Balancing IT costs during a recession

Face facts; business is bad. For most businesses, the sustained growth seen in the past 15 years is history.

Commentators are running out of doomsday comparisons for the current economic situation. Even the usually measured Mervyn King, the governor of the Bank of England, has now said we are in a "deep recession", while Ed Balls, the schools secretary, has described it as "the most serious global recession" in 100 years.

• Lowering IT spending
• How to reduce your IT costs 
• Cost-cutting potential
• Get a better deal
• Cut software costs
• Licensing deals
• Useful links

Faced with contracting markets and falling revenue, businesses are bound to look at the spending on their books and closely scrutinise anything not directly contributing to the top line.

Lowering IT spending

Although IT is often in the line of fire when it comes to budget cuts, because of the recent history of the technology cycle, there is less danger of reducing IT budgets in a knee-jerk reaction, according to Mark Raskino, Gartner vice-president and fellow.

"One of the things we have found with our CIO and chief executive survey is that IT spending is flat and relatively protected. Yes, we are in a deep recession, but there are lots of issues in business, and IT is a relatively small one at the moment," he says.

For example, Raskino says he worked with one large company which spends less than 0.5% of its revenue on IT. "There is not much urgency to reduce that. It is not in the target zone for spending cuts."

Although IT spending has been fairly flat since the dotcom boom and bust, and IT departments have become more aware of return on investment, there will eventually be pressure to keep IT spending down, according to Ben Booth, global CTO of market research firm Ipsos, known as Ipsos-Mori in the UK.

"There is a great deal of pressure on IT spending. Even businesses that will carry on activity, even at a higher rate, will need to take costs out," he says.

IT suppliers agree. Global purchases of IT goods and services will decline by 3% to $1.66 trillion in 2009, after an 8% rise in 2008, says analyst house Forrester.

Meanwhile, IT departments will be expected to provide the business with the same level of service, he says.

Cost-cutting potential

Fortunately, there are many ways to reduce spending, Raskino says. "Very few IT departments are so lean that they have done everything that is worth doing to save money. Some things need to be done every two years, so it is worth doing them again."

It could also be easier to save money from the IT budget because the department's relationship with business managers will change during the recession, Raskino says.

"In a boom time, control moves to the business. They want a particular package from a certain supplier so you end up with a proliferation of services, packages and mobile phones, and there is a loss of control of many things because the business asserts its rights. But in a downturn, the CIO is likely to report directly to finance and has more direct control of purchasing decisions."

Get a better deal

Because IT departments were left lean and efficient after the dotcom crash, they have to be clever in how they reduce their spending, Booth says. "There will be an expansion in contract negotiations to get better deals. Telecommunications and hosting company deals will be pushed very hard."

Raskino agrees that some savings can be made now. These include asset management and telecoms contract negotiation because pricing models change rapidly. "When you look at them again, you can find more money there," he says.

Booth says there will also be a freeze on capital spending, such as hardware replacement. "IT will defer investment which can be sensibly pushed back, such as PC replacement and other routine stuff. So if the IT department replaces equipment, it needs to focus investment on what is going to be really valuable to the business."

Booth, who is also vice-president of the British Computer Society's Elite Group of IT directors, says that despite end-users' desire for the best hardware, there should not be many complaints over making do without the new kit.

"In the current circumstances, people know that they have no pay rise and are worried about keeping their jobs. If they are daft enough to worry about getting the latest PC, their days are numbered anyway. Most people are realistic enough to realise that they would make fools of themselves if they take that attitude," he says.

Cut software costs

Increasing investment in virtualisation software can help organisations get more from older equipment, says Clive Longbottom, service director with IT analyst firm Quocirca. "With that you can bring up utilisation of hardware from about 10% to maybe 50%. That is a good start."

However, the toughest cost to get out of the IT budget will be staple software licence deals.

"There will be tough conversations on licences and suppliers will not move until you are screaming at them," says Raskino.

Software suppliers will be desperate to maintain their revenue streams as customers go bankrupt or delay expansion and software upgrade projects, he says. "It is not going to be easy to renegotiate contracts that you are already in."

Fortune 500 companies will be able to use their long-term relationships to negotiate with suppliers. These companies can offer something in return for lower licence fees, such as accepting lower service levels, so the supplier also saves money, Raskino says.

Smaller firms will find it much more difficult to negotiate with large suppliers, he says. One approach could be to go for an upgrade, or a new licensing model, and see if the supplier's finance department can structure a new deal that can benefit the user-firm in the short term, he says.

Licensing deals

Ian Campbell, CIO of British Energy and chairman of the Corporate IT Forum (Tif) of FTSE 100 IT directors, agrees software licences are going to be the sticking point in cutting costs because business cannot quickly find alternative suppliers. "It is difficult to change a major platform. In the short term, there is not much you can do."

However, a prolonged refusal by the major software suppliers to reduce licensing costs would result in a move towards open source software and software as a service, for these firms, he says.

Meanwhile, Tif is working with EuroCIO, the network of European CIOs, to form a joint strategy on licensing. The European user group is already in discussion with Microsoft and SAP around licensing.

Campbell says that group action on licensing already proved effective when Microsoft introduced changes to its licensing terms in 2002. "As individuals it is difficult [to get suppliers to change], but as a group, at a European level, one can negotiate with them," Campbell says.

The other side of the coin is that users have to be careful not to push their key suppliers too far, says Gartner's Raskino. Pushing smaller niche software suppliers to accept lower licensing terms could drive them into receivership, he says. Most users know how their suppliers are doing because of due diligence, but they can still get caught out.

"You do not always know how much debt suppliers are in," he says. This happened with telecoms supplier Vanco in May last year, he says. "It was quite without warning; we are going to see more of that."

For the current calendar year, Ipsos' Booth believes most IT department have made the changes to cope with the recession. "The challenge is going to be in the future. I think if we are still in a similar situation in a year's time, then it will be different and we will see a new order."

This could involve a permanent shift to lower business costs and lower IT spending, he says.

Next in this series on IT in the recession, Computer Weekly will look at how IT departments can help their business units drive down costs while doing more.

• IT in the recession: part 1

Useful links:

• British Computer Society
• Corporate IT Forum
• EuroCIO
• Gartner

Photo by Bethany L King on Flickr