Six budget tips for surviving 2009

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Computerworld - Early this past summer, well before the financial meltdown in mid-September, CIO Michael Twohig met with the executive leadership at Clean Harbors Environmental Services Inc. in Norwell, Mass., to discuss the company's 2009 budget. It was the first of many meetings intended to address what they saw as a troubling economy in the coming year, given conditions in the financial markets and general economic indicators.

"Not that we had a real crystal ball, but we were concerned about the direction the future would be taking," Twohig says.

Despite that early and clear-eyed start, Twohig says he's back to reviewing his 2009 plan, thanks to the steady drumbeat of bad economic news that started with September's calamity on Wall Street. He says he is assessing the immediate actions he would take should the economy go into a total tailspin.

He's working from two plans, based on worst- and best-case scenarios. That's a common practice, except that now, "Plan B has been heightened," he says. If put into action, it would call for a significant cut in capital expenditures, the bulk of which would be aimed at the development side of the house. "We always try to run a tight ship, but I'm looking at which projects we could literally do without," says Twohig.

Like those caught up in the stock market's wild ride, many IT leaders -- even those who foresaw a tough 2009 -- are in a heightened state of uncertainty regarding next year's spending plans. And like Twohig, many of them are revising their spending plans or at least preparing to be fluid and ready to respond to any number of scenarios.

Shvetank Shah, executive director of the IT practice at The Corporate Executive Board Co., notes that in a survey of 52 IT organizations, 78% of the respondents said that they're re-evaluating their 2009 budget plans, 67% are putting nonessential projects on hold, and 57% are reducing their use of consultants and contractors. (Read more of Computerworld's ongoing economic coverage.)

What stands out, Shah says, is "the speed and extent to which the lights are being switched off." In mid-August, CIOs were looking at 2.8% budget increases, according to his firm's survey, but four weeks later, budgets were frozen or at least under heavy scrutiny.

Analyst firms such as Gartner, IDC and Forrester have also revised their IT spending forecasts, sometimes drastically. The consensus is that global IT spending will likely fall somewhere between flat and 4% growth. "On a daily basis, people don't have an idea of the full impact of what's happening," says Gartner analyst Kurt Potter.

In September, a few weeks before the financial meltdown, IT executives who responded to Computerworld's annual Forecast survey were already registering concern: 79% said they were either somewhat or very worried about the economy. And the percentage of respondents who reported that their IT budgets would increase in the next 12 months dropped from 47% in last year's survey to 28%.

With this unusual lack of visibility into next week's business conditions -- much less next year's -- IT's marching orders are shifting to emphasize flexibility, especially as business priorities and resources change. Here are six new factors to consider as the calendar page flips from a very dark end of 2008 to a decidedly murky 2009.

1. Understand the Credit Crunch

Today's credit crunch directly affects IT because, for many companies, technology is the No. 1 "capex" (capital expenditure) item, Shah says. That means IT leaders need to pay more attention to financial metrics such as the weighted average cost of capital, or WACC. "What's different about this crisis is it's a capex crisis," because it involves expenditures used to acquire or upgrade physical assets, he says.

WACC measures the rate that a company is expected to pay to finance its assets. The higher the WACC, the higher the "hurdle rate" in a return-on-investment calculation, or the minimum rate of ROI that must be met to undertake a project.