Analysts agree the new financial year will see little
improvement in the economy. How will this affect IT budgets and
what should IT chiefs consider when planning for the year ahead?
Julia Vowler reports.
Outside the public sector, "IT spending is not increasing at all,"
says David Rippon, chairman of IT directors' group, Elite. Yet IT
budgets still have to align to IT strategy, and that has to follow
business strategy, says Rippon. "You must revisit the strategy
before you revisit the budget, and you must look at the business
strategy and how to align IT to it to best help deliver that
business strategy," he says.
Since the prevailing business strategy is cost reduction, so too
must be IT strategy. Views are mixed as to whether IT directors are
closest to the firing squad.
David Roberts, chief executive of Tif, the Corporate IT Forum,
thinks they are. "The perception of the corporate finance
department is that IT costs are out of proportion compared with
other corporate functions and so they want more cuts accordingly,"
he says. "That has been going on for three years and shows no signs
of slackening.
Not everyone agrees.
"I think it is worth recognising that IT is not being singled out
for budget control," says Ed Darnell, a former IT director and now
a consultant. "Most businesses I look at are trying to control
budgets across the piece. Although the excesses of Y2K and dotcom
spending have not done IT directors any favours, assuming they have
their own house in order, providing good quality of service plus
basic support and infrastructure costs of less than £2,000 per
head, then the last place they should be looking is the overall IT
budget."
Instead, "They should first be looking with the rest of the board
at the big picture, examine overall [corporate] revenues, costs and
headcount across all areas of the business, ideally based on
industry benchmarks," says Darnell.
"The IT director has a big role to play in helping to identify real
opportunities - not supplier hype - where technology can deliver
increased revenue at reduced cost."
Only if there are no such opportunities is it time to consider the
total IT budget and cut all but essential infrastructure spending,
says Darnell.
With the exception of spending on security, recessionary IT budgets
therefore have to achieve a single end - taking cost out of the
company - but by two different means. One is direct cost-saving
within IT itself, and the other is indirectly by using IT to save
business costs elsewhere.
When it comes to direct costs - reducing the cost of IT itself - IT
budgets are now facing "second-generation cuts", says Julian
Hewett, chief analyst at Ovum.
The soft targets have all been hit - now it is time to "cut
smarter", he says. But how?
The principle displayed by IT leaders interviewed for Ovum's
forthcoming report, The CIO Agenda 2003, is to make business track
IT, instead of the other way round. To that end they have a raft of
targets in their sights. Customisation has become a dirty word. Now
it is a question of fitting the business to the software, says
Hewett.
And as little software as possible - rationalisation is another
clear target. "They are trying to use less of everything -
architecture, infrastructure, applications - they are trying to
simplify and reduce the number of packages," he says.
Local variance is out too - one-package-fits-all, is in. "At least
half of the CIOs said they would standardise on SAP," says Hewett.
"They know it is not the best for every part of the organisation
but the cost benefits of having one supplier outweigh [the
disadvantages of standardisations]."
Any dissent from local managers is neutralised. "The savvy CIO will
get [software standardisation] stamped at board level," says
Hewett.
IT leaders are also showing a tough stance to suppliers. "They are
being ruthless," says Hewett. "They are not accepting that software
has to be updated, and suppliers cannot tell them the next version
is better. CIOs are telling suppliers that they will stick with the
current version as long as possible and suppliers will have to
support it or they will look elsewhere."
Roberts agrees, "Keep IT procurement competitive. Suppliers are
competing for business so negotiate until the price seems
reasonable."
Even dominant suppliers can be squeezed. "There is a growing body
of people looking at alternatives - supplier dominance will not
last, and we are seeing a rising increase in interest in open
source," he says.
Deferring upgrades is now par for the course. "Asset sweating is
taking place as a defensive strategy," says Roberts - even if it
means more maintenance to stay with older versions.
"The cost of maintenance went up 20% last year as suppliers tried
to hold up their revenues," says Meta vice-president Rakesh Kumar.
"Negotiate for a three- to five-year maintenance contract - it will
still be cheaper than new technology."
When it comes to suppliers of commodity IT - such as networks and
telecoms - the talking is even tougher.
"Work out what your areas of commodity IT are," says Chris Young of
IT leadership organisation Impact. "You will know a commodity when
you cannot tell the difference between providers," he says.
As a purchaser of commodity IT, all you are interested in is the
best deal at the least cost. But this is probably not what the
supplier will be interested in, says Young.
"Suppliers will try and turn a commodity into a strategic service,"
he says. "They will want to talk about becoming your partner, and
they won't want to talk about money."
His recommendation is to move the conversation back to discussing
money. "Tell them you are assuming 100% reliability, and want to
know what the cost will be."
Young sees an opportunity to take out cost from a commodity
service, over and above whatever best price a provider
offers.
"Ask the provider what is the cost, to him, of servicing your
account - this will include a big sales and marketing cost. Find
out what that is as a percentage of the cost of servicing your
account - for example 20% - and tell them you do not want selling
to, or marketing to, and so they can lop 20% off your bill."
To get the lowest price on commodity IT, you should be prepared to
agree to a longer deal. However, it must allow for some
flexibility, for example, if your company makes an acquisition you
can renegotiate at that point.
But tough times means IT is on the receiving end of tough talking
as well. According to Gartner, "Not only are business units making
more IT project decisions, they have also been given authority to
manage project budgets, doling out project funding as
needed."
IT will have to demonstrate best value as well as least cost. Green
lights will be given only to projects that are about achieving
strategic imperatives. "IT directors need to be certain about their
IT investments - be clear about the value proposition," says
Young.
And the value proposition could well invoke the indirect cost
saving imperative of IT - using new IT to reduce business costs or
increase revenues.
"You could invest in IT to change a business process so that you
can write more volume, for example," says Young. The net gain will
be greater than the cost of the IT.
But it is essential to tie the IT investment rigorously to the
business value it will achieve, or not do it at all, he says.
Since two-thirds of all major technology investments do not achieve
their intended result, says Gartner, "The IT organisation will be
required to prove every step of the way that projects are
progressing as planned to get the next phase funded. Major projects
will be split into multiple smaller projects, and business units
will have the power to delay funding at each project stage, and
discontinue projects at will."
The fall-out could be high. "Companies should expect to terminate
about a quarter of their IT projects," says Gartner managing
vice-president, John Mahoney.
He advises giving a new project no longer than 60 days to
demonstrate it is going to pay for itself - whether by saving the
business money or helping it increase revenues - before halting
work. This is not the time for giving ambitious but uncertain
projects the benefit of the doubt.
IT is therefore playing safer than ever, to avoid the flak. "Our
members are saying they are only doing what will give guaranteed
results, such as consolidating servers or reducing the number of
software licences," says Young.
They are also building in other guarantees to achieve project
paybacks, he says. When projects finish those working on them will
not be left drawing salaries.
"CIOs are saying, 'your role will be redundant at the end of the
project,' and effectively giving, for example, nine months'
notice," says Young.
Staffing is a favourite way to cut costs. "The first round of
headcount cuts was the contractors, and that has been and gone,"
says Hewett. Even so, it has not been a clean sweep.
"Some CIOs are looking to maintain a percentage of contractors
because it gives them some flexibility - it gives them that
percentage to lose [if under pressure to cut costs yet
again]."
Apart from keeping some contractors handy to serve as sacrifices to
the finance department, there is, "simultaneously a hiring freeze
and getting numbers down by natural attrition", says Hewett.
However, unlike the recession of the early 1990s, says Kumar, we
have not seen a mass cull of IT departments. "There have been
selective headcount cuts, but organisations are balancing between
lowering costs and maintaining their skills portfolios.
"Most are doing a reasonable job of keeping quality staff," he
says.
One of the challenges facing IT directors budgeting in hard times
is to avoid the generic "lose 20% of staff across all departments"
directives that come from the board.
"Make it clear that if you are to lose 20% then business
understands who you are losing, and why and what the 'cost' of
losing them is," says Young. "You might benefit from a lower salary
bill, but not if you have to bring back contractors.
"Senior management has to understand the value of what IT delivers
to the business."
And that, perhaps, is the greatest opportunity that recession is
offering IT - a chance to prove its worth in tough times. "More
than ever this is a time when IT should be playing the board-level
role it talks about," says Darnell.
Despite the financial gloom, IT directors are surprisingly
positive. "There is an overwhelming sense of realism that this is a
time of change for IT, of maturity," says Kumar.
Hewett agrees. "Yes, they have budget cuts and fewer projects, but
they do have far greater control of IT now, and they are getting
closer to business. It is all about doing things better and more
simply. Most CIOs would regard that as positive."
Recessionary budgeting may not feel nice, says Roberts. "But it is
doing IT good."
Is there an "up" side to recessionary
budgeting?
Get your own back time. Corporate IT is finally
getting the upper hand on suppliers, refusing to tread the upgrade
treadmill and negotiating ruthlessly for maximum value and minimum
price
Slim means beautiful. Relentless cutting means
IT is losing its fat-cat label, and improving its own operational
efficiency
Eager, slaving minions. It is a buyers' market
for IT professionals - cheap skills, willing workers and no more
contractor rip-offs
Coup d'état on users. Board-sanctioned orders
to save money gives IT the gun to wrest control of IT back from
business departments - centralised, standardised IT is cheaper than
decentralised and customised
Cosying up to the board. IT knows what business
processes cost so gets to spend to make others save.
Four tips for IT chiefs
- Behave like an accountant - it is how you will be
measured
- Keep an eye on innovation - it cannot be all cost savings
- Do not stifle IT creativity completely - let IT continue
playing with new gadgets
- Stop waiting for the next big killer application - they are
probably extinct now.
Three technologies IT should be investing
in
Rakesh Kumar, vice-president at Meta Group, offers these
recommendations:
Storage management "Even in the recession
storage volumes are increasing. When we come out of recession we
will see an exponential data explosion, so there will be tremendous
pressure on organisations to get their storage management right,
otherwise there will be chaos. They should be spending money now on
tools for storage management, archiving, replication and so on. It
is not sexy, it is old-fashioned, but that is where the money
should be spent today."
Asset management "You need good inventory
management tools to ensure IT runs in a financially well-oiled
environment. Yes, it is boring and unsexy, but without it
organisations will come out of recession with their financial
structure no better than before, or worse. It is foolish not to
invest here."
Utility-based computing "Over the next six- to
12 months, IT should look at automated provisioning software that
can get new systems online very quickly [on existing machines]. In
highly decentralised environments you do not want to have to send
teams of expensive people out to branches to work on servers.
Software provisioning increases productivity and utilisation, and
changes the financial model by making it possible to charge users
according to their actual usage of IT."