The Financial Times

Downturns create an opportunity to strengthen IT

Downturns create opportunities for businesses to take advantage of weaker players and improve their competitive position.

Par Donie Lochan and Sachin Shah

First published on juin 08, 2009
min


Managing information technology in a downturn is different from normal IT management and cost discipline. When economic turbulence strikes, IT needs quickly to realign with new business priorities. CIOs will be charged with keeping IT investments under control, radically cutting costs, while at the same time doing some clever prioritising to address new business needs—the discipline to "do even more with less" becomes the mantra of today's CIO. 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 Within three years, the business was severely hampered because 60 per cent of its core business servers had become out of date.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.

Managing information technology in a downturn is different from normal IT management and cost discipline.

When economic turbulence strikes, IT needs quickly to realign with new business priorities. CIOs will be charged with keeping IT investments under control, radically cutting costs, while at the same time doing some clever prioritising to address new business needs—the discipline to "do even more with less" becomes the mantra of today's CIO.

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.