Commentary: IT cuts could jeopardize business

With the slowdown continuing as the second quarter of the year draws to a close, companies that have not been affected so far are beginning to see an influence on their industries, and we are now starting to see a second round of business plan realignments and cuts.

	See news story: Goldman Sachs sours on tech recovery

That's after many companies had already made adjustments to their business models in the past few months, based on the economy slowing during the latter part of 2000 through the first quarter of this year.

As IT and general corporate operating budgets come under increased pressure from senior management in response to the continuing slow economy, corporate management must avoid two classic errors.

First, management should avoid killing large projects that will benefit the company, though it might want to slow investment in these projects to save money. Second, management should avoid making changes that result mainly in annoyance and even demoralization of staff, while achieving scant real savings. The dirty secret about corporate cost-cutting initiatives is that companies often waste amazing amounts of money when trying to save money.

Market leadership positions change during bad economic times much more significantly than during good times. In the IT world, the current economic slowdown greatly favors companies that are selling the most cost-effective solutions, which usually means less expensive ones, as well as companies with large cash reserves.

On the other hand, companies that see themselves as market leaders and can charge large premiums because of their leadership position will find their position and pricing power eroding as customers turn to less expensive products. Two industry leaders in particularly strong positions are Intel and Microsoft, both of which sell comparatively cost-effective solutions and have large cash reserves.

Many companies were not making money even during the good times of a year ago. Some of these companies are selling large, strategic systems. Customers should be careful about making commitments to suppliers whose longevity is in serious doubt.

Doing more with less
One way that companies waste a great deal of money and lose long-term business opportunities is by canceling important projects. This wastes the investment that has already been made in those projects and, more importantly, eliminates the opportunity to realize the important business goals the project was designed to achieve.

Instead, businesses must continue to build IT organizations in a manner that fosters innovation, agility, high performance and dynamic alignment with business goals. Instead of simply slashing the budget, IT groups must restructure to do more with less:

• Achieving extreme short-term results.

• Attaining a critical savings run rate in 2001.

• Moving to a sustainable model for engineering IT costs and value for the times.

• Delivering more value for less money.

To achieve these goals, IT organizations must combine effective short-term cost-cutting tactics, which achieve real savings without harming basic functionality, with long-term business/IT transformation strategies that focus IT groups on doing the right work at the right cost while staying aligned with business needs.

Organizing IT spending
The first step in creating these strategies is to organize IT spending into five categories:

• Core operational expenses, such as electricity, heat, building security and so on.

• Nondiscretionary enhancements designed to support organic growth.

• Discretionary enhancements that support basic business change.

• Longer-term investments designed to support competitive differentiation and deepen penetration into core business markets.

• Venture investments supporting massive innovation designed to open new markets.

These five groups of expenses should be managed as a portfolio, with the CIO positioned as a "fund" manager and the costs/benefits of all projects expressed in business terms that underscore value and timing. The investment in and yield from each project should be managed with regard to both risks and returns, with the basic measure being how the project meets present and projected business needs. All projects should be linked through an investment management discipline that constantly refers to the changing needs of the business.

The stripped-down approach
Some organizations are currently not sophisticated enough to unleash this five-category portfolio approach. For these organizations, a more realistic approach is to use the following stripped-down set of three categories:

• Core: Includes operational expenses, upgrades and so on that are absolutely necessary to keep the business running and preserve the current level of revenue; this would include nondiscretionary activity in response to government regulatory requirements.

• Discretionary: Includes support for new capabilities, penetration of new markets, and support for organic growth, in a time frame or by using technologies that presents a low to medium level of financial risk to the company.

• Venture: Includes support for new capabilities or penetration of new markets, in a time frame or by using technologies that present a high level of risk to the company; the classic early-adopter plays here.

In the short term, IT organizations can cut costs in these ways:

• Managing all IT projects as a portfolio and cutting initiatives that lack clearly defined benefits, efficiencies and effectiveness.

• Employing aggressive asset-management techniques to eliminate software with limited use and better understand true life-cycle costs.

• Renegotiating rates, terms and conditions (for instance, with telecom, software, sourcing and storage companies) and employing aggressive comparative negotiation techniques for all IT investments.

• Implementing business-focused benchmarking to continuously restructure the cost/benefit structure of IT.

• Consolidating technology (in data centers, application infrastructure and so on) while being sensitive to hidden and potentially cost-increasing changeover expenses

By focusing on those tactics, IT groups can avoid making serious mistakes that may hurt the organization's long-term business position and demoralize employees with draconian (and often ineffective) cost-cutting measures.

Meta Group analysts Dale Kutnick, Dr. Howard Rubin, Val Sribar, William Zachmann and Jack Gold contributed to this article.

Visit Metagroup.com for more analysis of key IT and e-business issues.

Entire contents, Copyright ? 2001 Meta Group, Inc. All rights reserved.