In such times of crisis, cost cutting is the most frequent question to be dealt with by a CIO. Business unit managers and CEO would like to get back as much money as possible to preserve strategic company investments and operations. Each manager is keen to show how best he is in company strategy support, so CIO.
Then it is time to have ideas.
IT Budgets are splitted into investment and operations headings.
Investments
| Investment | Benefit | drawback |
|---|---|---|
| 1/ Investments regarding decomissioning platforms | save IT and BU operation costs | impact year+2 |
| 2/ Investments for BU productivity | save BU operation costs | impact year+2 |
| 3/ Investment for IT productivity | save IT operation costs | impact year+2 |
| 4/ Investment for BU new capability | increase BU gains | impact year+2 |
| 5/ Investment for IT new capability | Improve service to BUs | impact year+2 |
| 6/ Investment for renewing existing platform | maintain service to BUs | impact year+2 |
In such times, the only investment headings that can be cancelled or postponed, are 4 and 5. The urge of extending capabilities fall short as companies has to deal with overcapacity. For companies with a mature information system which has pervaded most business activities, these headings use to weight 20% of investment budget.
The other things is that all other investments would have an effect only in year + 2, and are not likely to save any operation costs next year.
You may also delay investment 6 a little bit, but only after a careful review since you may undergo platform obsolescence risks and incur increase of maintenance costs.
Operations
| Operations | Benefit | drawback |
|---|---|---|
| 1/ Operations regarding Infrastructures | maintain infrastructure SLA | needed year+1 |
| 2/ Infrastructure maintenance | maintain infrastructure SLA | needed year+1 |
| 3/ Operations regarding Applications | maintain application SLA | needed year+1 |
| 4/ Application maintenance | maintain application SLA | needed year+1 |
| 5/ IT management | maintain IT SLA | needed year+1 |
Lowering operations costs cannot result from operation cancellations since it may impact negatively the level of service and, therefore, BU operation productivity.
For IT operations there is 2 ways of saving :
- improving level of service quality which improve indirectly BU operations productivity
- obtaining productivity gains either from process optimisation or platform streamlining
Each way usually requires investment and weight investment budget
IT Costs
In a few words, we are discovering that IT costs are rather inelastic : they are not following companies capacity ups and downs, but a lot of immaterial things like company capabilities.
A strong portfolio management allows to preserve investments which are the only way of change for IT.
Indeed, CIO could not rely only on cost killers who try to catch expenses not directly related to production : travel, communication, reception, office charges, cars, and so on… Since everybody is aware that it is vital for the company, changes would be accepted, but they represent a tiny part of budget. And it would be OK, so far all companies are doing the same otherwise you may rise a risk on your staff.
Frequently, the view of costs in IT is staff expenses which represent with subcontractors around 50% of budget. But shedding inaccurately people may put activities quality of service at risk and lead to Business operations inefficiencies. To succeed a high level of process maturity is required.
Another idea is outsourcing which transforms internal operation costs in external operation costs. You only export your management problems. To succeed, it requires your subcontractor is better than you in IT management.
Conclusion
Because IT Costs are inelastic, they require investment for changing.
Strong portfolio management and process maturity are beside charismatic CIO who has a vision and explain it, critical success factors for containing costs.
Crisis are favourable period for changing, because you don’t need to justify it, but it requires real capabilities which make the real difference between companies, especially looking for flexibility.
Finally Crisis emphasize well managed companies which change faster and efficiently and which may belong in 2010 to the winners group. Ill managed companies will destroy value trying to contain costs and will undergo a hard starting in 2010. They will be likely in the loosers group.