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Managing IT to Win in the Recovery: Five Questions CEOs Need to Ask

When the economy cooled in 2008, companies throughout Australia were quick to rein in Information Technology (IT) spending.

By Donie Lochan and Bart Vogel

Published on April 20, 2010
min read


When the economy cooled in 2008, companies throughout Australia were quick to rein in Information Technology (IT) spending. But with the first signs of recovery, they risk introducing a host of problems by ramping up IT budgets to compensate for having cut too much in the downturn. In order to win in a recovery, CIOs should consider the following questions: 1. Do we (those companies considering IT strategy) understand what was broken and have a plan to fix it? Deep budget cuts during a recession trigger ripple effects that can reverberate long after growth resumes. As business rebounds, the consequences of deferred maintenance become apparent when IT systems strain to handle the increase in transactions, introducing unacceptable business risks. For example, one leading consumer electronics company responded to the last major downturn by cutting its IT spending nearly in half. When business improved, the company discovered that over one-third of its mission-critical systems were running on technology no longer supported by its vendors. Before signing off on new spending programs, companies need to systematically look for hidden business vulnerabilities that were compromised by cutbacks. 2. How do we obtain the full potential from discretionary spending? A recovery unleashes pent-up demand for new initiatives, new systems and new applications from both IT organizations and the business units they support. The usual rationale for boosting discretionary spending is that it's a competitive necessity. And managers may have a hard time resisting these pressures since over 85 percent of IT budgets is typically spent to "keep the lights on." However for each dollar invested comes a less visible—but no less real—commitment to spend as much or more on ongoing operations, future maintenance and enhancements that begin immediately. We've found that these follow-on expenses can cost anywhere from two to 10 times the original outlay for years to come. Decisions about where to invest limited discretionary money need to be made carefully and strategically. An upswing in the business cycle is precisely the time to ask hard questions. Wise investments should target or build on initiatives aligned with core business needs that deliver competitive advantages. For example, a company should prioritise IT investments based on capabilities that are creating value now, not just value sustaining. 3. How will we drive unnecessary complexity out of IT? Companies can become trapped in a viscous cycle: As they retrofit suboptimal systems, install patches to tweak performance, or fail to fully integrate IT added through mergers or acquisitions, complexity relentlessly builds up. The result: slower IT response times and systems out of synch with the processes they're supporting. To strip out complexity, organizations must first stop adding more IT systems that only make the problem worse, and second, begin consolidating underperforming systems. We've found that the root of the problem is unnecessary complexity in the business the IT organization supports. The surest way to eliminate product and process complexity is to calculate what your cost structure would look like if it offered just one bare-bones product. Then cost out each new product variation as features are added back in. Most companies find that costs jump sharply at break points where added complexity starts to strain capacity. Knowing where those break points occur—and how to avoid them-can spell the difference between healthy profitable growth and subpar performance. 4. How will we take better advantage of good-enough solutions? As senior executives search for a competitive edge, they need to resist the temptation to build or customize software as opposed to using off-the-shelf solutions. In our experience, clients can more effectively meet 80 percent of their IT needs by taking advantage of off-the-shelf applications and configuring them to their purposes. Taking advantage of vendor-supported software by switching on features most make available as part of their standard packages usually boosts performance as effectively, and at far lower cost, than investing in a one-of-a-kind upgrade. The cost of customizing can be high in two key ways that aren't always obvious. It can prevent a company from taking full advantage of superior—and less costly—enhancements. Companies that over rely on developing in-house solutions misallocate talent and energy. These scarce resources should be tapped to develop systems to give the company an edge in other ways. 5. How can outsourcing be more strategic? Smart companies see business-cycle upswings as major opportunities to re-evaluate their outsourcing strategies. They weigh how they can capture all three advantages that third party IT-service partners can provide—performing IT functions more cheaply, doing them better and doing more of them. In short, outsourcing shifts from a cost-cutting tactic to a strategic weapon. When a business uptick is tentative, outsourcing can provide flexible capacity to accommodate demand without increasing fixed costs or committing capital to assets that sit on the balance sheet. Donie Lochan is a Bain & Company partner who leads the firm's Asia-Pacific IT practice. He is based in New Delhi. Bart Vogel is a Bain & Company partner based in Sydney.

When the economy cooled in 2008, companies throughout Australia were quick to rein in Information Technology (IT) spending. But with the first signs of recovery, they risk introducing a host of problems by ramping up IT budgets to compensate for having cut too much in the downturn. In order to win in a recovery, CIOs should consider the following questions:

1. Do we (those companies considering IT strategy) understand what was broken and have a plan to fix it?

Deep budget cuts during a recession trigger ripple effects that can reverberate long after growth resumes. As business rebounds, the consequences of deferred maintenance become apparent when IT systems strain to handle the increase in transactions, introducing unacceptable business risks. For example, one leading consumer electronics company responded to the last major downturn by cutting its IT spending nearly in half. When business improved, the company discovered that over one-third of its mission-critical systems were running on technology no longer supported by its vendors. Before signing off on new spending programs, companies need to systematically look for hidden business vulnerabilities that were compromised by cutbacks.

2. How do we obtain the full potential from discretionary spending?

A recovery unleashes pent-up demand for new initiatives, new systems and new applications from both IT organizations and the business units they support. The usual rationale for boosting discretionary spending is that it's a competitive necessity. And managers may have a hard time resisting these pressures since over 85 percent of IT budgets is typically spent to "keep the lights on." However for each dollar invested comes a less visible—but no less real—commitment to spend as much or more on ongoing operations, future maintenance and enhancements that begin immediately. We've found that these follow-on expenses can cost anywhere from two to 10 times the original outlay for years to come.

Decisions about where to invest limited discretionary money need to be made carefully and strategically. An upswing in the business cycle is precisely the time to ask hard questions. Wise investments should target or build on initiatives aligned with core business needs that deliver competitive advantages. For example, a company should prioritise IT investments based on capabilities that are creating value now, not just value sustaining.

3. How will we drive unnecessary complexity out of IT?

Companies can become trapped in a viscous cycle: As they retrofit suboptimal systems, install patches to tweak performance, or fail to fully integrate IT added through mergers or acquisitions, complexity relentlessly builds up. The result: slower IT response times and systems out of synch with the processes they're supporting. To strip out complexity, organizations must first stop adding more IT systems that only make the problem worse, and second, begin consolidating underperforming systems.

We've found that the root of the problem is unnecessary complexity in the business the IT organization supports. The surest way to eliminate product and process complexity is to calculate what your cost structure would look like if it offered just one bare-bones product. Then cost out each new product variation as features are added back in. Most companies find that costs jump sharply at break points where added complexity starts to strain capacity. Knowing where those break points occur—and how to avoid them-can spell the difference between healthy profitable growth and subpar performance.

4. How will we take better advantage of good-enough solutions?

As senior executives search for a competitive edge, they need to resist the temptation to build or customize software as opposed to using off-the-shelf solutions. In our experience, clients can more effectively meet 80 percent of their IT needs by taking advantage of off-the-shelf applications and configuring them to their purposes. Taking advantage of vendor-supported software by switching on features most make available as part of their standard packages usually boosts performance as effectively, and at far lower cost, than investing in a one-of-a-kind upgrade.

The cost of customizing can be high in two key ways that aren't always obvious. It can prevent a company from taking full advantage of superior—and less costly—enhancements. Companies that over rely on developing in-house solutions misallocate talent and energy. These scarce resources should be tapped to develop systems to give the company an edge in other ways.

5. How can outsourcing be more strategic?

Smart companies see business-cycle upswings as major opportunities to re-evaluate their outsourcing strategies. They weigh how they can capture all three advantages that third party IT-service partners can provide—performing IT functions more cheaply, doing them better and doing more of them. In short, outsourcing shifts from a cost-cutting tactic to a strategic weapon. When a business uptick is tentative, outsourcing can provide flexible capacity to accommodate demand without increasing fixed costs or committing capital to assets that sit on the balance sheet.

Donie Lochan is a Bain & Company partner who leads the firm's Asia-Pacific IT practice. He is based in New Delhi. Bart Vogel is a Bain & Company partner based in Sydney.