by Laurie M. Orlov

Your IT Budget: When Cutting Costs, Look to the Future

Jun 10, 20086 mins

If your IT budget must be cut, make sure you preserve your organization's muscle by retaining key positions and consulting with business users about project priorities.

The economic slump has generated pain all around. If it hasn’t kicked in for your organization, at some point it will. As we swing into the second half of the year, CIOs are scanning for opportunities to prune expenses. For those who anticipate being asked to cut their IT budgets between now and the end of the year, it’s a good time to reflect on our past behavior.

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The last time the economy soured, CIOs responded as if the sky were falling. In the ensuing panic, many CIOs cut too much of the wrong things. This time, you need to plan ahead to preserve your organization’s ability to grow again when needed.

Then: The Destruction of IT Competency

Think back to the dotcom boom. Remember the Y2K spending hangovers, bloated organizations and data centers everywhere crowded with redundant equipment? IT shops amassed unused software and stacks of yet-to-be-read service and maintenance contracts. Pioneering infrastructure outsourcing deals designed to “save money” were launched with nary a baseline cost analysis. Travel was unconstrained, and everyone’s stock was up.

When the bubble burst, IT organizations were sitting ducks. Spending was justifiably slashed—but without contingencies and little strategic thought about what would happen once growth began again. Vendors went out of business, venture capitalists stopped funding new ideas and IT R&D teams were disbanded—putting a damper on innovation. Meanwhile, service levels often plunged and enterprise know-how was pushed out the door without warning, as Just-Do-It outsourcing accelerated.

Finally, as a nasty side effect, IT lost its charm as a career for young people just as the average age in many organizations began to climb. In one large defense industry IT organization I am familiar with, the average of IT employees is older than 50. In a large manufacturing company, only the senior IT staffers are employees; instead, IT careers with the company must be launched and developed inside supplier organizations.

Now: Preserve the Future of IT

In this next wave of cutbacks, we can do better—now that we are armed with experience and hindsight. We know which cuts we made last time—like eliminating investment in R&D—weakened IT’s ability to respond when business picked up and CIOs were expected to contribute to innovation.

Let’s assume your organization is doing all the right stuff—consolidating servers, data centers, vendor licenses and maintenance agreements; deferring new purchases and outsourcing commodity services under contracts that really do save money.

Let’s also assume that you’ve offered early-retirement incentives for employees who are eligible, that you’ve terminated any contractor roles you can live without and that you’ve deferred filling vacant staff openings. You know that you’re doing all the right tactical things. So what shouldn’t you cut and where else should you look?

1. Protect hard-to-fill roles. Architects, database administrators, relationship managers, security specialists and business analysts: It took you a long time to find them—and even longer for them to understand your tech environment, business constituents and enterprise strategies. How much time has it taken them to identify those investments your company sorely needs but no business leader or steering committee has thought to request? These folks know what’s needed next year and beyond, though their value isn’t always obvious to the CFO.

Make the case for keeping them around by clarifying what will happen if you don’t retain their skills in-house. Without that architect, future M&A synergies may take forever to crystallize. Without a really senior person acting as a demand manager, helping business units prioritize projects, those business units may get from IT just what they asked for—but not what they need. If the IT budget is a top target for cuts, maybe, as a last resort, you can shift business analysts and demand managers (though probably not the architects) to more flexible business budgets.

2. Bring on the interns. Interns are inexpensive. And one way or the other, young people represent the future of your business, your IT organization and the IT industry. Even if they don’t join your company full-time, interns who work for you will end up referring new employees, customers, vendors and service providers.

To tap into the supply of interns, cultivate a relationship with business and technical faculty at your local college. Each semester, bring one of their top students on board to learn your business, soliciting their observations and ideas. You may find talent you can’t do without (if you don’t, you should help the faculty shape a program that does deliver what your business demands). Keep in touch with your interns, and when they graduate, help them find jobs in your firm or with a peer at another company.

Meanwhile, take advantage of this year’s crop of graduates. As the economy softens, they’re finding it tough to line up jobs. Persuade your boss to let you hire a few of the brightest before they give up and enroll in business school. It’s better for them to gain a few years of work experience from your organization as context for an MBA—and better for you to be able to cultivate a future with them so they return to you after they get that graduate degree.

3. Solicit ideas from your staff and peers. Your staff knows what’s really going on in the nether reaches of the firm: which organizations struggle under laborious processes, which business units are hugging their tiny data centers to their chests, or how teleconferences could replace costly (and often miserable) travel. Collect the ideas using an online tool, such as a wiki or discussion forum, so you can save, share and respond to their ideas.

Tap ideas from your business constituents, too. They know in their hearts what they truly need now and what can be put off until the next quarter or next year. Ask their advice on how you can help them sustain the company while saving money. Once these conversations begin, you and your staff can suggest ways to ways to save space, energy, time, maintenance, devices and even paper. While you’re with them, take the opportunity also to answer their questions about IT spending that they may not understand.

Why You’ll Succeed

You’re probably wondering whether this approach can work if IT is such a compelling cost-reduction target. I think it can because this time around, CIOs are better communicators. They’ve had to be to recover from the last round of cutbacks.

CIOs today know how to make a business case, and how to explain IT’s impact on profit and revenue. Today’s IT executive is also experienced at explaining the value of strategic IT positions as well as the need for low-cost, high-potential new hires. He or she is well-positioned and skilled enough to listen to staff and business peers. CIOs who lived through the last poorly managed slashing and burning of IT are wiser about shaping the future that their organization needs.

Laurie M. Orlov does research and consulting on business and technology strategy. She is a former vice president and principal analyst at Forrester Research.