by Ian S. Hayes

How quickly times change. Just yesterday, it seems like technology ruled the economy and IT budgets could go nowhere but up. While we can hope the current economic downturn will be short-lived, it is forcing many IT organizations to do something they haven't had to do in a long time -- cut budgets and spending.

A first quarter 2001 survey published by TechRepublic found that the majority of responding IT organizations had already cut previously approved capital expenditure budgets. Moreover, 85% reported they would review the need for more significant cuts over the next 6 months.

When it comes to making cuts, the choices are never appealing. Important projects have to be deferred, ramped down or cancelled, hiring must be frozen, consultants released and, in the worse case, staff laid off. Ironically, these cuts have the side effect of exacerbating an already depressed economy.

IT Budget Challenges

While few can argue about the long-term benefits IT delivers, when economic pressures force short-term thinking, IT feels the impact of corporate budget cuts and deferrals in capital spending. As an overhead function with no means of generating its own revenues, IT's financial well-being is entirely dependent on the well-being of its internal customers. When growth slows, sales are down or Wall Street increases the pressure on earnings, IT budgets face reductions. Unfortunately, as every CIO knows, the inherent structure of an IT budgets severely limits its flexibility in adapting to budget shortfalls. IT has never had the luxury of owning budgetary slush funds that can be painlessly cut in times of need.

As shown in Figure 1, few of the categories found in a typical IT budget are truly discretionary. Fixed costs, items such as hardware and software leases, long-term maintenance contracts and office expenses, are effectively untouchable when considering short-term budget reductions. Production Support, which includes operations and application maintenance, is required to keep the business running. While introducing additional efficiencies may provide some cost reduction, most of the activities in this category are non-discretionary. Development project budgets are partially discretionary, as lower priority efforts can be deferred or cancelled, however, companies are loath to terminate or delay projects that can provide new sources of revenue or reduce operating expenses. Planned Upgrades, such as migrations to newer hardware or a later version of Microsoft Windows, may be deferrable in situations where the current environment remains functional, but more often than not, they are mandated by pressing business or technical needs. Growth, in terms of New Hires and New Technologies, is discretionary as long as it is not needed to support subsequent phases of a critical development effort. Finally, Miscellaneous items such as travel, conference attendance and education are discretionary in hard times, however, they represent a very small percentage of the average IT budget.

Figure 1 - The IT Budget Dilemma

Fixed and non-discretionary activities can account for 80% or more of an overall IT budget. As a result, the CEO's request to chop 10% out of the overall IT budget means the entire reduction must be taken out of the remaining 20% of the budget, forcing discretionary activities to be cut in half. Within this discretionary category, aside from deferring hardware expenditures, the bulk of hard dollar savings must be gained from personnel reductions.

Four Budget Scenarios

When facing budget constraints, the options available to IT managers depend heavily on the level of cost pressures they face. Figure 2 shows four possible budget scenarios. Normal Growth applies to IT organizations lucky enough not to be affected by the current slowdown. Slow Growth applies to IT organizations facing modest cuts in projected growth rather than core activities. These organizations can cope primarily through reductions in discretionary activities. Status Quo refers to those organizations whose budgets are frozen at last year's levels. Since salaries and many other costs rise year over year, by sticking to last year's budget level, these IT organizations face an effective budget cut. In addition to eliminating the growth portions of their budgets, these organizations need to find additional reductions to cover cost increases in non-discretionary areas. IT organizations facing the need to Cut budgets below previous levels face the toughest challenge. Aside from reducing or even eliminating discretionary activities, they may also need to reduce non-discretionary activities.

Figure 2 - Four Possible Scenarios

As they prepare their budgets, IT executives at Cut and Status Quo organizations need to think long and hard about the business effects of their decisions. Many short-term cuts have long-term consequences to their corporation. Staff reductions can be particularly painful both in terms of morale and the difficulties of hiring replacements when the economy improves. Deferring the move to a more advanced hardware platform or cutting the exploration of a new technology may seriously impede the organization's ability to respond to future competitive pressures. Slowing new development efforts delays the business benefits of those applications. And, by foregoing or reducing capital expenditures, IT executives miss the opportunity to take advantage of attractive terms, such as rock-bottom PC prices, that crop up during tight economic times.

Techniques for Cutting Costs

Gaining cost savings is not rocket science; it is a matter of reducing workload, using resources more effectively and releasing freed resources. By finding ways to free resources from non-discretionary and semi-discretionary activities, Status Quo and Slow Growth organizations can continue to support discretionary activities that would otherwise need to be reduced or eliminated. Organizations that have to cut their IT budgets will need to release redundant resources to capture real dollar savings.

• Reduce workload

This step is obvious -- if we do less work we need fewer hardware, software and people resources. During a period of economic prosperity, expansive organizations accumulate marginally beneficial systems and activities. The trick in a downturn is to identify and retain the most value-adding work, but eliminate extraneous and low value tasks. Reducing workloads in Production Support frees otherwise dedicated resources for other tasks.

Areas to focus on include:

• Eliminating systems and services that do not provide sufficient business value to justify their support costs.
• Reducing internal service levels; instant response to problems is expensive and not always essential.
• Ensuring available resources are devoted to the highest value assignments by requiring better justifications for work requests and eliminating "under the table" work. "Under the table" work, those little efforts that are done as favors, consume a surprisingly high level of resources in most IT organizations.
• Improving "first time" quality on deliverables to reduce effort spent on reworks.
• Consolidating applications, platforms and overlapping functions to reduce support and staffing overhead.

• Increase efficiency

Once the workload is controlled, use efficiency improvements to reduce the quantity of resources needed to accomplish the remaining work. Prudent investments in training, tools and processes will quickly generate savings exceeding their initial costs. Classic methods for increasing efficiency include:

• Enhancing personal productivity through training and skills development.
• Providing incentives to reward efficiency.
• Installing additional laborsaving software tools.
• Implementing and enforcing the use of more efficient IT processes.

• Lower resource costs

The previous steps lay the foundation for cost savings. The actual savings are gained through one or more of the following methods:

• Outsourcing

Consider outsourcing tasks that can be performed more effectively by an outside organization specializing in that activity. A combination of best practices and economies of scale often enables "best in breed" outsourcers to offer the same level of service for less cost. If staff assumption is part of the engagement, the outsourcer can often transfer redundant personnel to other assignments.

• Downsizing

Downsizing includes canceling unnecessary software licenses, unloading extra hardware and releasing newly freed staff members. Auditing and reducing software licenses and maintenance agreements alone can save surprisingly large amounts of money.

• Downscaling

Methodologies and efficiency improvements often allow a given task to be performed by more junior, and therefore cheaper, personnel. Also, IT organizations often retain staff members performing at levels beneath their current pay scales -- is that individual a five-year C programmer or five times a one-year C programmer? A typical method for reducing resource costs is to release consultants by transferring their tasks to internal employees. While this approach sometimes has merit, despite higher hourly charges, consultants can be as or more cost effective than internal staff when productivity and hidden costs are considered.

• Relocating

Moving operations outside of major metropolitan areas can reduce facility costs and staff salaries. For example, outsourcers rely on offsite development centers in less expensive onshore, nearshore or offshore regions to reduce staffing costs.

Techniques for Cutting Costs

Hopefully, the economic downturn will be short-lived and your IT organization will not face significant budget cuts. But if cuts are required, a little planning will go a long way to reducing the pain of those cuts and ensuring that your company will not be crippled when the economy turns around. Making prudent reductions early on may alleviate the need to make more drastic cuts under pressure later.