Expansion ends: time for restructuring

We are at the end of an era in which the objective for IT managers was to acquire as many IT resources as possible. From now on,...

We are at the end of an era in which the objective for IT managers was to acquire as many IT resources as possible. From now on, we'll have to squeeze as much value out of IT budgets as rapid restructuring will allow.

In the past 20 years, chief information officers have thrived on expansion. Future CIOs will have to cope with meagre dollar growth. They'll survive by rethinking how they spend the money in their budgets. Allocations to hardware, software and services will have to shift because asking for substantial additional funds will be unacceptable. CIOs will have to be frugal about how they spend money and allocate the spending differently.

From 1980 to 2001, the typical IT budget grew 10% to 15% a year. The performance of IT also kept improving by at least 15%. It's no wonder that the dominant characteristic of the past 20 years was waste. You can't extract gains in productivity if IT insists on acquiring at a gluttonous rate.

Why were organisations unable to digest the IT capabilities? The explanation is simple. Each firm had to organise its IT department, train managers, educate executives, develop most of its software and integrate vendor offerings with disorderly legacy code. It was easier to junk and rebuild than to accumulate and grow. Vendors and consultants thrived, with revenues growing faster than IT budgets. Vendors and consultants reaped about 30% of total worldwide IT spending of $2 trillion in 2001.

The vendors and consultants prospered by selling goods without warranties and avoiding performance liabilities. The customer took all of the risks. If the technology didn't perform, customers had to buy the next upgrade or spend money fixing the mess.

This worked well for the vendors and consultants because foul-ups generated more revenues. It was also good for CIOs. They could justify bigger staffs and larger budgets to keep the IT machinery going. What we got was a technology contest, not a demonstrable economic gain.

But it's the 70% of IT spending that goes to internal corporate expenditures rather than vendors and consultants that's now the source of the greatest opportunity for improvement. Risks for IT management should migrate from customers to the vendors. Right now, customers must cope with technology obsolescence. That's a misplaced expense. The costs of excessive technology depreciation should be absorbed by vendors that often aim for increased obsolescence.

Instead of buying software and then spending a huge multiple of the cost for integrating, fixing, maintaining and modernising the technology, let the vendors deliver guaranteed application service. Start throttling back on software licences (up to 25% of the total IT budget), on consultants and on the internal staff of maintenance programmers to keep systems from falling apart.

Instead, reassign most of your maintenance staff - about 20% of your budget - to value-enhancing improvements. Get the IT staffers out of the IT department and give them careers in business operations. Eliminate contract labour - another 10% to 15% of the budget. Your services vendors will have to assure systems integration as they deliver solutions. You'll rent application services and not spend time on IT housekeeping. In this way you can dispense with much of the overhead and concentrate on creating business value.

The next big opportunity is to cut the costs of your computing infrastructure. Even the largest organisations don't have a sufficient volume of work to justify the reliable, secure, redundant and flexible processing and networking capacity they support. In the compulsion for control, organisations still keep acquiring too many underused technology assets. The worst examples of such excesses are the 200 million desktop computers in offices throughout the US. Each has a full cost of well over $3,000 per year. If you examine the prices for vendors supporting desktops as a web service, you can come to only one conclusion: It's only a matter of time before much of the standard computing and messaging infrastructure will benefit from such services at enormous savings.

IT is neither irrelevant, mature nor at a point of diminishing returns, despite such contentions in a May Harvard Business Review article. It suffers primarily from mismanagement. The time has now come to cure that so we can get moving again.

Paul A Strassmann is an IT management conultant and was recently acting CIO at NASA, the US space agency

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