by Tim M. Crawford

Are CIOs truly prepared for the next economic downturn?

Aug 02, 2019
BudgetingCIOTechnology Industry

Organizations found themselves in a precarious position during the last economic downturn. Here is a list of things to consider before the next one hits.

stockmarket crash wild ride economic downturn recession depression
Credit: Thinkstock

Over the past decade we experienced a significant economic decline followed by a period of great prosperity and growth. Leading into this negative period, many enterprises were caught flat-footed and ill-prepared to shift gears in a timely fashion. Companies were stuck with financial commitments based on continued growth.

Watching external economic factors is as important as understanding the core of your own business. The problem is that many have put the past experience far in their rear-view mirror and have not prepared themselves for the next one…which is coming.

Flexibility is key

There is no question that demand for computing resources will increase over the long term. It has for decades. It is those periods of flat or negative demand that lead to problems. This is exactly what happened in 2008-2009.

The key is to structure the organization, assets and resources in a way to provides flexibility. There are three aspects to consider: Organizational structure, long-term commitments and expensive assets.

Organizational structure

Some may argue it is easy to change (read: dismiss) team members as needed. A good leader will tell you that letting someone go is one of the hardest things of their job. Not only is this impacting an individual’s livelihood, but it comes at a time when other companies may not be hiring. That weights heavy on the mind of the leader.

Beyond the impact to the individual, one must consider the impact to the organization. Most IT organizations are still structured with a classic two-part organization with infrastructure operations in one part and applications development in the second part. Commonly there are horizontal functions that sit across these pillars including business analysts. Organizations have been moving away from this siloed model, but the process is slow.

As a team member is changed, the responsibilities of the individual typically do not go away and must be re-assigned to another team member. Moving responsibilities can take time and is disruptive to the overall operation of the IT organization.

Multiply that by many individuals and one can quickly see how disruptive organizational changes can be to their culture. Organizational moral drops and added energy must be inserted to stabilize the remaining organization to ensure consistent operations.

To prepare for the next decline, organizations must consider a more flexible organizational model that accommodates cross-functional knowledge while breaking down the silos. Focus on functions and parts of the organization that would remain should a dip occur. These functions should include those most directly tied to the intellectual property and critical functions of the company. Use contingent labor or outsourcing agreements to augment additional areas. Contingent labor allows for the ability to scale up or down as demand changes.

Long term commitments

The second aspect is to avoid long-term commitments. Look out for hard commitments that would limit flexibility to change contracts. Examples include contingent labor, outsourcing, licensing and spending thresholds. Negotiate contract options with flexibility should an economic decline hit. Vendors will be reluctant to agree to this language in their contract. Consider a compromise where commitments are made but have out-clauses should negative economic conditions prevail.

A more nuanced approach would accept long-term commitments when positive economic conditions are forecast for the duration of the contract. When the time comes to renegotiate the contract, consider the economic forecast for the time horizon of the contract and negotiate the terms accordingly.

Expensive assets

In a similar vein to contracts and commitments are assets. A common asset for IT organizations is their infrastructure. Keep in mind that not all infrastructure is alike and should not be treated the same.

Longer term commitments, like data centers, may have a 10-, 20- or 30-year commitment to maintain the asset. In addition, that includes all of the support infrastructure within the data center including power, network, cooling. In a nutshell, data centers are expensive to own and operate. Even if the demand decreased, it is incredibly difficult, expensive and disruptive to reduce the footprint of a single data center. And this is why many companies do not decommission a data center until the last application, system and network connect has been removed. In the meantime, the costs to maintain the data center continue.

During the last dip, companies struggled with their data center assets. Commitments were made based on continued growth. Yet, there was little that could be done to reduce the data center spend.

There is a wide belief that once infrastructure is purchased, it is owned forever with no additional costs. Unfortunately, this could not be further from the truth. Infrastructure value declines over time to the point where it is less expensive and more productive to purchase new, replacement systems versus keeping older systems in place.

One thing that organizations did during the was extend their infrastructure replacement schedules. Instead of replacing server and storage infrastructure every 3-5 years, they extended it to 5+ years. Network equipment went even longer. This is a tactic that could come into play during the next slowdown too.

In order to combat the infrastructure challenges, look at leveraging cloud-based resources for those applications that can be refactored to leverage cloud. Cloud has the potential to provide the ultimate in resource flexibility. For those applications with restrictions, consider moving from corporate-owned data center assets to co-location resources. Again, consider the impact of long-term agreements.

It takes time

As with many things, reality is just a point in time along a continuum. In addition to considering these three core aspects, leaders must continually evaluate their product, service and project portfolios over time. As dynamics change, so will these aspects.

None of these actions can be done quickly. Each takes time for planning and execution. Some will take months to years to put in place. This is why leaders need to be planning for the next economic decline today and not when it hits. Otherwise, we will experience the issues faced in 2008-2009 all over again.