CIOs preparing for a recession should remember this: In hard economic times, the CFO -- not your business customer...
-- is your best friend. Second, resist the urge to play hero and single-handedly slash IT costs. Budget revisions are a top-down exercise, usually driven by -- you guessed it -- the CFO.
That was the headline news in a recent Forrester Research Inc. conference call with CIOs on what IT can do to help employers weather an economic downturn.
"Going into a downturn, the CFO is ultimately the one who makes the call about cost cuts," said Andrew Bartels, a vice president at the Cambridge, Mass.-based firm. "You want to be arm-in-arm with the CFO, fully aligned and seen as an ally who will help him think through what can be cut, as well as be preserved."
And if it means sacrificing a little bit for the business partners, so be it, Bartels added. "It is much more important in a downturn to have the CFO as your clear, firm partner."
Bartels, who hosted the call with analyst Alex Cullen, said he believes the economic outlook is still uncertain enough in most industry sectors that CIOs must prepare for cost cuts but hold off on taking action until the shape of the downturn is clearer. An exception is the financial services industry, which is now operating in crisis mode.
If a recession does hit your industry, well, let's just say your logical powers will be put to good use. CIOs will need to review the IT portfolio, identify cost cuts, weigh the short- and long-term risks of those cuts to both the business and IT, make the argument to the CFO and stand up to both the CFO and CEO when the phrase large-scale outsourcing comes up. And it will.
Primer for recession
"Most firms on fiscal years that conform to the calendar year have already established their operating plans and 2008 budgets. Any rethinking of these plans is going to be a top-down activity, in which the CFO is going to be the key driver," Bartels said.
The CFO is the person to whom the CEO will turn for information. And it's the CFO who likely makes the call that the company is indeed headed for a downturn and needs to take corrective action on expenses.
When that happens, the CFO will be looking to cut capital expenses and discretionary operating expenses, defer hiring, accelerate retirements and zero in on investments that promise quick returns in both the business and the IT budgets.
"Those are the areas you need to be thinking about and anticipating, so that you can be a proactive partner and help the CFO manage the task of cutting costs," Bartels said. That does not mean playing the hero and taking a bullet for the company, he stressed.
"It is not the CIO's role to make cuts themselves. You're a senior business executive. You're not going to act unilaterally," he said. "Be a hero by being a comrade and a compatriot."
Trimming the MOOSE
"If you are running IT well, adapting to a recession is easier," said Cullen, a research director at Forrester. But it will also be harder to find places to cut.
A well-run IT shop has strong governance in place. The CIO works with business partners to prioritize investments and understand cost drivers. IT costs are transparent and aligned with business services, so business peers don't see IT costs as a black box. Well-run IT shops typically have strong vendor management, including a good understanding of the obligations, flexibility and strategic value of vendor contracts. Effective CIOs have developed metrics that are linked to business outcomes, not server uptime.
Most of an IT budget -- some 50-80% -- goes to keeping the lights on, or what Forrester likes to call "MOOSE": maintaining and operating the organization, systems and equipment. Well-run IT shops don't have a lot of fat to cut in this area. CIOs should be prepared to show the CFO how they have kept MOOSE costs down.
Always a trade-off
To get started, CIOs must do a careful review of the IT portfolio, analyzing the risks associated with cutting, postponing and cancelling projects.
- Avoid cutting existing projects that are targeted to reduce business costs.
- Keep IT projects that that will reduce the cost of MOOSE, such as consolidating, retiring and upgrading systems.
- Protect new investments that will lower business and IT costs. Protect research and development as well.
- Delay and defer capital investments instead of cancelling them.
- Prioritize, prioritize, prioritize.
Obvious candidates for cuts include new computer and communications equipment, new projects with long paybacks and the use of consultants.
Keep in mind that even these cuts pose risks, and be prepared to spell out the downsides to the CFO.
For example, holding off on buying new computer equipment may increase service outages; keeping old PCs could translate into higher maintenance costs and lower morale. Cancelling an ambitious "long payback" project could hurt competitiveness. Cutting IT consultants without cutting back on projects burdens internal staff.
Also, keep in mind which skill sets you'll need when the economy rebounds. While it may be tempting to offer early retirement to baby boomers, these are likely the people who have the institutional knowledge, management and legacy skills that give the business a competitive advantage. "You want to husband them," Bartels said.
Many CEOs and CFOs think of IT outsourcing as a fast, effective way to cut costs. CIOs know it's not that simple, Bartels and Cullen said. In a down economy, outsourcing often translates into "asset transfer," or selling assets to an outsourcer and leasing back. It can take six months to a year to choose an outsourcer, and contracts usually last about five years. Outsourcing specific IT functions, such as help desk or data center hosting, can make sense and bring fast benefits, Cullen said. But those savings will be small if you have been running a strong IT shop.
Rino Nori, vice president of Nori & Associates, an IT consulting and placement firm in Stamford, Conn., agrees. "Outsourcing is not simple and, frankly, I am not convinced that it is the best way to cut costs. It takes awhile for the processes to settle into place. Two or three years later, many companies look back and discover in retrospect they didn't save that much, if anything," said Nori, a professor of IT systems at Fairfield University and member of the Society for Information Management. "I'm not convinced that replacing IT with a bunch of guys from Infosys is the smartest way to go about it in this point in time."
A last piece of advice: As you move through the downturn, Bartels recommends you stay in touch with business users so you know when the pinch becomes a pain.
"That's when you want to start being their advocate, and go back to your CFO and say, 'We took the cuts we needed to get through this, but the business is really feeling pain here, and if we don't do something we're really going to get hurt on the upturn.'"
Let us know what you think about the story; email Linda Tucci, Senior News Writer.