by Kim S. Nash

Worried About a Recession? How to Hold the Line on Your IT Budget

Jan 25, 200811 mins

The recession may not be official, but companies aren't waiting to rein in costs. Here's how to get smarter about what you spend on IT.

More than 2 million families, unable to pay the escalating interest on subprime mortgage loans, may soon lose their homes, according to the Center for Responsible Lending.

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At least 90 companies that loaned that money at subprime rates are already out of business.

CEOs at struggling firms from Bear Stearns, Citigroup and E-Trade to The Gap, Merrill Lynch and Motorola have left, or lost, their jobs.

At least 98 companies filed for bankruptcy protection in 2007.

Car and home sales are down.

Food and oil prices are up.

So is unemployment: 1.4 million people were laid off last year.

Morgan Stanley predicts recession will hit the U.S. early this year while Merrill Lynch says it’s already here.

CEOs, meanwhile, aren’t waiting for the statistics to match a dictionary definition of recession. Already their confidence in the economy has drifted to the lowest levels since 2000, according to The Conference Board.

Anticipating more ugliness, and trying to stimulate spending, the Federal Reserve Bank, which regulates the flow of money, has cut interest rates four months in a row.

How IT money will be allocated this year is TBD. If it hasn’t happened already, you’ll soon be deep in conversation with senior executives about your budget in particular and technology spending in general. Get ready for long meetings in which managers pass around charts of bad news. And after that?

Budget cuts and hiring freezes.

Across all industries, average IT budgets, measured as a percent of revenue, have shrunk compared to last year, dropping from 7.4 percent to 6.7 percent, according to our end-of-year “State of the CIO” poll of 558 corporate technology leaders.

One manufacturing CIO says things are so bad at his company that he doesn’t even want to talk about IT budgeting. “I’m afraid I could not afford to be candid,” he says.

“We’re planning for a tough year across the company,” says Kevin Bott, CIO of Ryder System, the $6.3 billion transportation company. “We’re trying to be as fiscally responsible as we can for all budgets, not just IT. If the economy does better, that’s an upside. But we don’t want to be caught.”

No one does.

The Way Things Were

Remember 2000? That’s when those high-flying Internet startups, fueled by the notion that technology-based miracles would cure any and all business ills, burned out and came crashing back to earth, their business plans revealed as untenable. The 9/11 terrorist attacks followed in 2001 and so did recession. CFOs clamped down on budgets and CIOs were forced to justify every nickel they spent—not a bad idea, but unfortunate and unprofitable when born of distrust.

At the time, software guru Howard Rubin talked about IT’s “triple whammy”: technology spending as a percent of revenue sank, absolute dollar spending also dropped, and IT layoffs, practically unheard of a few years before, proliferated. Cutting costs and using metrics to prove IT’s value naturally became the CIO’s top priorities. What happened to IT funding for Aydin Onur, then-divisional CIO at Philips Electronics, reflected what many others experienced: His spending in 2001 fell 42 percent short of what he’d budgeted for the year and then he had to cut another 25 percent on top of that for 2002. Airlines declared bankruptcy; unemployment was growing.

We’ve been digging ourselves out ever since. Today, optimism among CFOs (who aren’t known for being chipper anyway) has hit its lowest level since—you guessed it—2001. That’s according to a survey from Duke University and CFO magazine, which warns: “This pessimism will slow growth in earnings, capital spending and hiring.” Feels like old times, doesn’t it?

Today’s Word Is “Caution”

Technology spending is indeed expected to slow in 2008, says IDC (a sister company of CIO’s publisher), with spending rising 5.5 percent to 6 percent, compared to last year’s 6.9 percent. Forrester Research also predicts a slowdown in IT spending.

CIOs may be tempted to devise a backup budget for economic emergencies, but if that document becomes public (and it probably will), it’ll surely be misconstrued, says Mark McDonald, group vice president at Gartner. Don’t operate under a Plan A budget, then pull a tighter, smaller Plan B budget out of your back pocket when you’re told to cut, McDonald advises. “If the CFO finds out you knew a cheaper way to do it and you haven’t been doing it that way all along,” he says, “he feels like you’re stealing from him.”

Jeff Loeb, CIO at Wilsons Leather, a $321 million retailer, has factored economic uncertainty into his “very, very cautious” 2008 budget, he says.

Loeb is an economy buff; he trades foreign currencies as a hobby. Retailers, including Wilsons, with its 410 stores, reported mediocre 2007 holiday sales, reflecting consumer uncertainty, he says.

But the economy is only one worry for Loeb. Sales at Wilsons have dropped every year since 2002 and the company has lost money five of the last six years. IT hiring has been frozen since the middle of last year. Meanwhile, Wilsons gropes for a way to produce profits. Loeb will be able to fill slots on his 30-person staff that open as a result of turnover, but he won’t get any new reqs this year, he says.

Keeping staff flat is one technique for controlling IT costs. Money can also be found by renegotiating telecommunications contracts and consolidating servers. But there are other, simpler things you can do right now.

Battening Down the Hatches

Keep projects small. Start the year cautiously, advises Ryder’s Bott. Bite off small projects, or smaller parts of larger projects, in the first half of the year, while waiting to see how the economy goes. Bott’s holding off on most capital spending in early 2008. “If things look better, we would scale up in Q2,” he says.

Hire temps. IT leaders can avoid layoffs by hiring temporary contractors to expand and contract IT staff as business needs demand. Corning, a $5.2 billion manufacturer, for example, uses half contractors, half full-time IT staff, in part as a hedge against an economic slowdown.

Contract your project portfolio. Lop off the bottom third of the project portfolio, advises Gartner’s McDonald. Ask yourself whether you’ve ever finished all of the projects lined up for a given year, he says. The answer is likely no. “If they’re not going to get done anyway,” he says, “use them as a source of potential savings.” His recommendation is rather than letting go the people attached to that work, reassign them to the highest-priority projects and deliver those that much faster.

Preserving IT’s Value Add

One of the worst things a CIO can do during a downtime is simply cut costs. Instead, CIOs should work to tighten spending but bargain to keep some of the resulting savings for small projects, McDonald says. In essence, cut, but don’t give it all back.

“Say, ‘Give me $50 of the $100 I’m saving you and let me spend it to implement something for enterprise growth,'” McDonald says. “If you’re only worried about preserving your budget, you’re at serious risk. But if you prove you’re doing things more efficiently while supporting growth, you’re much more valuable to the organization and your IT group is much more relevant.”

Polishing the shine on IT’s perceived value to the business is, as we learned in previous lean years, critically important during hard times.

Sunbelt Rentals, a $1.5 billion construction equipment rental company, is budgeting now for its fiscal 2009, which begins in May. John Stadick, Sunbelt’s director of IT, says he’s “always looking” at how economic indicators such as new commercial and residential construction rates might affect his industry and his company. But more fruitful for IT planning, he says, are his frequent meetings with the company’s 11 operational vice presidents. He visits them in their regional field offices, where they broker rental deals with Sunbelt’s corporate customers.

“Budgeting meetings are about dollars and revenue contributions and concepts,” Stadick says. “But that doesn’t get you as much into their heads” as in-person meetings with business managers in their habitats. Out there, he can see what trips them up during the business day.

For example, on a trip to a Mississippi office, Stadick saw that phones installed as part of a then-new Cisco voice-over-IP (VoIP) system were gumming up the works because the system didn’t allow the managers answering calls to transfer them to sales agents’ cell phones. Consequently, the managers were writing messages to salespeople while customers who had walked into the store were left standing and waiting to be served.

This, it turned out, wasn’t a flaw in the technology; it was just a feature that hadn’t been turned on in the software.

“I was standing there and said, ‘Hey, what if you could do this?'” Stadick recalls. “You’re improving the efficiency of the guy standing behind the counter, helping the sales rep get business and helping the customers much quicker,” he says. “That’s something I wouldn’t have seen from my chair here.”

The takeaway? In hard times, the CIO has to extend himself a bit more to cultivate personal relationships with managers in other areas of the company. That will pay off for everyone. Yank the Vendor Reins

Hard times call for rigorous vendor management. LaVerne Council, Corporate VP and CIO of $61 billion Johnson & Johnson, has responded to her sense that economy will be contracting by pushing her key software vendors for enterprise contracts in order to reap economies of scale.

Before 2007, various vendors cut deals with separate Johnson & Johnson divisions and business units. No longer. Now nearly all Johnson & Johnson entities can get the benefits of volume pricing. So far, according to Council, that’s saved the company $150 million in 2007 and 2008. (Editor’s note: This story was updated on Jan. 28, 2008 to correct information in the previous two paragraphs. Read the correction.)

She also has instituted a business reinvestment strategy that delivered significant cost savings back to the business. “We all know that one of the objectives of IT is to create competitive opportunities and innovation. All those things require investment,” Council says. “The key is to create the dollars for investment so we’re not fighting for all the same dollars.”

Council considers understanding and controlling the vendor sales process so critical that the vice president of IT procurement reports to her rather than to the head of sourcing, as was the case before Johnson & Johnson hired Council as CIO in 2006. To make sure that a CIO gets what she pays for, she says, “the idea is to create the right relationships.” Budgets Up in Down Times?

Budget increases are not inconsistent with prudence in these hard times, argues Becky Blalock, CIO of Southern Co., a $14.4 billion Atlanta-based utility.

Blalock’s IT budget has increased 12 percent per year on average for the past three years. Right now it’s at $300 million, or 2.1 percent of revenue. But that doesn’t mean IT is bloated, she says. Some of the increase came from removing shadow technology spending from business units and applying it to corporate IT. “Business has transferred money to us to solve their issues,” she says.

Take the automated meter-reading system Southern is installing now. “If we put technology in, it’s going to cost money, but it will save us the cost of having someone going out to read meters every single month,” she says. Plus, the system can collect data at whatever intervals Southern wants, allowing for more detailed understanding of customers’ usage patterns. That, in turn, could lead to new, more profitable pricing plans, she says.

Blalock credits a good working relationship with Tom Fanning, Southern’s CFO, for this kind of forward-looking, “invest now” thinking about IT. Fanning is the company’s former CIO (which helps).

“We know that he understands our business and what technology is necessary,” Blalock says. “We’re lucky to have that kind of understanding.”

Ryder System’s IT budget has declined every year since 2001, but this year it’s going to go up, says CIO Bott.

Concerns about the economy drove Ryder to start budget planning two months earlier than usual (July instead of September) to give managers more time to debate priorities, he says. That meant weekly and sometimes daily meetings between IT and the managers of Ryder’s four business units: fleet management solutions, supply chain solutions, central support services and international.

Ryder is in IT investment mode and the budget for 2008 is increasing compared to 2007. Still, the figures are “conservative,” Bott says. Some projects have been put on hold. Hardware and telecommunications spending will continue to drop; hiring is frozen. His help desk has been outsourced offshore; telco spending is being tightly controlled and Ryder switched hosts for its midrange servers several years ago, getting a better deal. (He declined to name the vendors.) There’s little else left to cut, Bott says. The company must invest now in software and infrastructure to continue to see payoffs from IT, he says. “We’ve been fairly fiscally responsible to take out costs. Now it’s getting to the point where there’s not as many opportunities to do that,” he says.

“It’s not necessarily good for me that I’m the first CIO in the seven years to raise the IT budget,” he adds, chuckling.

As 2008 unfolds, we’ll see if Bott’s still amused.