Companies considering cutting IT budgets in the face of dismal economic conditions have been warned to be prudent about where those cuts are made.

A report released today by analysts The Hackett Group suggests that a typical Global 1000 company can expect to save €40m a year on IT spending, without impairing organisation performance.

Nevertheless the report also warns that making cuts in the wrong areas can be fatal. “You don’t want to cut the muscle,” said Hackett Group advisor David Ackerman.

The report noted that the truly world-class organisation strike a balance between trimming IT expenditure and recognising the business contribution IT makes. Typically, these firms will have highly consolidated technology platforms and application portfolios.

The hallmarks of a world-class IT function are "architecture complexity management, centralisation, demand management and sourcing", the report concluded.

And while many companies look to outsourcing to reduce technology costs, there are pitfalls, warned Eric Dorr, senior research director at The Hackett Group. Companies need to ensure flexible contracts, be wary of high base fees that cannot be reduced and ensure they are adequately transferring risk to the outsourcing provider, he said.