Business decision-makers often cut IT budgets in times of economic slowdown. But they risk reducing business opportunities in the future.
- Delaying decisions
- Emerging gently from recession
- Focus on broadening your customer base
- Outsourcing to avoid recessionary mistakes
- Useful links
Harvard Management, which manages the assets of Harvard University, has published a list of common mistakes businesses make during a recession.
Companies often cut IT budgets as a direct result of three common errors:
- Delaying decisions that will improve the long-term health of the company
- Assuming the smart way to grow is always cautiously and incrementally
- Focusing on broadening the customer base
IT projects are usually the first to go, or be put on hold, when companies cut budgets. But Harvard Management says this can be a mistake, as businesses still need to invest in the future.
Justin Speake, CEO at analyst firm Bloor Research, says that during an economic slowdown businesses should re-examine their decisions, but warns against cutting projects as a knee-jerk reaction. If there was justification for a project originally, it probably still applies, he says.
"They should reaffirm that their return on investment process is effective. If they confirm it was right, they should not cancel a project," Speake says.
High street bank HSBC's decision to step up investment in a project to standardise systems globally is an example of this theory in practice.
The bank started a project, known as One HSBC, before the financial services turmoil. But rather than cut its investment in the IT project, it has increased how much it spends on it each year. In 2007, the bank spent about $650,000 on the project, and expects to invest a further $1.2bn next year.
Harvard Management believes it is wrong to assume that the best way to start growing again is always cautiously.
Businesses can use technology to grow their businesses quickly when things pick up. The use of web 2.0 technology in financial services is a case in point. Banks realise that web 2.0 is a good way to reach the new customers of the future, but many believe they cannot justify investing in the technology during the downturn.
Bob McDowall, analyst at Towergroup, says this may be a mistake. "You should not just stop all discretionary spending but assess the risks and benefits of it."
He says web 2.0 is a good example because the technology is already available and people are using it. "It is a case of assessing how it can be nimbly and quickly deployed." Companies that invest in it now will be at an advantage when the recovery comes, he says.
Analyst company Celent warns that banks will face competition from rival financial service providers, including retailers, phone companies and pre-paid card suppliers. They are likely to exploit web 2.0 applications to deliver new services.
Harvard Management says businesses should cherish the customers that stayed with them through a slump because they will probably be its best customers when things pick up.
Investing in technology to improve customer services can create greater loyalty in the customer base. Analytical software is one option that could help businesses understand their customers and offer them better services.
An important part of HSBC's One HSBC project, for example, is the fact that it made it easier for its customers to work with the bank.
Outsourcing is another trend that increases when times are hard. Companies often base the decision to outsource on cost-cutting. It can save money in areas such as maintenance and support, while freeing up budget for more strategic IT investments.
Duncan Aitchinson, head of Europe at sourcing consultancy TPI, says businesses can use outsourcing to avoid the pitfalls highlighted by Harvard.
"When negotiating an outsourcing contract businesses should think about more than just cost; take a longer-term view and position themselves for the upturn," he says.
Strategic investments in IT can help businesses survive periods of recession and position themselves for the upturn. But if they are to avoid the mistakes described by Harvard Management, CIOs have to develop strong business plans which analyse the risks and benefits of each project. They must also revisit those business plans that were written before the economy slowed to ensure they are still relevant.