IT departments have enjoyed years of stable or growing budgets as they've expanded their prowess in driving corporate revenue growth and cost improvements since the economic downturn a half-decade ago. But CIOs got a loud wake-up call late this summer that conditions can change unexpectedly, as credit and mortgage woes combined with general uncertainty plunged global markets.
The sudden drop shined new light on corporate cost management practices, and raised some crucial questions: Will companies feel the ripple effect that often accompanies market downturns? Will businesses slash budgets amid the insecurity? And if so, what are the implications for CIOs?
There's no single recipe for successful cost management. Most CIOs say, however, that a proactive approach--enforcing budgetary discipline constantly-- beats a reactive one, where budgets are adjusted or slashed in response to a revenue decrease or market downturn.
To accomplish this, IT departments must collaborate closely with their companies' business lines, maintaining a continuing dialogue to plot strategy, planning and execution in terms of dollars and cents. "A significant mistake that's made is when someone gets on a bandwagon to reduce costs without understanding the connections between IT and the business," says Federal Express CIO Rob Carter.
But based on recent IT cost management performance, there may not be much to worry about. IT leaders who responded to CIO Insight's survey on cost management feel they're managing costs effectively; in fact, many believe their departments' success in recent years will shield them from cutbacks. Six of 10 respondents say their IT organizations aren't under more pressure than other departments to cut costs. And even more say their companies don't have a cost-cutting strategy for the current fiscal year.
"What happens is that most companies constantly look at [cost management], but the intensity with which they look at it really depends on the business cycle," says Haim Mendelson, a professor of operations, information and technology at Stanford University's Graduate School of Business. The CIO Insight survey "reflects the fact that currently in the business cycle, IT organizations are in continuous improvement mode as opposed to cost-cutting mode," he says.