The trouble is that many companies instinctively look at their
information technology departments primarily as an easy place to
cut costs. It's an impulse that will prove expensive down the
road.
Consider the PC manufacturer that indiscriminately slashed IT
costs in the 2001-2002 downturn to meet an arbitrary cost-reduction
target. Within three years, the business was severely hampered
because 60 per cent of its core business servers had become out of
date.
Downturns create opportunities for businesses to take advantage
of weaker players and improve their competitive position. Gains
made in a downturn are more likely to sustain companies through the
next boom cycle. That's why winning companies view IT cost-cutting
as a chance to strengthen the business.
Our research shows that leaders look at IT more strategically in
a downturn: as an opportunity to lead the pack while coming out of
the recession. Instead of simply going for easy budget cuts, they
reassess and redefine their IT strategy, ensuring that the IT
investments yield quantifiable business benefits in line with
strategic goals.
They do cut IT costs. But they select the right areas to avoid
damaging valuable assets built up after years of investment. And
they use the downturn as an opportunity to invest selectively in
initiatives that promote growth. They identify technology
investments, such as data centre virtualisation and cloud
technology, to reduce the costs of maintaining the status quo.
These companies divert the savings back to the business and also
use them to support the changing business needs.
We've found that companies employing this strategic approach
during tough times save as much as 20 per cent of their IT costs,
while also changing the ratio of spending on maintenance versus
strategic initiatives. The reductions have to be fast with an
in-year return on investment, and are often achieved in less than
180 days. Because new investments are better aligned with business
needs, they deliver more value back for every dollar spent.
Consider the case of a large financial services company called
FinCo. It needed to cut IT costs by more than 20 per cent and also
change the allocation of IT costs to more strategic business-driven
initiatives. The company's IT budget represented between 15 and 20
per cent of all operating costs and was critical to helping reduce
costs throughout all operations.
But FinCo was spending more than its peers on IT, and getting
less in return. Too often it was spending in the wrong areas. As is
typical with financial services companies, more than two-thirds of
the IT budget was spent just keeping the lights on.
The company used a five-step process to trim costs while
improving effectiveness.
1. Aggressively manage cash flow now
Leaders start by looking inward to trim IT costs quickly. They
eliminate unnecessary costs that the CIO can unilaterally act on,
such as non-essential travel and overtime, extending desktop
upgrade refresh cycles by six to 12 months, re-examining the need
for "Platinum type" service levels, and pushing out timetables for
IT application projects that are not critical.
FinCo captured 6 per cent of its total IT savings just by
reducing IT discretionary costs through tighter recruitment,
training, and entertainment expense policies.
2. Change the IT cost model
This involves accelerated cost reductions and pursuing
opportunities that will pay back in less than 180 days. Winners
also scour their budgets for ways to reduce costs further. They
find lower-cost storage options; accelerate investments with
hard-dollar savings; and make use of virtual servers.
They also re-examine all external spending, including
renegotiating vendor and outsourcing contracts. By rationalising
non-strategic vendors and bundling application development and
maintenance, FinCo achieved 20 per cent of its IT cost savings.
3. Capture the savings identified
It's one thing to make cuts - it's another thing to realise the
savings. Too often, companies fail to achieve projected savings
after trimming costs and realigning priorities because they don't
eliminate related resources and expenses.
For example, they leave people in positions that are no longer
necessary, or they outsource too much work, ending up with a
duplicate IT operation. Leaders don't make this mistake.
At the same time, they re-evaluate long-held contracts -
determining where it makes sense to replace costly contractors with
full-time employees. They also reduce the IT infrastructure in
areas tied to cutbacks. For its part, FinCo found 3 per cent of its
total cost savings simply by using less expensive permanent staff
in place of high-priced contractors.
4. Re-align IT to new business priorities and
selectively invest in initiatives that will yield quantifiable
business benefits
By realigning priorities, IT accelerates cost savings. Instead of
across-the-board cuts, winners are discriminating, making deep
reductions in some IT areas and less - or none at all - in others.
They reduce IT services after evaluating the trade-offs between
costs and benefits. For example, slashing developers in one area
might seem smart - until a business unit needs them to develop
software for a great cost-saving initiative.
Winners also selectively invest in strategic systems with
immediate pay-offs, such as those aimed at supporting critical
demands - such as better managing risk.
FinCo prioritised new projects by weighing their strategic value
and the ease of implementation. It fast-tracked projects with
direct customer impact and delayed those that weren't critical.
This allowed FinCo to gain nearly 20 per cent of its IT cost
savings.
5. Reshape the IT organisation to reflect new priorities
and demands
In the current marketplace, IT leaders recognise the power of a
more centralised IT model. They centralise or combine groups,
streamline operations, cut out layers, and take advantage of scale.
They use re-location both to support new priorities and reduce
costs. Employees are re-assigned to priority projects, areas of
specialisation or less expensive locations. Nearly 8 per cent of
the cost savings at FinCo came from such a reshaping of the IT
organisation.
By employing these five steps, IT leaders not only save on costs
and improve their ability to support the business - they also
create lean and flexible organisations designed to sustain the
benefits when the economic turbulence subsides.
Donie Lochan is a partner in Bain & Company's Sydney
office and leads the firm's IT practice in the Asia-Pacific region;
Sachin Shah is a London-based partner in Bain's European IT
practice.
