers
to more immediate, direct one-time actions aimed at reducing corporate expense levels.
Unlike cost cutting, cost optimization isn’t a one-time, immediate activity. Instead, it
provides a long-term solution for your IT budget.  Automated systems and tools can help
companies managing their IT inventory, aligning consumption with costs and verifying
those costs with contacted rates.[ CITATION mike19 \l 1033 ]
2. How to Differentiate IT Cost Cutting from IT Cost Optimization

Cost cutting is a one-time undertaking aimed at reducing expense levels while cost
optimization is a business-focused, continuous discipline to drive spending and cost
reduction while maximizing business value. Many IT cost cutting options are related to
human resources,  like reducing pay, laying some individuals off, switching to a less
expensive health insurance and so on.  Gartner estimates that 37% of IT budget is related
to staff, so it makes sense why organizations first cut costs surrounding employees while
Effective IT cost optimization often adheres to programs and policies that are based on
time-tested best practices and procedures. Cost cutting refers to immediate, direct actions
while Effective IT cost optimization often adheres to programs and policies that are based
on time-tested best practices and procedures.[CITATION Caroline20 \l 1033 ]

3. What is the difference between Cost Cutting and Cost Optimization?

While cost cutting is solely focused on reducing expenditure, cost optimization is broader
in scope. It is important to recognize that, in fact, all cost cutting requires an investment.
Even the simplest cost cut requires some level of analysis and human effort. Cost cutting
is not free. In extreme cases, you may even make a decision that reduces revenue, in
order to obtain an even greater reduction in expenditure. In the long term, cost
optimization is likely to be more fiscally responsible than simple cost cutting.[ CITATION
Gerald10 \l 1033 ]

Conclusion

For an organization to ensure more profit growth by producing quality goods and services
with available resources on the ground there is a need to control cost and reduce cost to
the acceptable limit as regard to control and reduction on wastage and loss. Challenges of
effective cost control and cost reduction could be solved by direct observation and
supervision by management by taking note of the key non-performance indicator in any
section or departments having challenges and as a result, finding ways of improving it.
Cost control and cost reduction scheme must be properly administered in an organization
by setting realistic standard Cost control should be operated in every department in an
organization especially the production department in other to make sure that the numbers
of finished goods are properly accounted for. For effective cost control to be achieved
there should be proper data collection, data analysis and control administration.
Bibliography

Khoury, G. R. (2010). INNOVATIVE COST OPTIMISATION.

Le Brun, C. (2020, june 06). How to Differentiate IT Cost Cutting from IT Cost Optimization.

Saxby, M. (2019, october 14). COST OPTIMIZATION VS. COST CUTTING.

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