South China Morning Post

IT cuts in tough times may cost firms dearly

IT cuts in tough times may cost firms dearly

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

  • min read


IT cuts in tough times may cost firms dearly

Managing information technology in a downturn is different from normal IT management and cost discipline. When economic turbulence strikes, IT needs to quickly realign with new business priorities. Chief information officers (CIO) will be charged with keeping IT investments under control, radically cutting costs, while at the same time doing some savvy prioritising to address new business needs—the discipline to "do even more with less" becomes the mantra of today's CIO.

The trouble is many companies instinctively look at their IT divisions primarily as an easy place to cut costs. It is 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 Within three years, the business was severely hampered as 60 per cent of its core business servers had become out of date.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 investments yield quantifiable business benefits in line with strategic goals.
They do cut IT costs. But they carefully select the right areas to avoid damaging valuable assets built up after years of investment. And they use the downturn as an opportunity to selectively invest 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, just keeping the lights on.
We have 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 "lights on" to "strategic initiatives" IT allocation ratio. 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 services company we will call ServiceCo. It needed to reduce IT costs by more than 20 per cent and also change the allocation of IT costs to more strategic business-driven initiatives. The IT budget represented 15 per cent to 20 per cent of all operating costs and was critical to helping reduce costs throughout all operations. But ServiceCo was spending more than its peers on IT, and getting less in return. It used a five-step process to trim costs while improving effectiveness. These steps can help any company turn the downturn into an opportunity to strengthen IT.
Leaders start by looking inward to quickly trim IT costs. They eliminate unnecessary costs that the CIO can unilaterally act on.
Winners also scour their budgets for ways to further reduce costs. 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.
It is one thing to make cuts—it is another thing to realise the savings. Too often, companies fail to achieve projected savings after trimming costs and realigning priorities because they do not eliminate related resources and expenses. Leaders do not make this mistake.

Donie Lochan is a Bain & Company partner in Sydney, leading the Asia-Pacific region's IT practice and Johnson Chng is a partner in the Beijing office.


Ready to talk?

We work with ambitious leaders who want to define the future, not hide from it. Together, we achieve extraordinary outcomes.