Hard Times Ahead?

CIOs haven't been socked with budget cuts yet, but many are preparing to tighten their belts in the softening economy.

Last year, the bubble burst for many dot-coms when they learned that profits really do matter after all. Now, weak spots are showing up in a much broader swath of the U.S. economy, and IT executives are coming under increased pressure to cut costs and speed up the delivery of revenue-enhancing technologies.

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Finding the Fat

Although it isn't clear whether the U.S. is heading for a recession, many IT executives say they're always under pressure to cut costs. For Honorio Padron, president and CEO of Exelon Business Services, the place to start is in "O&M" - operations and maintenance, or recurring IT costs.

"People always focus on the project side because it's easy to cut projects," says Padron. "The executive committee focuses on projects. When do they talk about cost per MIPS or how many servers you have? Nobody really understands that side except the IT group."

Padron says CIOs should consider outsourcing functions handled in-house, such as network management and telecommunications support, and "in-source" activities that were previously outsourced, such as application development. He says server consolidations are likely to save money.

In addition, Padron advises "locking down" desktop systems so users can't install their own software. "That's a slam dunk," he says. "It can reduce support costs 40%."

Senior managers should also take a tough stand against the proliferation of pagers, personal digital assistants (PDA), laptops and other mobile devices, says Padron. "The need for mobile computing is totally exaggerated, and it's out of control right now," he says. "I've seen staff waste hours trying to figure out an executive's PDA problem, and you may have five executives all with different models."

IT spending at The Prudential Insurance Company of America in Newark, N.J. - now at $1.1 billion - will be "flat to slightly down" this year, or off by as much as 3%, says Vice President and CIO William D. Friel. Some savings will come from replacing expensive U.S. consultants with IT workers at Prudential's new development center in Ireland. Opened last year, it employs 118 people and is expected to save the company $20 million to $25 million annually once it's fully staffed at 335 people, he says. The facility was set up with the help of the Irish Industrial Development Agency with an investment that was "not that significant," Friel says.

For its part, Panasonic Management Information Technology Services used to nab consultants and temporary employees from about 30 sources, according to President Bob Schwartz. Today, all of his requests for supplemental staff flow through a single company, Princeton, N.J.-based JobReq.com Inc. Now in its first year of use, JobReq's online staffing tool will pare 6% to 7% off his $11 million consulting budget, says Schwartz.

Christopher Horrocks, a vice president and CIO at Selecterra, says one way to cut costs is to get them into somebody else's budget. For example, end users at Selecterra generate their own reports with a user-friendly report writer.

Says Horrocks, "If I built up a large IT staff to do those reports, [users would] think they were free."

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Even CIOs operating under generous budgets set last year when the economy was robust say they're reprioritizing projects and looking for ways to trim operating expenses.

But several senior IT managers interviewed by Computerworld who have seen the budget ax before say they're shrugging off renewed pressure to meet short-term financial goals. Some even say the pressure is a good thing. "It makes people rethink and rescale what it is they want to do," says Allan Ditchfield, an independent IT consultant in Marion, Mass., and former CIO at The Progressive Corp. in Mayfield, Ohio.

Pressure on companies to improve short-term financial performance often leads them to avoid long-term "big-bang" projects - such as enterprise resource planning rollouts - that have high failure rates, Ditchfield says. "A project squeeze helps you keep focused on what's real and what's desirable," he explains.

Projects that will receive funding priority in the coming months include those with a high likelihood of making quick improvements to a company's bottom line, says Thornton May, chief awareness officer at Guardent Inc., an information security consultancy in Waltham, Mass.

"There's a flight to quality," May says. "The economy is slowing down, and there's the sensitivity that you have to spend smart."

Christopher Horrocks, a vice president and CIO at Selecterra, an online business-to-business marketplace in Chicago, says CEOs are right to demand that IT projects meet clear financial goals.

"If you can't estimate, with some statistically provable likelihood, what the payback on a systems investment is going to be, I wouldn't touch it with a barge pole," says Horrocks, who has advised more than 200 corporations as a consultant.

In his view, Horrocks says, public companies should be required to report major systems changes to the Securities and Exchange Commission. "A company tends to be very exposed during that period - rather like a soft-shelled crab," he says. Such a public reporting rule would encourage greater involvement among senior management in IT planning, he explains.

Mix It Up

Honorio Padron, president and CEO of Exelon Business Services Co. in Chicago, says it's important "to have a mixed bag of IT projects in the hopper - things that will produce quick returns on investment, and also projects that will deliver the long-term results you need." Exelon Business Services provides support to the business units of Chicago-based electric utility firm Exelon Corp. Padron, a former CIO at Dallas-based CompUSA Inc. and Miami-based Burger King Corp., says the prioritization of investments that goes on in every budgeting cycle should include a hard look at systems that could be eliminated.

Panasonic Industrial Co.'s Japanese parentage (Matsushita Electric Industrial Co.) brings with it a slightly longer-term view than that of most U.S. companies, says Bob Schwartz, president of Panasonic Management Information Technology Services Co. in Secaucus, N.J. For example, Panasonic will approve IT projects with returns as far as three years from their implementation dates, he says, whereas U.S. companies typically look for a return within 18 to 24 months.

Sometimes IT projects are just deemed necessary. Some IT infrastructure upgrades and enterprise applications have been undertaken without "rigorous analysis for return, but rather to position the company for the e-world," says Schwartz.

For example, he notes, Panasonic underwent a major overhaul of its network infrastructure when it migrated from an SNA-based network to an IP-based system.

"The investments were approved based on the technical merits and the capability improvements they would bring rather than by a classic [return-on-investment] assessment," he says.

Tricks of the Trade

IT planning and budgeting holds a number of pitfalls - for IT managers and general managers alike, Ditchfield says.

"Some companies have blinders on. They ask what it's going to cost to have this done, but nobody asks how much it will cost to operate it," he says. "The CIO has to have an understanding with the user counterparts that this thing ain't coming just for the development cost."

Ditchfield also cautions IT managers to recognize that financial pressures demand that they pay attention to political as well as fiscal matters.

"The CIO may think he or she is doing a great job, but there's this seething resentment in the corporation because you're spending money like hell and they are firing people out the door," he says.

Another political hurdle for IT leaders, says Schwartz, is that the financial justification for an IT project often requires business process improvements that aren't under the direct control of IT managers. They must insist on the early and active involvement of business unit managers, who must "clearly articulate what they are trying to accomplish and what benefits they expect to see," he says.

Now isn't the time to cut IT spending, even if your company is retrenching overall, May says. "Smart companies are viewing this time as an opportunity to gain a march on their competitors," he says.

That's a view shared by Mercer Management Consulting Inc. in New York. In a recent analysis of the actions taken by 800 companies during the last recession a decade ago, Mercer found that most firms that employed a "circle-the-wagons" approach and cut costs broadly and deeply before the recession were left financially crippled for years after the recession ended.

"The collapse of the dot-coms has caused managers at incumbent firms to relax," according to the Mercer report. "Instead, these managers should take advantage of the temporary availability of talent and other resources to digitize - but only in the cause of solving their most pressing business issues."

Apparently, many are heeding that advice. According to a survey of large companies that was released by Stamford, Conn.-based Gartner Group Inc. last month, 65% of 510 CIOs polled are planning to increase IT spending this year. Of those, the average increase reported was 13%.

And in a recent survey conducted by Boston-based AMR Research Inc., 87 of 100 CIOs polled said they plan to sustain or increase e-business investments this year. In its survey of financial services, retail, manufacturing and utility companies, AMR found that the rate of IT spending growth - but not total spending - is declining.

These days, the efficiencies and innovations that technology can bring to businesses are too vital to allow a slowing economy to derail pressing projects, says AMR CEO Tony Friscia. "Even in a down economy, e-business is not a spectator sport," he says.

Copyright © 2001 IDG Communications, Inc.

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