Scenarios For IT Success In The Downturn
by Bobby Cameron
Recently, Forrester spent some time interacting with IT executives regarding their 2009 budgeting and how the recession is impacting their planning. We'll present the results of these in a complimentary webinar on December 11, but here’s a quick summary of what we heard—and our analysis.
The biggest surprise was that not everyone is now cutting—or expecting to cut—IT's spend. Twenty-one percent told us that they expect their budgets to remain the same or to grow into 2009. Now some of these are firms in sectors like financial services where they cut to the bone earlier this year. But others are companies in sectors like healthcare and utilities that expect business to continue with minimal impact from the downturn.
But most firms are playing out one of three scenarios targeting reductions in the IT budget—and each scenario is exemplified by an industry sector:
Those already cutting—like manufacturing and business services. A third of the firms we spoke with are actively pulling back and expect this to continue into 2009.
Those anticipating cutting—like financial services. Eleven percent of these firms in our survey are actively putting plans together for 2009. And some, like banks and investment houses, took a dramatic chunk out of their IT budgets at the start of 2008.
Those keeping their options open—like the public sector. Just over a third of the organizations haven’t had to do anything yet but aren’t sure what next year will bring.
No matter which scenario a firm is playing out, the data showed us a couple of clear patterns:
Most firms are focusing on IT’s traditional cost-cutting tactics. To address the 30% of the IT budget that includes capital expenditures (CapEx), these companies are segmenting their investment portfolios to cut costs and maximize returns—by using commodity, low-cost resources, eliminating large-sized efforts, and focusing on short-term returns. Some are also focusing on adopting lean thinking to reduce both the complexity of the projects and of development.
To keep the operating expenses (OpEx) down, these traditional tactics include activities like consolidation/standardization, consistent with the business model—across data centers, server/storage virtualization, and vendors. This is being done through centralization of IT contracts and lean thinking. But the firms are also driving staff and asset utilization optimization, delaying upgrades and refreshes, and even downgrading capabilities for lower volumes.
Not many companies are driving large cuts of more than 15%. Only 21% are making larger cuts to their OpEx spend while 43% are working on large reductions in OpEx.
Forrester Recommends Following Firms Investing To Accelerate Out Of The Downturn
Not everyone has hunkered down with IT's traditional cost cutting tactics, expecting to wait out the financial crisis. We also found firms taking two approaches designed to take what little investment they could and using that to improve their firms’ chances of success when things do turn around.
These firms are investing in:
Agility. While the downturn is broad and global, those companies that can more rapidly shift suppliers, trading partners, and markets will be more likely to wind their way through the miasma of failing firms and slow-to-restart economies. Instead, companies courting agility are focusing investments on flexible external interfaces to data and systems, applying SOA for strategic flexibility, and looking to third parties for flexible interfaces. In the public sector, this might mean being able to shift contactors or change the internal/external mix. In finance and insurance, firms want to resell services from third parties or expand integrated channel alternatives. And business services and manufacturing companies will add and change partners, suppliers, and markets globally.
Innovation. Instead of hunkering down, firms adopting this approach will look for new business models and product/service offerings in addition to operational improvements. Companies adopting this approach are assigning a portion of their diminished CapEx for innovative ideas, focusing the selection criteria on core business strategies. Some are using Web 2.0 technologies to farm ideas from across their networks of suppliers, partners, and customers. And all are employing a different investment pipeline and steering committee to drive innovation forward.
Each Firm's Scenario Determines Its Optimum Approach
Each firm will address the downturn according to its scenario:
Those already cutting have to focus on the bottom line. These companies must continue to keep their financial position alive—executing plans to cut and preparing to make deeper slices if things don’t turn around in the mid-term. They should consider making investments in agility and innovation, but only if they have enough room to maneuver.
Firms anticipating cuts should add agility and innovation investments. Their plans need to be finalized and executed, but mid-term health will be optimized by making investments in agility and innovation a priority. The commitments should be kept small, with short-term returns—in case the worst happens—but these firms should keep strategic futures in their sights.
Companies keeping their options open should aggressively pursue agility and innovation. None of us knows how this economic shift will play out, but most expect a leveling out of the global economy late in 2009—and 12 months isn’t a long time. So firms that have enough strength should be focused, increasing their agility and making innovation a larger portion of their CapEx spending.
The bottom line: Firms should address the downturn according to industry—based scenarios, driving IT's decisions based on the business value of investments and operations, not wholesale cuts. And to make this happen, each IT shop should hone their IT governance processes—like project-portfolio-, IT-services-portfolio-, and IT-resource- management. And if at all possible, they should consider investing in agility to increase options and innovation to accelerate out of the downturn.
Featured Blogger Bobby Cameron
Bobby Cameron is a vice president and principal analyst at Forrester Research, where he serves CIOs. He is a leading expert on best practices for IT, including: organization, governance, IT processes, metrics, strategy, the marketing of IT, and IT/business alignment.
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