Whether the current recession proves shallow and short or deep and prolonged, many companies will look to lower their costs in the coming months. CIOs need to think about the downturn on two fronts, advised Forrester Research Inc. in an online seminar Monday.
First, IT leaders should focus on projects that help their companies weather the downturn.
Second, CIOs need to ensure that IT emerges from this downturn as an integral, not marginalized, player in their companies' business strategy.
"Paradoxically, in strong economic conditions the linkage of investments to strategies is typically less important," said Alex Cullen, who presented the seminar with Forrester economist Andy Bartels. Times are good, strategies are abundant and projects can be justified through a variety of means.
In hard times, smaller projects with faster payback periods dominate. As CIOs do their part to reduce costs, they should look for ways to support projects that are linked with their business's strategy to ride out the recession, the Forrester analysts advised. The caution? Don't just hack your way to reduced spending. And don't go it alone.
Budget imperative for 2009: "Stay in lock-step" with the business
A raft of industry experts -- Forrester included -- believe that this recession will not be a repeat of the 2001 recession for IT, when technology was the bubble and the IT profession paid dearly when it burst. Gartner Inc. hedged its bets last month at its Symposium ITxpo conference, forecasting that the change in IT budgets over 2008 could range from a 3% increase to, worst-case scenario, about a 2% decrease.
In an ongoing Forrester survey of CIOs, Cullen said the budget forecasts he has received from CIOs this past week do not differ significantly from what he heard in July: More than half of the IT executives say they are not cutting budgets and do not have plans to make cuts for 2009. About 11% say they plan to cut budgets, a slight increase from the summer.
The percentage of those who are cutting budgets has dropped from 43% in the summer to 35%. A big caveat: The number of CIOs responding thus far is roughly a third of what Forrester normally sees at this point in a survey, Cullen said, suggesting deep uncertainty about what is going to happen.
One explanation for the relative immunity enjoyed by IT this time around, if it holds up, is that a lot more businesses "get technology" than in 2001, Cullen said. A majority of business leaders now view technology as a core component of their products and services (82%) and/or as a differentiator (72%) in addition to a vehicle for reducing the cost of business operations (66%).
IT financial management has also changed. Since the 2001 recession, CIOs have learned to budget lean. The roughly 70% of IT budgets that goes to maintaining operations is managed well by CIOs, according to Cullen.
Indeed, the challenge for CIOs in this downturn is not cutting IT costs but "staying in lockstep with the business as its priorities shift," said Cullen, so that IT can provide help where help is needed.
All that said, business executives still tell Forrester IT could do more to help their companies cut costs and boost productivity. "They want to see more of us," Cullen said. "This is the start of an opportunity for us."
Smaller projects with quicker paybacks and tight alignment with business
In hard times, priorities change. When companies are flush, the 30% of the IT budget that goes for discretionary spending typically is aimed at helping the business grow. Big projects, big risks for potentially big returns -- an overhaul of the supply chain network to accommodate more external suppliers, for example. Projects in flush times are relatively bulletproof, Cullen said, likening the phenomenon to an Ivy League education: Getting in is hard but once admitted, you're pretty much guaranteed a place until the end.
In a rough economy, those blockbuster initiatives give way to projects that reduce the cost of the business and of IT and boost workplace productivity. Companies want to keep their income statements looking good, so smaller projects with fast paybacks are typically more attractive than a big project with a long payback.
The model is certainly proving true in the outsourcing industry, which saw large deals of more than $1 billion dry up in the third quarter, said Mike Slavin, head of information technology outsourcing (ITO) at TPI, a data and sourcing advisory firm based in The Woodlands, Texas. The third-quarter result points to a longer trend toward smaller deal sizes, Slavin said.
"Traditionally, you'd see someone walking into the sourcing market with $50 to $100 million scope. Now we see people with a $5 to $10 to $15 million-a-year scope, whether it be ADM [application development and maintenance] or infrastructure, looking to find an answer to their problem," Slavin said.
The challenge for service providers and consultants, he added, has been "to deliver the same amount of value to people with a smaller problem set." It's a good lesson for CIOs.
Tactics for keeping IT relevant during and after the recession
As CIOs cull their IT portfolio going forward, linkage to business strategy is paramount: Business executives improve their focus in hard times. Expect cancellations and be on the lookout for projects that don't fit the times.
In cutting IT costs, CIOs will want to adjust for reduced business volumes, Cullen said, and aim to drive down the cost per business transaction -- for example, lowering the cost of an incoming order, or getting a new employee onboard.
Paradoxically, in strong economic conditions, the linkage of investments to strategies is typically less important.
Alex Cullen, analyst, Forrester Research Inc.
But -- and it's a big one -- CIOs should be aware that the current environment poses risks for IT. At companies where business peers do not understand IT spending, IT will be asked to cut investment levels. Projects are cut due to politics and influence and the business relationship with IT suffers -- so much so that when the upturn comes, IT is marginalized, Cullen said.
The thing to do? Cullen offered a list of tactics: Organize your IT costs around services visible to the business. To minimize the impact of office politics on IT cuts, look to strengthen business involvement in IT governance.
During hard times, the CFO is your point person. Asking for permission to add or cut a project is no way to navigate a downturn. Build a relationship with the CFO around agreed-upon criteria for spending. Communicate the risks of deferring infrastructure investments, the trade-offs for reducing service levels, etc. Work with the CFO on the timing of important decisions.
"The people we talk to -- and Forrester agrees -- [suggest] if you do these things when the upturn comes, IT is better positioned with the business execs," Cullen said. "Think of this as an opportunity for improving your position with your business."
Finally, not all businesses are created equal in this recession (so far). Now is a good time to tap talent let loose by financial services and manufacturing companies.
Let us know what you think about the story; email Linda Tucci, Senior News Writer.
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