IT must make do with a smaller piece of pie

Analysts agree the new financial year will see little improvement in the economy. How will this affect IT budgets and what should...

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."

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