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Shifting IT business models in time of economic crisis

For CIOs who already budget lean, here are four more places to save. You can stop some projects, reduce service levels, increase levels of risk and, yeah, move to the cloud.

ORLANDO, Fla. -- Peter Whatnell, CIO of Sunoco Inc., prepared three budgets for next year. The first scenario lays out what IT would have proposed had the financial crash not occurred. The second is the plan if his budget stays flat. And the third? What a 20% reduction in budget would look like.

"In each case, we have said, 'This is what we deliver, this is what you would get for it, this is the consequence for stopping or reducing, and this is how much money you would save.' So, we're trying to be anticipatory with that," Whatnell said, in an interview with at the SIMposium 08 conference in Orlando this week.

Is a contingency budget necessary, particularly at a company whose third-quarter profits more than doubled, blowing away Wall Street forecasts? Well, the Philadelphia-based oil and gas refiner has felt the pinch of the global economic crisis: Year-to-date earnings of $572 million significantly lag last year's $900 million in profit. And the company recently said it hopes to save $375 million by scrapping an upgrade to its Tulsa, Okla., refinery.

Companies like Sunoco are looking for quick solutions, Whatnell said. In budget discussions with business peers during this economic crisis, CIOs will need to do their part in reducing costs. At well-managed IT departments, that usually leaves three options: stop doing some projects, reduce service levels and increase risk levels. At Sunoco, Whatnell is scrutinizing everything from the levels of service in the data center to the use of Google for email.

The larger challenge for CIOs in these discussions with business peers is spending at least as much time talking about "how IT can help the company in its other areas of operations to create benefits far greater than what they would get than by cutting the IT department by 10%," Whatnell said.

In addition to his duties at Sunoco, Whatnell is the incoming president of the Society for Information Management (SIM), a 3,600-member association for CIOs and host of the annual SIMposium. While the theme of this year's sessions was innovation, the economy was the elephant on the agenda of many of the nearly 700 IT executives in attendance.

"It is almost like a perfect storm," said Whatnell, who has seen fiscal crises come and go in his long career in IT. He's also negotiated plenty of tough budget cycles during his seven years at Sunoco and, before that, 17-year career at Texaco Inc.

"I think the difference this time is, you have huge change and pressures in the IT function itself, whether it be technical changes, whether it be business model changes that Nick Carr was talking about, or whether it be pressures in terms of sourcing, which has always been with us," he said, referring to keynote speaker Carr's treatise on the industrialization of IT, The Big Switch.

"But at the same time, you've got these huge economic pressures, which for the first time in my real memory, are moving into an international problem rather than just a national problem," he said. For large companies, the country-by-country arbitrage they can leverage when a fiscal downturn is localized obviously disappears when the crisis is global.

IT should be looking for ways to help the business thrive, he said, but, "I don't think you can have that conversation about what you can do for the business if you haven't been able to show that you have been willing to look at your own operations and be open-minded about alternate delivery models and show reduced costs. Because, without that, you just come across as overly defensive -- that there is nothing wrong with you; it's everybody's else's problem."

SIM forecasts majority of IT budgets flat or increasing

What will happen to IT budgets is anyone's guess. The results from the annual SIM survey taken in June show that 44% of respondents were planning to increase their IT budgets in 2009 and another 37% predicted budgets would be flat. But that was then.

Anecdotal information from CIOs at SIMposium suggest that IT budget discussions vary dramatically from company to company. And even at companies looking to chop budgets by 10% to 20%, for example, there is no single prescription for CIOs. At Raritan, N.J.-based Johnson & Johnson Pharmaceutical Research & Development LLC, CIO Karan Sorensen, for example, is planning for a 60% increase in IT projects.

Caren Shiozaki, CIO at Thornburg Mortgage Inc., a Santa Fe, N.M.-based single-family residential mortgage lender focused on prime and super-prime borrowers, is budgeting lean and having a hard time filling IT positions because of the industry she's in. One CIO said his IT roadmap for next year was 'looking more like a trail map." Mostly, CIOs seemed to be holding their breath. Ed Trainor, CIO and vice president for Amtrak, said it was too early to gauge what will happen to budgets in 2009.

Sunoco looking at data center SLAs to email from the cloud to save money

At Sunoco, where much of the IT infrastructure is outsourced, Whatnell said that two months ago his team members started sitting down with each one of their providers and business representatives to understand what services Sunoco pays for and the ramifications of changing service levels to reduce costs.

It is almost like a perfect storm.

Peter Whatnell, CIO, Sunoco Inc.

One example is the vendor Sunoco uses for data center operations, he said. Sunoco servers come with different levels of service, from titanium -- the company's designation for best service -- to bronze.

"When we actually looked at the real world of performance of what we were getting even at the lowest level, the bronze service, because the equipment is so reliable and our processes are so disciplined we are exceeding the level contractually, and said, 'Gosh, can we bring everything down to that level,'" he said.

Does that mean IT can guarantee there will never be an outage of more than three hours on a particular machine? No. But "in our case we can say we have been running these for three years, we have track record," he said.

But the crunch also opens doors. "What's the cliché? Never waste an opportunity a crisis gives you," he said. In his case, he has used this fiscal crisis as a platform for moving toward cloud computing.

One game changer he's pushing is using providers like Google Inc. and Yahoo Inc. for email service. The move to cloud providers for email would eliminate the need for disaster recovery for email, since that is baked into the service. If the tradeoff is 90% of the service for one-tenth of the cost, this is an option CIOs must consider. He has also been talking to Google and others about office applications delivered as a service and environments like Amazon's EC2 (Elastic Compute Cloud) for its application developers.

During the past six months, Sunoco has also replaced some of its communication lines to smaller locations with public infrastructure. Some people balked, pointing out there is no service-level agreement on the Internet. But, he adds, "In times of crisis, it is amazing the new ways of thinking that people are able to countenance."

Let us know what you think about the story; email Linda Tucci, Senior News Writer.

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