New Delhi: Managing information technology (IT) 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 will be charged with keeping IT investments under control, radically cutting costs, while at the same time doing some savvy prioritizing to address new business needs—the discipline to do even more with less becomes the mantra.
In India, the situation is no different and no less challenging. Companies across multiple industries are increasingly using virtualization and cloud computing to reduce costs in the slowdown.
The trouble is that many companies instinctively look at their IT departments as an easy place to cut costs. It’s an impulse that will prove expensive down the road. Consider the personal computer 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 Within three years, the business was severely hampered because 60% of its core business servers had become out of date.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 slowdown. 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 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 to reduce the costs of maintaining status quo—just keeping the lights on. These firms divert the savings back to the business and also use them to support the changing business needs.
We’ve found that firms employing this strategic approach during tough times save as much as 20% 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’ll call ServiceCo. It needed to reduce IT costs by at least 20% and also change the allocation of IT costs to more strategic business-driven initiatives. The company’s IT budget represented 15-20% 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 return. Too often, it was spending in the wrong areas. As is typical with services firms, more than two-thirds of the IT budget was spent just to keep the lights on.
The firm 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 chief information officer can unilaterally act on, such as non-essential travel and overtime, extending desktop upgrade cycles by 6-12 months and pushing out timetables for IT application projects that are not absolutely critical. ServiceCo captured 6% of its IT savings just by reducing IT discretionary costs through tighter recruitment, training, and entertainment expense policies.
Accelerate cost reductions, pursuing opportunities that will pay back in less than 180 days. Winners also scour their budgets for ways to further reduce costs. They find cheaper 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 rationalizing non-strategic vendors and bundling application development and maintenance, ServiceCo achieved 20% of its IT cost savings.
It’s one thing to make cuts—it’s another to realize 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 no longer are necessary or 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, ServiceCo found 3% of its cost savings simply by using less-expensive permanent staff in place of high-priced contractors.
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.
ServiceCo prioritized 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 the firm to gain nearly 20% of its cost savings.
In the current marketplace, IT leaders recognize the power of a more centralized IT model. They centralize or combine groups, streamline operations, cut out layers and take advantage of scale. They use relocation to both support new priorities and reduce costs. Employees are reassigned to priority projects, areas of specialization or less expensive locations.
Nearly 8% of the cost savings at ServiceCo came from such a reshaping of the organization.
By employing these five steps, IT leaders not only save on costs and improve their ability to support the business but also create lean and flexible organizations designed to sustain the benefits when the economic turbulence subsides.
Bhanu Singh is a partner in the India office of Bain & Co. and co-heads the firm’s global capability sourcing practice. Donie Lochan is a partner at Bain’s Sydney office and leads the firm’s IT practice in the Asia-Pacific region.
Respond to this column at email@example.com