5 Cost-Cutting Opportunities For CIOs
Tech Execs Plan For Economic Troubles Ahead
By Alex Cullen and Phil Murphy with Andrew Bartels, Laurie M. Orlov, and Brandy Worthington
This is the first document in the "Managing IT In Uncertain Economic Conditions" series.
Macroeconomic conditions, whether they are downturns or boom times, broadly shape the CIO's job, but the firm's own context drives action. The reality is that any business at any time may need to shift its executive focus toward running lean—whether due to possible recessions or just normal competitive pressures combined with investor expectations. The CIO must know how to maximize business value during these times as well as during periods of growth. The keys are to work in concert with the CFO as well as other executive team members, provide sufficient emphasis on improving the business's overall cost profile, and ensure risks from cost deferrals are understood.
WHEN COST REDUCTION BECOMES THE PRIORITY, THE CIO MUST SHOW LEADERSHIP
Macroeconomic conditions—growth or recession—get the headlines, but the economic environment for any one firm is a function of its markets, suppliers, and value proposition. Even in a recession, there will be firms experiencing business line growth, and even in boom times, a firm may see sales wane or costing and pricing pressures squeeze profitability. When a firm's executives start to see signs of impending lean business conditions:
The CFO is likely to be first to raise the flag...He or she will lead the effort to replan for a period of tighter sales, longer selling cycles, or declining margins and look for ways to quickly affect the expense lines of the budget, such as deferring new capital investments, eliminating discretionary operating expenses, postponing hiring, and accelerating retirements.
The CFO may pursue a strategy of looking for initiatives where the discretionary investment produces quicker, smaller paybacks.
...creating a sea change for IT. Instead of driving investments to support growth or strategic positioning, the CIO has to shift IT gears toward helping the business reduce its costs, with IT expected to reduce its own costs at the same time. These are not fun times to be a CIO, but they do provide the opportunity for CIOs to help lead their firms' adaptation to lean business conditions and increase their own stature as business leaders.
With Good Management, Adapting IT To Lean Times Is Easier
When IT is asked to adapt to lean business conditions, cutting expenses will be ugly if project portfolios aren't based on a strong business-case discipline or if there is little understanding of IT expense drivers. It helps to already have the structures, processes, and tools of well-run IT in place (see Figure 1):
Broad-based demand management. With effective governance that goes beyond simple project funding approvals, CIOs are able to look at the entire demand picture—business and IT project spend as well as IT service demand.(see endnote 1) And with good budget transparency, the purpose of spend, along with cost drivers and reduction levers, is clear to business and IT decision-makers.
Mature vendor management. Visibility across all external suppliers helps focus attention on where the greatest improvements are possible.(see endnote 2)
Business-outcome-oriented IT metrics. IT performance management that is business-outcome-oriented helps business understand the connection between business activity, such as new customers captured or products shipped, and IT cost.
Strong CFO and business-unit-executive relationships. With these relationships in place, the groundwork is prepared for the types of hard decisions that cost reductions entail.
Figure 1: IT Management Foundations
Source: Forrester, Research Inc.
CIOs Must Explain The Structure Of IT Spend
Executives often look at IT spend as a black box and compare it as a percent to overall revenue.(see endnote 3) They should be educated to understand the breakdown of this spend into its components of:
Nondiscretionary maintenance and operations (MOOSE). The most important breakdown is the split between new investments and basic operating expenses, which are approximately 70% of IT budgets and which Forrester refers to as MOOSE (Maintenance, Operations, and Ongoing support of Systems and Equipment).(see endnote 4) MOOSE covers all the IT expenses that would occur if the business continued but no changes were made. This year's MOOSE contains the ongoing operational expenses generated by last year's new investments.
Investment capacity. The remaining 30% comprises investments to support business growth, to cut business cost, and to cut the cost of IT MOOSE (see Figure 2). This investment capacity is discretionary, and so business executive management can ramp it up or down or allocate it differently from year to year. But woe to the business that underfunds investments to support growth, reducing its own cost of operations as competitors with greater capacity or lower cost profiles charge ahead. And the consequence of not investing in MOOSE control is a continual increase in cost, eating away what investment capacity exists, resulting in dwindling reliability as systems age.
Figure 2: Different IT Spend Is Affected Differently
Source: Forrester, Research Inc.
OPTIONS FOR IT SPEND REDUCTION COME WITH RISKS
Every well-run IT shop has minimal fat in its budget because performance measurement combined with good business-case discipline drives this fat out. When cuts are made, the CFO and business leaders must understand the impact and associated risks of not spending in an area. They also must understand that cutting the cost of business transactions by just 5% will in almost all firms have a greater bottom-line impact than killing all discretionary IT investments.
Different Risk Mitigation Tactics Are Needed For IT MOOSE Versus New Projects
MOOSE is the biggest cost, and spending deferrals have the lowest near-term business risk, but companies that have done a good job making investments in MOOSE control won't find much to cut (see Figure 3).(see endnote 5) New investments are a smaller portion of total IT spend, and as discretionary spending, they can be eliminated more easily but with greater business risks.
MOOSE risk mitigation. With the CFO and business executives, CIOs should review options for IT-specific spending and communicate the risks of deferring infrastructure investments - for example, the risks to reliability of deferring server upgrades. Explore service-level tradeoffs, such as support response time increases, and consider service costs versus service-level tradeoffs. Look to see if contractors used for operational support can be cut back while still maintaining adequate coverage.
New investment risk mitigation. With the CFO, CIOs should lead discussions around the IT project portfolio: understand "must-do" versus "nice-to-do." Consider whether to increase the mix of projects for cost reduction versus revenue or customer satisfaction, and protect new investments that will lower business and IT costs. Beyond this, qualify the implications from deferring business initiatives: what will be the impact on competitive positioning, future product options, or sales force effectiveness, for example.(see endnote 6)
Next: How To Help The Business Lower Its Costs.
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