by Christopher Koch

IT Spending: Your Budget Playbook

Sep 01, 200113 mins

It’s the big budget Super Bowl. The clock is running out. The economy is down, and spending is tight. The CFO is blitzing you with budget cuts. He’s counting on you to block him with a standard line about how IT is too strategic to be cut during hard times, and he’s looking forward to crushing your argument with low revenue and profit forecasts. Instead, you blindside him with a simple plan that benefits you while telling him what he wants to hear. You say, “I’m going to spend money on making people more productive, not adding computers.” The CFO is stunned, speechless, knocked off balance.

It’s a difficult argument to counter. IT is the best?though imperfect?way to force improvements in the ways people do their jobs. “Computers don’t make money. People do,” says Paul Strassmann, consultant and IT budget researcher for Strassmann Consulting in New Canaan, Conn. Thinking about technology that way helps you sort out your IT budget priorities when you are approached by a strong opposing lineup of the powers that be. Software upgrades that don’t improve the ways things are done? Cut them from the playbook. New computers and networks that won’t give employees new capabilities? Back to the bench. Got a demand for an across-the-board cut in IT staff? Time out on that one. Technology dollars spent on IT staff have a direct effect on raising sales and revenues (see “Halftime Show: The Case for IT Staffing,” Page 76). Spend more on IT staff and your company will make more money.

Judging from a recent survey by CXO Media (CIO’s publisher), “IT Spending and Lessons Learned” (see “Don’t Drop the Ball”), CIOs are being asked to make serious cuts. But they’re learning to deflect the damage. Asked to cut big implementation projects, they postpone them instead. Outsourcing?which has the potential to cripple the IT department while offering limited, if any, short-term savings?can be accommodated in slices.

Make no mistake, the CFO is after you. In the survey, four times more CFOs (26 percent) said the IT budget should be cut during tough times than did CEOs and COOs (6 percent each). Since the majority of CIOs still report to the CFO (35 percent to 40 percent, according to Hudson, Ohio-based research company Hackett Bench-marking & Research), the CIO has to find a way to hang on to staff and keep strategic projects going during tough times. After all, these are the projects that prove IT’s (and the CIO’s) worth to the business. If companies reduce IT spending to the point where it’s only able to just keep the wires untangled and the boxes running, IT will never get the chance to follow through on its promise of improving productivity and raising revenues.

First Down:Postpone the Big Projects

The biggest IT projects?such as ERP, CRM, supply chain management and e-commerce?are the hardest and most expensive. No wonder many companies reconsidered their particular mountain-moving software projects this spring when the economy began to sour. But don’t let tight times kill your big initiatives. Instead, offer to postpone them. It’s the most popular way to cut costs, according to the CXO Media survey. More than 40 percent of survey respondents said they’d be postponing their new IT projects.

Roger Mowen, CIO of Eastman Chemical in Kingsport, Tenn., postponed his CRM project this spring when it appeared that demand for chemicals would be down for the year. That project is part of Mowen’s master plan, but he is confident that he’ll soon be able to get the project back on schedule.

Mowen, who reports directly to the CEO, is part of a four-person committee that runs Eastman day to day. With a CIO at the table, discussions at the committee’s weekly meetings often turn to technology and its value and role in the company. Mowen’s seat at the big table also ensures that Eastman will revisit his CRM plan frequently and sympathetically.

“I’ve only agreed to postpone the project for one quarter,” he said in May. “In the meantime, I haven’t stopped planning and preparing to do it.” While the project hangs fire, Mowen is focused on revamping customer-facing work?such as sales support, for example?as well as internal processes.

Of course, not all CIOs have the same kind of power to affect their budget future as Mowen does. James Lapomardo, senior director of IT for videoconferencing company PictureTel, reports to a CFO and has had to recently postpone a critical CRM upgrade for at least a year. Some of the best new product ideas have come from customers making passing comments on the phone or on warranty cards, says Lapomardo, but the Andover, Mass.-based company’s ability to push customers harder for those comments is limited with its current software.

Like Mowen, Lapomardo says he will focus on improving the company’s current customer relationship work methods while waiting for the green light to resume working on the CRM upgrade. But he understands the danger of waiting too long. “All the momentum you’ve built up behind the project gets jeopardized when it gets postponed,” he says. “It’s a struggle to keep people focused on the planning aspects because they never feel like they’re getting out of the gate on the project.”

To get businesspeople’s attention during a postponement, Lapomardo pulls them into small planning projects that are very narrowly defined. For example, Lapomardo has a few people working with him on very specific interfaces in the legacy CRM software to determine what type of information should be ported between sales and marketing.

“Businesspeople tend to put off really trying to understand everything the software will do until the project begins,” Lapomardo says. “You have to use a postponement as an opportunity to get them involved in small pieces of the project so they will understand it better when you get going for real.”

Game Plan: Determine if the project is really worth fighting for. If information is not a critical part of the product or service you sell, then you can probably afford to hold off on that CRM or other big project. Clinging to it simply because the media or analysts say it’s the latest, greatest thing would be foolish. “If you’re a gravel and cement company, there’s only so much that IT can do for you,” says Kurt Potter, research director for Stamford, Conn.-based research company Gartner. “But I can guarantee you that you won’t see Charles Schwab cut its IS budget by 35 percent in this downturn or any downturn. Information is part of its products.”

And don’t forget to keep the businesspeople involved even when a project is on hold.

Second Down: Outsource by the Slice

When times get tough, companies reflexively look to IT outsourcing to save money. But mistakes happen, and there is less room for error in tough times than in good, warns Strassmann. “Anytime you yank out all your trees and haul them over to a new orchard, some of them are going to die,” he says. “The time to outsource is when you have lots of money to cover up the glitches.”

Given the complexities of turning over all of IT to someone else, outsourcers now let you do it by the slice. Many companies have had good luck outsourcing their websites because the work of maintaining a site is predictable and doesn’t vary much by company or industry. Similarly, infrastructure outsourcing?data centers, Web servers and networks?is growing because the work of providing pipes and networks and servers is universal and repeatable, and outsourcers can achieve economies of scale that individual companies cannot.

It’s getting much easier to outsource the machines rather than the people. A small industry is rising around the idea of letting someone else worry about the boxes and wires while you focus on maintaining the software. There’s little reason to build a new data center yourself anymore when a colocation company can rent you space in a monster data center that serves many different customers at once. A new data center costs $400 per square foot today for individual companies, says Tom Mangan, managing partner for enterprise technology solutions for Andersen, a Chicago-based consultancy. But leasing from the infrastructure providers costs $40 to $100 per square foot?or as low as $11 per square foot from some of the dotcom data centers that went out of business in the recent technology bust.

Chris Corrado, CTO of New York City-based financial services company Merrill Lynch, is working on a multiyear plan to move the company’s data for its institutional customers to a storage outsourcer, StorageNetworks. “This is not something you do overnight,” he says. “You’re changing business processes for managing this stuff, and you’re introducing new technologies to store it.” Corrado thinks he’ll save 47 percent in storage costs when he finishes shifting things over in 2003 because the outsourcer’s work methods are better than his. “Let’s say you need to acquire 100 gigs of storage,” he says. “The old-fashioned method is you find vendors, buy hardware, integrate it into your environment and manage it. With a managed service, you just say, ’Give me 100 gigs.’ You should be able to get that immediately so the acquisition is much quicker and your release capability is that quick as well.”

Game Plan: Your IT department has an economic advantage over any outsourcing company: It doesn’t need to make a 25 percent profit margin on the work it does. In order to lower your IT costs by 10 percent and still hit that 25 percent profit margin target typical for most big outsourcing companies, the outsourcer needs to do the work for 35 percent less than your internal people can. So don’t expect any improvements in service for your 10 percent savings, warns Douglas Plotkin, director for Meta Group Consulting, a division of Stamford, Conn.-based research company Meta Group. “Most outsourcing customers expect both lower costs and improved service levels from their outsourcer. But that equation just doesn’t close,” he says.

If you need another argument against wholesale outsourcing, point out that the costs of picking an outsourcer and negotiating a contract?about $150,000 to $200,000 for a midsize company (under $100 million in revenues), according to Giga Information Group?will most likely suck up any short-term savings.

But tread carefully if you outsource by the slice. Each time a new type of outsourcing comes along?such as storage networks or colocation data centers?the going can be rocky as outsourcers learn about the new technology and figure out ways to gain economies of scale across many customers at once. Customers start looking more like guinea pigs than clients. Bill Hutchison, global director for the technology industry in business consulting for Andersen, has seen four different technology waves in outsourcing, from sharing space on mainframe computers in the ’60s to ASP providers today. “Each time you cross a technology barrier, the costs of outsourcing go up to the point where you’d be better off doing it yourself,” he says. Once the technology settles down and the outsourcers gain experience with it, the savings increase. Hutchison believes we’ve only just crossed one of those barriers with ASPs.

Third Down: Standardize and Centralize

Good centralization and standardization efforts save money when they can create similar work methods for as many people as possible without limiting anyone’s ability to do a job well. For Mike Webb, senior vice president of IT at Singapore-based Flextronics, standardizing the work of installing and maintaining ERP is a matter of survival, and his ability to keep costs in check by doing this is a winner in tight times as well as flush.

Flextronics is a contract manufacturer that, like its competitors SCI and Solectron, makes the technology equipment that goes out under well-known brands such as Cisco and Dell. Flextronics’ margins for this work are so low?about 4 percent to 5 percent, according to Webb?that the company depends on fast growth and manufacturing efficiencies to stay profitable. In August 2000, for example, Webb’s IT team brought 13 factories online?some new, some acquired from outsourcing customers?with deep, complex ERP systems. The only way to do all this work in a month, Webb says, is to standardize on the same technology (Baan ERP in this case) and forbid any customizations to the systems.

To make sure the edict doesn’t hamstring the factories, Webb has a committee that meets regularly to review the work processes in the standard software to see if they can be improved and to add new ones to fill gaps that crop up. The standard processes, like finance and payroll, don’t change much at all. But for more complex manufacturing work, Webb’s group offers three or four options to give the plants some degree of flexibility and to fit the different types of manufacturing?cell phones, routers or PCs, for example?the company does for its clients.

Though the savings will not be readily apparent in the short term, the long-term savings will be massive, as Webb likes to say. The price of customizing ERP is very high. Over the five-to-seven-year average lifetime of a big enterprise software package, support and maintenance make up 80 percent to 85 percent of the total cost, dwarfing the amount spent on installing the stuff (about 15 percent to 20 percent), according to Andersen’s Mangan. Each customization you make in ERP requires extra support and maintenance because the software vendor won’t support changes.

Your IT employees will have to do it?trapping valuable re-sources in an endless cycle of customization each time you upgrade the software.

Game Plan: Though standardization seems like a tactical, IT-only exercise, it will not succeed without the support of top-level business managers. “Senior management always wants to know how much we’re spending on IT,” says Sean Magee, CIO of Lanier Worldwide, an office products company based in Atlanta. “That means centralizing spending on things like PCs and databases and networks. It’s the only way I can know how much we’re truly spending as a company. But the centralization push has to be initialized by senior management, otherwise businesspeople think I’m taking away their laptops just because it’s my sandbox and my toys.”

According to Gartner, in the course of figuring out all the IT you have secretly stashed around the company, you may discover that your infrastructure needs are woefully inadequate, requiring more investment 40 percent of the time. But with a good centralization program, IT infrastructure costs go down by 10 percent to 20 percent over time.

Controlling IT costs with an eye on improving work takes longer and might not result in as many short-term savings as simply driving through the IT budget defense. But the long-term benefits will far outweigh the disadvantages. Big enterprise software projects will go more smoothly, take less time and cost less. Outsourcing contract costs will not balloon over time as the outsourcer attempts to extract its margins out of a low-ball initial agreement. IT won’t have to waste time acting as guard dog over untenable standardization programs. The measure that ultimately matters most, productivity, will rise over time because the actions IT takes will serve the goal of reducing the time it takes people to do their work.