Businesses willing to risk the future for short term gains

News Analysis

Businesses willing to risk the future for short term gains

Karl Flinders

Recessions don't last forever and businesses that cut back on IT indescriminantly are likely to be at competitive disadvantage in the future.

According to research from business consultancy Deloitte, 84% of cost cutting is being driven from outside the IT department by executives who have little understanding of the potential savings and the associated risks.

The research, based on interviews with 60 large businesses and public sector organisations, found that 70% of businesses and government departments are cutting IT costs, with another 10% planning to do so.

A total of 75% of these organisations are prepared to delay or cancel projects, 67% will increase their reliance on out-of-date infrastructure and more than half plan swingeing cuts to IT staff.

But businesses that rely on older equipment and reduce IT staff are increasing the likelihood of system failures and reducing their ability to respond to failures.

"Businesses are sweating assets and some are going even further by deliberately reducing the level of resilience and disaster recovery in their IT systems," says Neville Howard, partner at Deloitte. "If you compound these two factors, an organisation could be more likely to experience a major systems failure, and less able to respond to it."

Relying on out-of-date systems leads to problems today, while cutting back on staff will make life difficult in the future," says Howard.

"Resourcing the wave of projects that will result could be a real issue for organisations that have cut too deeply into their permanent staff, particularly as they will then be competing with other organisations for what could be scarce skills," he says.

Another area where businesses are cutting costs is in renegotiation contract prices, says Howard. This can bring hidden costs.

According to a survey published by PA Consulting last week, two-thirds of the companies surveyed said they were going to renegotiate existing outsourcing contracts.

Graham Beck, senior sourcing advisor at PA Consulting says cost-cutting is being done "almost to the detriment of anything else".

He says there are hidden costs associated with any process to re-tender contracts. "Having to direct your resources into creating a competition and chose a supplier will divert resources away from the front line."

Beck adds that the trend to use multi-sourcing strategies to lower costs through suppliers competing for projects can also cause difficulties in the future.

"This is ok if you break your service requirements up. But there could be trouble again in the future when the customer has to stick them back together again."

Howard says CIOs must go to the board with ideas about how the business can cut IT costs. This, he says, is better than "waiting for the CFO or COO to pass down an arbitrary cost-reduction target".

Businesses have to cut costs and IT often makes up a large proportion of operating costs. But this does not have to be at the expense of performance today and tomorrow if IT and business work closely to agree where cuts could be best made.


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