Preparing for the Economic DownturnBy Tony Kontzer | Posted 02-07-2008
Preparing for the Economic Downturn
Jerry Batt twice had the misfortune to find himself in exactly the wrong place at the wrong time. Batt was CIO at Sprint PCS when the 2001 dot-com crash devastated the wireless carrier world. Now, Batt is once again at economic ground zero, as CIO for the $14.3 billion-a-year builder Pulte Homes just when the subprime mortgage crisis--and the resultant drying up of the real estate market--is a massive contributor to the nation's fiscal doldrums.
"When you're in the industry that tanks the hardest, the mood swings are pretty severe," Batt told CIO Insight. "In both cases, I went from growing at 30 percent a year to cutting at the same rate."Batt learned a valuable lesson from the experience: Always be prepared for the worst. As a result, he keeps cuts of 15 percent to 20 percent in mind so he can make quick decisions when a downturn comes. These cuts are typically in areas such as vendor contracts or other planned IT investments. The main objective is to avoid having to lay off people, which is the typical knee-jerk reaction of the unprepared. He's also ready to explain the expected impact of those cuts to the company's business leaders.
Indeed, as the U.S. economy slows and a recession threatens, CIOs are bracing themselves to make tough decisions. CIO Insight interviewed a number of CIOs who weathered the last recession to see what lessons they learned and how they'd apply those lessons today.
We discovered that, with a little preparation and by resisting the urge to overreact, their strategies can not only be simplified, but converted into opportunities once the economic tide turns again. It's more than just cutting costs--it's developing new ways of thinking about IT and the IT organization, even if that means spending more up front to save more on the back end.
Sometimes a weakening economy provides the catalyst, the motivation to act decisively. "Economic pressure provides a great opportunity to focus on transforming IT," says Frank Modruson, CIO of $19.7 billion-a-year consultancy Accenture.
A 20-year Accenture veteran, Modruson took over as the business advisory consultant's CIO in the midst of the last recession, and that experience spurred him to take decisive action when the economy began to rebound. Most significantly, because IT plays such an important role in how the company services its customers, he focused on driving down his organization's operating budget so it could continue to invest in modernizing and streamlining its technology portfolio.
For example, he had the IT staff replace 450 financial applications used by Accenture offices around the world with a single instance of SAP's enterprise resource planning (ERP) suite. While the purchase of the new software required a substantial upfront investment, the payoff is a bundle of savings on maintenance, integration and a host of other complexity-related costs tied to the previous approach. Today, the company's IT spend is one-half of what it was in 2001, and the ERP consolidation has contributed to that savings.
Preparing for the Economic Downturn
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Similarly, Accenture had scattered billing systems around the world, but when the company's European operation consolidated on one e-billing system, Modruson decided to roll it out globally. Two years later, that system was supplanted during the SAP deployment, but Modruson has no regrets. It was a step toward where he wanted Accenture to be, and because it was software the company already had, it paid for itself in a year, resulting in significant bottom-line benefits the second year.
These and other changes--such as consolidating on one standard desktop and one system each for recruiting and scheduling--have helped make Accenture's IT department a much leaner machine. While Accenture's global employee headcount has grown to 175,000 from 75,000 since he became CIO, Modruson has reduced the IT budget by 20 percent during that time. "I'm supporting more than two times as many people for less money," he says.
Richard Fishburn, senior VP and CIO for Corning, also is able to breathe easier today because of actions he took in the wake of the 2001 recession. When that slowdown hit, Corning, a $5.17 billion-a-year maker of specialty glass and ceramic components for high-tech products, had a robust fiber-optics manufacturing business. But the dot-com bust hit the networking industry hardest, and Corning had to cut fiber-optics production from five fully operational plants to one running at half-capacity.
The company laid off up to 90 percent of the workers at some plants, as well as 650 of its then 1,200 IT employees. "I had worked in cyclical industries before," Fishburn says, "but when you get that degree of severity, you find yourself in a position where you say, 'I never want to have to do that again.'"
His response was to tweak the IT organization's operating model during the subsequent years of economic growth. For instance, he built flexibility into the operating structure by rebuilding his team with contractors rather than hiring full-time staff. By increasing contracted IT service delivery personnel to half from 17 percent, Fishburn greatly reduced the likelihood of layoffs during the next downturn.
He also created a more transparent link between IT and business value, in large part by focusing on short-term needs, such as tweaks to plant floor systems, and breaking larger projects, such as supply chain system upgrades, into more manageable chunks, such as proof of concepts and design. That helped business managers get behind IT because they could see clear results from IT investments. IT learned to make quick decisions without having to worry about mortgaging the company's future.
The payoff of this rethinking of IT operations has become clear as the economy has downshifted. "We're more confident heading into a downturn," Fishburn says. "In most situations, we can work through things much easier than [we could] five years ago."
Such wide-reaching efforts aren't for everyone, though. Some CIOs choose to take a hard look at what they have and make the most of it, rather than rethinking application portfolios or staffing strategies while trying to shield their companies from the effects of a recession.
When the recession hit in 2001, Sue Powers was CIO for Worldspan, which handled travel reservations for airlines, hotels and car rental companies. The downturn convinced Powers, now CIO of Travelport GDS, which acquired Worldspan a couple of years ago, that she needed to ask more of everyone--managers, employees and vendors. That had a particularly large impact on the corporate culture of IT and the terms under which she acquired products and services.
Powers called on her front-line managers to do a better job documenting performance. This helps her identify the strongest and weakest performers as the current slowdown evolves so Worldspan can retain the most valuable people should cuts become necessary.
Powers also asked Worldspan vendors to change the way the travel services company pays for products and services. For example, she didn't want to have excess capacity in the form of software licenses that wouldn't allow her to scale back the number of users when necessary. Powers wanted to pay only for software licenses the company used, while having the ability to ramp up when things improved.
Powers also began turning to on-demand applications where appropriate. She also started replacing some site licenses with per-seat or per-user deals.
She found vendors willing to make such changes because of the potential to do more business with the company when the economy regained strength. She rewarded cooperative vendors by doing more business with them the past few years, and has been able to roll back her capacity costs because of the flexible pricing she negotiated.
For Pulte Homes CIO Batt, a little bit of every approach is in order. He's been looking to cut costs on everything from software maintenance and network capacity to mobile phone plans and contractor agreements.
Batt is well aware that his having been in the industry--telecom--most affected by the previous downturn probably gave him an advantage as the subprime mortgage crisis took shape. If nothing else, it helped him recognize the early signs that something was amiss. "Any reasonable observer should have seen both [downturns] coming," he says. "But I know I was much better at predicting the second one after experiencing the first."
While Batt and other CIOs agree that the best time to plan for a downturn is during an upturn, they say it's never the wrong time to make sound business decisions. Too often, economic lows cause otherwise rational business leaders to make knee-jerk reactions.
By adhering to tried-and-true business principles now, CIOs will make quicker, less painful decisions when the economy contracts, and will help their companies better capitalize on the inevitable uptick.
5 Steps to Survive a Slide
5 Steps to Survive a Slide
Continuity in the CIO post clearly provides an edge for companies attempting to survive economic cycles. But sometimes it takes a fresh set of eyes to see opportunities during difficult times. That's where an experiment at investment management firm The Vanguard Group has paid off.
In 2006, Vanguard shook things up by having its then CIO Tim Buckley switch places with Paul Heller, who ran the company's retail business. Heller, who previously had run the systems integration organization, says his having been through a recession as a business executive helped him recognize potential advantages of the current downturn. Heller has identified five practices for IT leaders to strengthen their organizations when the economy is slow:
1. Reach out to key partners. There's no better time to connect with partners--internal users and external customers--to find out what's working and what's not. People are in problem-solving mode, so they're likely to turn over every rock searching for ways to improve processes and save money.
2. Look for silver linings. As the economy worsens, business leaders suddenly take interest in items that typically get dismissed as being IT-oriented. Server virtualization, automated testing tools and establishment of enterprise-level data, for instance, have moved front and center.
3. Focus on execution. It's a great time to "take friction out of the system," says Vanguard's Heller, who suggests paying close attention to a company's Web site performance to ensure high availability and efficiency of internal systems. "We're a virtual business, so we come to a standstill if any of our Web sites aren't running perfectly," he says.
4. Guard against complacency. Rather than letting the doldrums take the edge off an IT organization, use it to drive paranoia--in a good way. Establish momentum around improving privacy, compliance and other high-risk areas, for example.
5. Communicate more than ever. People tend to lose their perspective during economic slides, so it's important for the CIO to be a voice of reason. Remind staff not to discard fundamentally sound strategies just because things are down, Heller says.