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Issue of September 2002 
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CIO Speak: IT Budgeting
Global slowdown and the art of IT budgeting

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.

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.

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.

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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