If there were any doubts that we were heading for recession, they were spectacularly dispelled as the events in financial markets unfolded in September.
The space of one week alone saw the collapse of Lehman Brothers, the merger of Merrill Lynch with Bank of America, the US government rescue of a flailing AIG and LloydsTSB snap up HBOS. A bad case of the jitters had turned into full-on convulsions. Coupled with the poor UK housing situation and the rising cost of petrol and utility bills, consumers and corporates alike are reining in their spending in preparation for tough times ahead.
According to a September saleforce.com commissioned survey (carried out before the spectacular events of September), 41% of CIOs were already so concerned about the economy that they said they’d been forced to scale back their IT spend. Numbers were even high at large firms where 54% of respondents said spending had been cut. Two-thirds of respondents felt under more pressure than a year ago to prove ROI faster.
So budgets are under pressure, not for the first time. But if cuts need to be made, where should the snips happen, and how can IT departments continue not only to support the business but innovate? What do CIOs need to do not just to weather, but to surf the storm?
Vasant Mistry, chief executive of low-cost bus service firm easyBus, says that a recession is not the time to scrimp on new IT projects, but to proactively look for projects and creative ideas that can make savings for the business.
“The CIO should look for alternative ways for IT to improve the business – recession often means a reduction of people, but that work still has to be done, so IT should step in to say to the business people, how can we help and make your life easier,” believes Mistry.
At easyBus, for example, Mistry’s team is looking at a quick-fix project to speed up the bookings process, by automating the transaction process across the company’s different departments.
“IT people can help in terms of reducing cost. It’s a question of finding creative solutions, but that means understanding the processes and user perspective,” says Mistry.
It also requires a delicate balancing act between cash pressures on one side and maintaining high levels of customer service on the other and between long-term strategic goals and short-term profit.
“For me, longer term positioning is more important than thinking short-term – cutting is easy, but building up is again is hard,” points out Mistry.
Mistry’s view is echoed by Mark Paraskeva, vice president for northern Europe at design software firm Autodesk, who believes that short-term spending can bring long-term savings.
“You can’t compete in a global market if you’re doing things manually. Investing in technology is a better way of saving costs – you can reduce overall costs and improve productivity,” argues Paraskeva.
“Innovation, design and ideas are where our future lies in the UK and Europe – that is our role. We struggle to do manufacturing now, so we need to continue to innovate,” he adds.
While the 80% of budgets are spent keeping the lights on and only 20% invested in new technologies, CIOs should fight the temptation to erode that 20% investment pile. Otherwise, the risk is that short-term savings will lead to long-term problems, as the rift between what the business needs and what IT is supplying widens.
Paraskeva also warns against retreating from globalisation and expansion abroad. As the profile of growth changes across the world, companies should change their investment profile. Similarly, product development is vital, otherwise companies won’t be poised to take advantage of the upturn when it comes.
Above all, he cautions CIOs not to lose site of the people who keep them in business: their customers.
Elizabeth Gooch, chief executive of operations management software firm eg Solutions, makes the somewhat controversial point that too much is spent on IT.
“I think organisations spend too much on IT and not enough on deploying it effectively and getting it to what it says on the tin,” says Gooch.
In a downturn, the emphasis shifts to making the most out of existing investments, which is no bad thing in Gooch’s view.
“We’re seeing a number of organisations talking not about new spending abut about making the most of what they already have,” she says.
This recession, however, is different than the last one – and very hard to predict. In the run up to the dot.com bust there had been colossal spending on IT and were keen to slash those costs. But now, CEOs and general business people have a better understanding of the strategic worth of IT and its contribution to business growth.
“This is different because people are better at deploying IT now and it’s cheaper to deploy,” says Gooch. “This recession is different because it is unfathomable. Before, we would just wait for the economy to turn round, but nothing is so sure in this case.”
One of the positives of a recession is that it forces people to be creative and to change the way they are doing things. Y2K and the dot.com bust forced financial services firms that are eg Solutions’ customers to give up dos. This time round she feels the technology winners where companies should “spend to save” could be software-as-a-service and SOA, virtualisation and self-service.
Not surprisingly, Lindsey Armstrong, salesforce.com EMEA president, agrees with this analysis. “Large on-premise applications can take years and millions of pounds in licences and resource to roll out. These kinds of projects, where the ROI may be five or more years down the line are rarely undertaken during a time of belt-tightening and increasingly they simply aren’t being undertaken at all because the economic justification simply isn’t there, even in boom times.
If businesses are smart about the IT they use and how they use it, then budget cuts need not be an issue. Applications delivered over the internet and software-as-a-service offer far lower total cost of ownership with much of the maintenance and support done by the service provider,” says Armstrong.
But some cuts are inevitable for most companies to ensure they are still around when the upswing happens.
“Our chairman used to run Midland Bank and his key words are: cash is king and you need to reduce costs as much as you can. Spend to save, but in deals creatively done so that it’s a win-win situation with your vendor and make the most of what you have. Act as if you’re life depended on it, so that it never does,” says Gooch.
CBR opinion
While it’s sensible to cut back on unnecessary spending when times are tough, the depth and location of those cuts can make a big difference to the long-term success of a company. CIOs need to think creatively about how they can continue to add value to the business and support growth and to carry on investing in new projects that will leave their firm in a strong competitive position, once an upturn happens.
Sidebar: What to do in a downturn, as espoused by Mark Nutt, general manager at technology consultancy Morse:
Unsurprisingly in the current economic climate, cost reduction is the word on everyone’s lips. However, one way to reduce costs is often overlooked. Literally thousands, if not millions, of pounds can be saved by simply sourcing IT equipment more effectively.
Currently, individual departments within an organisation often buy the IT equipment they want independently on an ad hoc basis, without looking to see what equipment the company already has or consulting the IT department. As a result, businesses are wasting money on extraneous equipment.
To address this, businesses need to implement centralised purchasing through the IT department. By bringing purchasing under the control of the IT department, businesses can ensure that they’re not purchasing “luxury” machines, and can better prepare when approaching vendors to get the best price.
The IT department should take note of the company’s vendors and their standard prices to help bargaining for a cheaper bulk or long-term contract. After all, no vendor worth its salt wants to lose a long-term client and should be willing to provide an excellent discount.
To increase negotiating power even further, IT departments must keep track of the discounts given by each vendor in the past in order to obtain present day savings. This may seem elementary, but it can help the business make the most of its money.
In addition, IT should purchase equipment at the right time of year to reap the rewards of special vendor deals. Much like waiting until the January sales to buy a new TV, IT vendors reduce their prices at certain times because they are under pressure to meet targets or because their financial year is about to end.
Businesses should also be thinking about the residual value of their IT equipment and understanding how the cost of running and maintaining it changes over time. It may make sense to trade in equipment before it reaches the end of its life, while it still has financial value.
By doing this they can ensure they are managing the technology lifecycle in the most cost effective way without sacrificing capability at the hands of an economic downturn.
+ More advice on surviving and thriving in the downturn from Patrick Molineux, head of marketing development at consulting group CSC:
“Find cash. Identify subscriptions and other areas where money is being spent unnecessarily.
Focus on cash releasing projects. Some projects and programmes release cash back to the business, eg, many companies have huge assets in data centres, yet why? Why not outsource them and bring cash into the business and reduce ongoing costs.
Focus on immediate return projects. Many IT projects have return within a budget year. Eg, desktop virtualisation has a very quick ROI well within one year.
Reschedule use of contractors. Many CIOs achieve cost variability through the employment of contractors to supplement permanent staff. Can this capacity be found elsewhere? Eg, Eastern Europe, Asia?
Shrink the number of IT partners. The more wallet share a CIO gives to an IT supplier, the greater the savings. Savage the number of IT partners down to a handful, give them a certain wallet share – and make it clear what you’re doing – and then demand open book so you can see what margins they’re getting. Don’t let them get unprofitable, but do limit them to sensible margins.”
CBR
