Managing IT Costs in a Weakened Economy

By Allan Alter  |  Posted 09-11-2007

Managing IT Costs in a Weakened Economy

For several years, IT organizations have benefited from an expanding economy. Most companies have focused on boosting revenues instead of reducing costs and that has spared chief information officers from having to slash their budgets. To be sure, CIOs, like all prudent businesspeople, keep seeking ways to reduce the cost of doing business. But the pressure isn't what it was five years ago, when 80 percent of respondents to CIO Insight's October 2002 cost management study said they were under high pressure to cut costs. Reducing IT costs ranked a distant third in the list of IT management priorities in our January 2007 Future of IT survey.

Yet that could change in a hurry. The crisis in the real estate and mortgage markets, and its impact on the stock market, have increased the risk of an economic downturn. "The risks of recession are now greater than they've been any time since the period in the aftermath of 9/11," warns former Treasury Secretary Lawrence Summers, according to Bloomberg News.

And an economic slowdown would force CIOs to make painful choices about what IT projects, services, programs and staff to cut.

This month's timely cost management study is designed to be a guide to CIOs, no matter what direction the economic winds blow.

Our survey reveals the cost-related plans of 256 companies, broken out by revenues, success at managing costs, and business strategy.

The survey also reveals which technologies and cost management techniques result in the greatest savings. Negotiation, virtualization, standardization and consolidation, it turns out, are the most effective ways to significantly reduce costs; other practices (including layoffs) are much less likely to make a big difference to the bottom line.

Top 5 Ways To Cut IT Costs

Practice Savings Ratio*
Negotiate better practices from vendors 1.47
Use server, storage or desktop virtualization 1.26
Standardize technologies and vendor 1.22
Consolidate data centers, servers, stroage 1.17
Purchase IT products as part of a group 0.86
Expertise location and sharing 21

*"Savings ratio" = percentage of respondents who have received large savings through a cost-cutting practice divided by the percentage of respondents who received minimal savings.

Finding 1: CIOs Are Under Moderate Pressure to Cut Costs

Finding 2: The Ax Comes Down on Services

Finding 3: Teamwork + Negotiation + Standards = Savings

Finding 4: Virtualization and Consolidation Lower Costs...

Finding 5: Most IT Organizations Stay on Budget

Next page: CIOs Are Under Moderate Pressure to Cut Costs

Finding 1

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Finding 1
CIOs Are Under Moderate Pressure to Cut Costs (Slideshow)
But will it stay that way? When we conducted this survey, most companies were pursuing growth strategies. But If a credit crunch and worries about consumer spending lead to an economic slowdown, many companies could be forced to focus on cost cutting instead. That would create a much tougher environment for CIOs. Pressure to cut IT costs has been relatively mild, though it's higher at companies with more than $1 billion in revenues; only about a third of respondents say other executives believe the IT budget is bloated. The need to watch costs, of course, never goes away; even growth-oriented companies plan to reduce certain IT costs. But If companies once again put cost-cutting ahead of top-line growth, the pressure to reduce or curtail IT spending will ratchet up. Finding 2 reveals where cuts are being made now, and where they would be made if the economy goes south.

Next page: The Ax Comes Down on Services

Finding 2

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Finding 2
The Ax Comes Down on Services (Slideshow)
Staff expenses, but not staff, also are prime targets for cost cutting. One of the arguments for using service firms is that they can be dropped relatively easily when cuts become necessary. That's what respondents plan to do. New projects also are likely to land on the chopping block should the economy suffer. Other targets for 2007 are the usual suspects--labor, upgrades, hardware and software. Storage and security are the two items CIOs can't afford to sacrifice. We drilled down to see what respondents meant by "staff and labor," and found it usually does not mean layoffs; other staff expenses are more likely to be slashed. Still, when CFOs tell CIOs to start tightening belts, especially at larger companies, it's the IT staff that bears the brunt: more work, fewer perks and more fear of layoffs.

Next page: Teamwork + Negotiation + Standards = Savings

Finding 3

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Finding 3
Teamwork + Negotiation + Standards = Savings (Slideshow)
IT cost management is a cross-functional discipline. There are many ways to knock down costs, but not all are equally effective; companies aiming to generate the greatest savings should focus on negotiating better deals with vendors and standardizing on a few technology platforms and vendors. But the most striking finding is how important it is for IT organizations to work closely with other line organizations and put strong governance processes in place. Mechanisms and measurement tools such as service level agreements and chargebacks help. But IT organizations, by themselves, can't and shouldn't bear the entire burden of managing IT costs.

Next page: Virtualization and Consolidation Lower Costs...

Finding 4

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Finding 4
Virtualization and Consolidation Lower Costs... (Slideshow)
But cost management tools don't live up to expectations. Virtualization and consolidation have appeared as major trends in recent CIO Insight surveys because they do a great job reducing IT costs by helping companies save on hardware. Open source software, by comparison, is much less of a cost-buster, while outsourcing (as shown in other CIO Insight surveys) disappoints most companies that implement it in the hopes of reducing costs. Many of the software tools companies use to manage costs also prove disappointing: In general, they are as likely to meet expectations as not. This underscores our previous finding: Smart technology choices and effective collaboration between IT and business are what matter most when it comes to managing IT costs.

Next page: Most IT Organizations Stay on Budget

Finding 5

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Finding 5
Most IT Organizations Stay on Budget (Slideshow)
IT executives say they have kept costs in check. More than 80 percent of respondents say they meet or exceed their organization's IT cost-cutting goals or successfully manage IT costs. Skeptical? Look at the numbers: Just 14 percent say overall IT spending is over budget, and only 17 percent say projects have come in over budget. And most CXOs in other functions would be fairly satisfied with an "unnecessary spending" rate of 8 percent, although zero, of course, is preferable. Cost-cutting is part of IT's heritage; it's always been a motivator for implementing technology. Should the economy sour, the issue isn't whether CIOs know how to cut costs but whether the methods they've used successfully in the past are still appropriate in 2007.