CIO — Call it the CIO's dilemma: As IT leaders cut budgets in response to rising economic pressures, some find they must also deal with a spike in demand for IT services by their end users.

CIOs at top-performing companies are dealing with this issue in part by making quick and deep discretionary cuts across the board rather than through better IT cost-control initiatives, according to a new survey by The Hackett Group.

The survey shows IT budget growth at 1.3 percent for 2009 to 2011, compared to a historic average of 5.3 percent. At the same time, IT demand will grow at a rate of 8.6 percent. Reconciling greater demand with a smaller budget means IT must deliver higher levels of efficiency and productivity improvement, says Erik Dorr, senior research advisor for The Hackett Group.

CIOs traditionally do this through cost control (such as negotiating better vendor contacts) and discretionary cuts (such as staff reductions). Although discretionary cuts are the most effective way to quickly achieve savings in the face of rapid demand, this tactic comes at a cost, Dorr warns. "Without addressing fundamental productivity issues, these types of cuts inevitably lead to a degradation of service levels and a reduction in the level of demand that can be met," he says. The survey also found a lack of focus by CIOs on the demand-side of IT services, which creates an opportunity to trim costs there, says Dorr.

Typically, IT met rising user demand by simply handling it, rather than creating processes to prioritize work by its value. However, as CIOs do more with less, developing demand management capabilities becomes critical. The survey found companies focusing demand management efforts around project portfolios (58 percent) and cost allocation of IT services (37 percent).