IT Budgeting for Uncertain Times

By Brian P. Watson  |  Posted 09-18-2007

IT Budgeting for Uncertain Times

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.

Blending With the Business

Blending With the Business

Almost half our survey respondents say IT and business work together to guide their companies' cost management decisions. Yet when asked what techniques would best help their companies control costs more efficiently, 60 percent pointed to better collaboration between the two sides.

While the business-IT dynamic pays dividends, there's clearly room--and desire--for improvement. For many companies, collaboration between business and IT is a mandate from the very top. In early 2005, Countrywide president David Sambol told CIO Richard Jones to put a "laser focus" on expense management. "'I want you to really go after savings for the bottom line,'" Jones recalls Sambol saying. "Now, we basically have very aggressive goals each year that we track on a monthly basis as to how many millions of dollars we'll save the company over the year."

But it wasn't just IT: Countrywide, the largest U.S. mortgage lender, appointed David Smith, a former strategic planning executive with DHL Express and veteran of Bain & Company and Pricewaterhouse- Coopers, managing director charged with monitoring expenses across the company. Beyond that, the company established an IT finance and optimization unit to work with Jones and other department heads to identify opportunities where IT can drive cost savings and process improvements.

That group operates under Countrywide's version of Six Sigma Lean, dubbed FASTER (Flow, Analyze, Solve, Target, Execute, Review). The group also has introduced a project management schema around that process-improvement approach. "What that requires is tight collaboration with many organizations [within Countrywide]," says Michael Parkinson, executive vice president of IT finance and operations, who heads the optimization unit. "So when an opportunity shows itself, we pick subject matter experts, and they become part of the team."

For 2007, Jones believes the IT department will save $30 million in operating expenses across the company, through initiatives such as virtualization and storage optimization. On the books for 2008 is a virtual desktop rollout: Countrywide will move servers out of branches and deploy software from a central data center, decreasing the need for on-site maintenance and software disdistribution while improving data security and privacy and time to provision new local offices. Preliminary estimates are unquantified but point to several millions in cost savings, Jones says.

Following the collapse of the subprime mortgage industry this summer, Countrywide took out billions in credit to help stave off the impact. Jones says the company is adjusting its operations to meet the challenge, but declined to be more specific. But the results he's seen so far coincide with the findings of our research. More than eight in 10 survey respondents say their companies will meet strategic goals for 2007 based on current spending levels. Respondents also say their 2006 IT spending came in below budget (28 percent) or on budget (58 percent); few say they overspent.

At insurance giant AIG, cost management policies emanate from a CIO council, where top IT executives from each business unit meet with the global CIO and his deputies to set strategies around planning, architecture and emerging technologies.

A key objective of that council is to identify IT initiatives the company can undertake companywide, instead of unit by unit. If one division is looking to deploy a new technology, the council considers where else that technology could work within the company's various global insurance and investment divisions. That structure saves the costs they could incur by duplicating evaluation, planning or deployment of the same hardware or software tools across different units at different times, says Jim Klinck, a senior vice president and top deputy to AIG's CIO, Lou Amato. The "horizontal" view of the company's initiatives, inspired by CEO Martin Sullivan, "let units be responsive and fast, but make sure the things they're doing are in line with AIG's scale," Klinck says. "We end up finding ways to save money on IT initiatives and reduce costs and make more strategic investments."

Evolving Process

Evolving Process

Stanford's Mendelson is a strong proponent of a "continuous improvement" model for cost management. Back in 2001 and 2002, he says, IT departments were under pressure to drive down costs. But times have changed: The focus has shifted from cost-cutting to innovation, and constantly evaluating and quantifying expenditures and how they play into the company's overall strategy.

Despite current worries over economic conditions, IT is sitting pretty. "Especially in times like the present, IT is not in a crisis at all," Mendelson says. "They've accomplished substantial results since 2001 to 2002, so they can show the numbers. Most people came out of that experience saying, 'We can do it. We've already done it and done a good job.'" In those earlier troubled times, the pressure to cut costs led many CIOs to slash investments, staff and projects blindly, without considering the business implications, according to FedEx's Carter. "When you talk about these things, you talk about them across the key drivers you have to balance," he says. "Those things all work together."

Carter prefers the term "cost effectiveness" to "cost management." Managing costs--and making them more effective--means considering the people and capital the company invests in its business processes and how well they're following the courier service's core business principles of speed to market, innovation, providing levels of service and creating business alignment to ensure transparency and visibility around how dollars are being spent.

Incorporating those principles lets FedEx executives weigh more selectively whether the company is spending the appropriate amount on IT. But Carter believes companies continue to struggle with providing that level of transparency. "As simple as that sounds," he says, "I find that level of transparency to be one of the missing ingredients sometimes in seeing where the dollars go."

The process has clearly improved industrywide, with CIOs and their staffs looking more strategically at their investments and working with business units to meet operating needs. But measuring their success remains an obstacle.

According to our research, companies are shying intuitively, to be helpful in quantifying their cost management efforts. More than 40 percent of respondents say benchmarking against other companies provides minimal savings, for example, while slightly fewer say they don't or don't plan to employ that option. Similarly, nearly two in five respondents say post-investment ROI analysis yields minimal savings; almost 30 percent say they don't or don't plan to do ROI analysis.

For David Johns, CIO of Owens Corning, successful collaboration with business-line executives usually provides all the analysis his company needs. By communicating goals and results across departments and combining all the thinking, Johns says, the company gets a clear view of how, and how wisely, its IT dollars are being spent. For the building materials maker, cost management took on something of a new meaning in late 2001, when the company declared Chapter 11 bankruptcy protection due to liabilities from asbestos litigation stemming from products sold in the 1950s.

While Johns says the IT budget wasn't shaped by the move and hasn't changed much since, the Chapter 11 filing gave Owens Corning, which emerged from Chapter 11 last October, the impetus to reevaluate its spending companywide.

During that period, Johns and his business-line colleagues established better collaboration on strategy and spending by identifying how they wanted to operate, building the process and applying technology where appropriate. Today, that process is in full swing, with executives focused on identifying places where IT can help automate processes.

But like the majority of survey respondents, Johns says it's an evolving process with plenty of room for growth. "Collaboration and communication is just what it is--I don't think there are any specific secrets to it," he says. "We're still working at it and getting better at it, but we've come to see that collaboration and alignment is key to our success."