Jan 19, 2009

Dodging the Cutbacks

Dr. Jimmy Schwarzkopf (IT analyst) wrote...

Today I visited a client whose IT budget is no more than 1.6% of its revenues. His boss asked him to cut 20% of the capital investment and 10% of the operational budget (a total of 10% compared to budget 2008). In order to do this the company will stop projects that could have increased revenues, some that could reduce costs and some cuts would increase the risk of IT failures. Now my thoughts: By cutting 0.16% of revenues (as expenses) the company lost much more. Does it make sense to cut IT without a real analysis???

Clearly this company has designated IT as a pure expense center and utility service provider. As far as the business management is concerned, IT is no different than:

Facilities Management - Tell them to cut and they can eliminate the office plants and cut back on window cleaning.

Cleaning Service - Tell them to cut back and have a somewhat less clean office.

Security Service - Lock a few more doors inconveniencing how people enter the building but doing with less security.

Travel Expenses - Tell employees to travel less, stay in cheaper hotels, eat cheaper meals.

In this mindset, from IT... the network won't be any faster next year, the business doesn't really care. Desktop computers may be changed less often, again the business doesn't really care.

This client's IT department has failed to explain or demonstrate that they offer a business advantage, rather than just being a necessary burden for operation. IT management practices have allowed the business to categorize them as expendable. At this organization, interaction with the IT department is a major hassle. You describe what you want, you get something else. You pay IT budgets but see no measurable (from your business department perspective) value.

This IT department is divorced from the business drivers.

The result in the U.S. of such a positioning in the past resulted in complete outsourcing of the IT department at some companies (to EDS or IBM GS or Perot Systems, etc.) In the current downturn, we see some major companies having overall corporate layoffs at one level, say 10%, but IT layoffs at a higher level, say 25% (example of this: Metlife). In this model, improvement of business efficiency or opening of new sales or product channels via IT is not seen as a key factor to business survival.

Alternatively, IT is seen as fat and inefficient. Lack of flexibility of old designs, complete lack of systems architecture (as opposed to haphazard system building), and mis-alignment with business goals has resulted in many an IT organization that indeed is expensive and rather unresponsive to business needs.

However, as Dr. Schwarzkopf noted, a lack of analysis of how or why one's IT department is like this and just going for the big cut (instead of targeted surgery) will hurt many a business's future. (Of course, if a business is struggling to survive the year, such concerns are irrelevant.)

If you want to dodge the cutbacks of the future, make sure you the IT person understand what the business concerns and drivers are, and can demonstrate how you are helping to achieve them. Then DO demonstrate it, both in actions (deliver for your business) and in presentations (make sure they know it!)

A brief expense story: While working for a US Fortune 50, to save money the company decided to relocate several thousand employees out of New York City due to the office expense. The employees were scattered out to different offices depending on where the majority of the department lived - some going north to upstate New York offices, some going west to New Jersey offices, and some going east out of Manhatten to cheaper parts of the city.

The following year the company saw travel expenses explode as employees travelled around between 6 offices to meet and do their jobs. So they announced travel restrictions. The following year the company saw conference calling expenses explode as employees compenstated for the travel restrictions by engaging in long multi-office conference calls to do their job (which went even higher as due to the length of such calls, people wouldn't get together in a conference room but all call in from their desks to multi-task). So they announced an effort to cut down on... Finally they analyzed what groups needed to work together, reduced the number of offices people were spread about, returning to the original efficiency and reducing the travel and conference expenses - 5 years later.


Anonymous said...

Great piece - really hits the nail on the head. Staff need to tie themselve to business-value / revenue as fast as they can, or face getting caught in the cross-fire: