Enterprise Briefing

Industry watch

managing IT in a downturn

As the outlook for the global economy worsens, CIOs need to prepare for the worst-case scenario. With some analysts arguing that large economies such as the US are already in recession, the experienced CIO will be sounding out strategies for surviving a substantial downturn in IT spending.

IDC EMEA chief research officer Martin Hingley warns that now is not the time for long-term projects such as service-oriented architectures (SOA) and other broad transformation strategies. These are infrastructural projects requiring steep up-front investments for little immediate return. Instead, tactical measures such as moving capital expenditure to operational expenditure will be a better way to reduce the short-term impact of reduced budgets. "You should try to get rid of discretionary spending first," says Hingley, adding that this is why outsourcing often plays a big part in IT strategies during a downturn.

outsourcing wisely

However, companies should be wary of outsourcing disorganized, inefficient systems, says Peter Glock, head of solutions development at Orange Business Services. "People tend to grab for the outsourcing straw, but it can bring a different set of problems," he warns. A key mistake CIOs can make is underestimating their asset base. "When you get into the due diligence phase, you realize that you're not outsourcing 350 applications - you're outsourcing 700."

Operational expenditure tends to track staff levels more closely, especially if companies procure applications under software-as-a-service agreements on a per-seat basis. "If your business suffers a 20% loss in revenue, you can have a corresponding drop in IT budget, whereas if you don't do it that way, you'd annualize your capital expenditure and remain high for much longer," IDC’s Hingley says.

Not all software should be farmed out, however. Revenue-generating applications are sacrosanct, says Richard Scannell, senior vice president of corporate strategy at IT consulting company Glasshouse Technologies. "If it's an application that's generating revenue, then keeping it in-house makes sense, because it's your competitive advantage," he says.

According to Orange’s Glock, there is a happy correlation between reducing fixed capital costs, and adopting a green IT ethos. Datacenter transformation can reduce power consumption and hardware acquisition using techniques such as virtualization. "CIOs like green IT because it enables them to discuss corporate social responsibility (CSR) at a board level, while driving down operational costs with a little capital expenditure," he says. "Often, the payback from data centre consolidation can happen in one year."

assessing IT spending

One of the biggest problems of looking at IT spending is simple lack of maturity when it comes to financial reporting, warns Scannell. "The downside of many IT organizations is that they have a problem quantifying what they spend money on," he says. Business units use profit and loss sheets to understand how much it costs to provide the services and products. "IT operates on a budget, which consists of two rules: spend the money, and don't go over."

CIOs with a firm grip on the cost of the services they provide to business units will be able to make a better case for retaining their funding at a time when the C-suite will be looking for swinging cuts. "CIOs must ask themselves questions such as 'what does a computer unit look like? What does a storage network look like?'" asks Scannell. "And then 'how much does a unit cost?'"

As they struggle to achieve this financial accountability, the saving grace for CIOs in service economy sectors such as finance, could be the rapidly evolving relationship between business and IT. "There's an understanding today that you make more profit, the more you automate," says Hingley. "During the last downturn, IT was supporting personal productivity. In finance today, it's the business processes that are being run on the computers." That may make companies in the finance sector, at least, less likely to slash budgets.

Such advice could protect IT departments that have been considering selling ambitious projects to internal sponsors using issues such as business transformation as a justification. A storm is very probably coming, and a mixture of judicious budgeting and modest, short-term goals in the next year could save CIOs from getting wet when it finally hits.