|
 Recession
is not all that bad, and it makes companies stronger.
But how can an IT manager stretch the buck in a constrained
IT budget? by Probir Roy
As
you read this, you are well into your budgets for the
year and at best, it will serve as a primer for next
year's budgeting cycle or upcoming mid-year re-forecast.
For others in various financial year cycles, it may
not be too late.
Intel's CEO Craig Barrett says you don't spend your
way out of a recession, but emerge from it through new
products and technologies. For the savvy marketer, a
recession is often seen as Godsend; a time to make hay
while the sun sets, as they spend less money for the
same share of voice. Moreover, they feel that product
value gets enhanced as consumers get close to brands
that are advertised and hence visible in a recession.
On the other hand, IT practitioners are presented a
classic dilemma as senior management contends that IT
expense is too high, while the IT department tends to
think otherwise. Of course, the battle for funding in
such times between management and functional heads isn't
limited to IT alone. Most good managers will attempt
to increase departmental funding in order to add organizational
value. Savvy CIO's should recognize that recession is
a temporary phenomenon, driven by external factors,
and no reflection of their capabilities or importance
of their function. And they should wisely use this opportunity
to 'visibly' visit the basics of their role, functions
and investments to date. Alternatively, they can seek
refuge in the oft used and time-tested technique of
wanting to protect their legacy systems under the rationale
of soft-rupee expenses to preclude any failure or degradation
of business-critical applications—so as to avoid
the larger hard-rupee implications of loss in customers
or business.
During the 90's, companies aggressively spent on several
important IT initiatives including the upgrade of systems
prior to the infamous Y2K bug; the widespread adoption
of the Internet; installation of ERP systems; expansion
of enterprise application usage in general; the adoption
of open systems and more recent initiatives to get all
of these systems to work together. This was characterized
by meaningful expansion in the proportion of corporate
budgets allocated to IT.
CRUCIAL FACTORS
It is quite clear that there is nothing prominent about
the relationship between IT spending (capital + operating
expenditure) and economic slowdown that indicates an
adverse relationship between the two. While it is true
that in times of economic slowdown, overall capital
spends do dwindle, the greater proportion of capital
items still tends to consist of IT. This indicates that
infrastructure rollouts and upgrades can be expected
to be offset by savings made in operating expenditures
and discretionary spending. Ultimately it depends on
a complex interplay of forces amongst three crucial
factors.
First, the specific IT adoption profiles of the company,
whether it is a leading-edge adopter, mainstream adopter
or conservative adopter of technology. The more aggressive
adopter of technology will show continued growth in
IT spending as a proportion of revenues whilst enterprises
migrating from one type to another could also exhibit
significant increases in spending.
Second, the industry group that one belongs to may predetermine
the spending ratios. For instance, Financial services
companies spend more on IT than hardware manufacturers,
chemical manufacturers or retailers. For example, an
organization might use a percentage of the gross sales
or a percentage of gross profits. The caveat to this
approach is that while a reality, companies in an industry
segment might have the same basic issues—they also
face unique issues to be resolved. Therefore, a 'one
size fits all' approach is not necessarily a good indicator.
Third, where an enterprise is located on the maturity
curve of e-enablement itself. As brick-and-mortar enterprises
derive revenues from their Internet enabled businesses
or have cost savings/benefits accruing, they show higher
affinity for spending. Government enterprises are good
examples of where an interplay of moving from a conservative
adopter of IT to a leading edge deployment of technology
coupled with e-governance initiatives can lead to increased
proportion of IT spending.
CONSERVATIVE APPROACH
A business manager's rationale for IT spends (post 9-11),
will generally be dictated by imperatives such as managing
and protection of critical infrastructure (which includes
investments in business continuity/disaster recovery)
as against the earlier credo of expansion & growth.
This more conservative approach will take the form of
cautious equipment purchases & cannibalization,
re-architecting around the central server, cap on head
count of staff (including consultants), with a view
to extract more from less; re-centralization in IT budgets,
which can be expected to lead to cost savings and service
level benefits as also reduce 'hidden' costs; deferment
in custom developmental projects and/or major enhancements
and adoption of ASP partners for migration plans, whether
they be office applications or non-critical enterprise
applications.
The trick is to try and convert some types of capital
costs into monthly expenses and in the long run reduce
TCO while at the same time reducing typical recurring
costs such as travel, training, communications, consumables,
software. Alternatively, CIO's can look to passing some
of these recurring costs to the respective user groups
on user pays principle on a mutually agreeable basis.
Notwithstanding the traditional dilemma of what to outsource
or not, there will be a trend to continue dependency
on external service providers to render many of the
support & service, helpdesk, network management
& administration, and other infrastructure services.
However, there will be extreme pressure to demonstrate
Net savings to the company on the whole. Further, companies
will need to be better (read ruthless) at re-negotiating/managing
their deals and reduce multi-sourcing to decrease management
overheads associated with it (often said to add a clear
10 - 20 percent to the overall ESP costs). CIO's will
have to be serious on getting more out of less, on every
aspect of maintenance such as insistence on longer warranties
on software (thus reducing the 1st Year costs), cutting
down on extended maintenance contracts (one year at
a time rather than two or three) and heavily discounting
maintenance renewals in favor of new software.
FOCUS AREAS
As organizations rationalize their 'bread & butter'
outlay items they need to refocus on other areas such
as security, business continuity, Web services, and
think about to re-classifying Internet enabled initiatives.
Security has been the most neglected component of IT
whether it be tools, infrastructure, training and policies.
Traditionally, security has constituted only about 1
or 2 percent. But this can be expected to be anywhere
up to 10 to even 25 percent in highly data intensive,
mission critical and front facing enterprises, especially
after 9-11.
Business continuity and disaster recovery is yet another
area which could do with additional investment. A recent
Ernst & Young Study for India shows that 79 percent
of Indian companies do not have a documented and tested
BCM plan. Typical, spending has been between 3 - 4 percent
of the data center budget, and would represent spending
on resources committed to almost faultless real-time
recovery in the event of any incident.
Web services has not been sufficiently leveraged. There
are innovative ways to utilize smart apps which are
easily configurable around platform independence and
language neutral Web protocols, to carry out collaboration
& business-management integration.
Finally, another area of opportunity is e-business.
Once e-innovation becomes part of core business processes,
enterprises will redefine cost categories and cannibalize
other non e-business related spending. Companies will
find it hard to differentiate between an e-business
initiative and an ERP project, hitherto owned and budgeted
for by the IT department.
As such there is no single answer to an organization's
level of IT funding. Rather, the funding level will
depend on the organization's IT goals. If there are
no clear IT goals or expectations, the right level of
funding is whatever is currently spent on the function.
So while CIO's can remain 'bullish' about spending;
the rate of spending will certainly be a whole lot lesser
than the previous years. On a positive note, it is a
known cyclical phenomenon that companies come back after
recession stronger, leaner and meaner. And this will
inevitably provide the impetus for the next cycle of
growth. Perhaps sometime in 2003.
(The
writer is Vice President (Technology) at STAR TV, South
Asia; COO, Euro RSCG Interactive, and CTO, Euro RSCG
Advertising, India/ Middle East. He has also worked
with the United Nations, Vienna, and the Department
of Atomic Energy, India.)
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