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Optimizing IT Spend in Economic Uncertainty

by Blake Sellers

During the fourth quarter of 2008, the U.S. economy experienced a series of economic alarms that are beyond the experience of virtually anyone in today's workforce. Not since the 1930's have we experienced a series of "systemic shocks" on this scale. The following are several indicators as of
December 31, 2008 that reflects these shocks.

Metric / Indicator	Value at 12/31/07	Value at 12/31/08	Change
DJIA	13,265	8,813	<4,452> or <33.6%>
S&P 500	1,468.36	903.25	<565.11> or <38.5%>
Unemployment Rate	5.0%	6.7%	1.7% or 34%
Consumer Confidence	90.6	38.0	<52.6> or <58.1%>

As all of this has occurred, we've just completed an election that will shortly transition the White House from the Republican Party to the Democratic Party for the first time in eight (8) years. During the past two months, hundreds of billions of dollars in the form of "rescue" or "bail-out" packages (depending on your point of view) have been approved or are being considered. In every case, the details about how the funds will be spent and how accountability will be ensured are murky at best.

Despite all of this uncertainty, CIOs must continue to make decisions regarding their level of spending / investment related to information technology (IT). This task is often challenging under the best of circumstances. It will be even more challenging in 2009 if the company's CEO and/or CFO are mandating budget reductions across the company.

Given this situation, we find it valuable to use a simple framework to analyze a company's investment in IT-related systems or projects. Given our experience over the years with dozens of both mid-market and large-market firms, we've found that breaking down the situation into the following key areas is a good way to start:

IT Governance
IT Maintenance / Operations
IT Projects

IT Governance

To optimize an organization's level of IT spend / investment, the CIO must begin with questions related to IT Governance which focuses on making trade-offs and setting priorities within IT considering risk, regulations, strategy, potential return etc. Why start with governance? We think there are several key reasons, including:

The level of spend on IT as a percentage of sales can vary dramatically between companies and industries
The mix of spend between maintenance / operations (e.g., "keeping the lights on") vs. new projects (e.g., investments in new capabilities) can vary dramatically

The overall cost of most IT projects (one time and total cost of ownership (TCO)) is often significantly greater than initial estimates

These are just a few of the reasons that effective IT Governance is so important. With this background, ask yourself the following IT Governance-related questions about your organization:

Can you describe your organization's IT Governance processes?
Is it clear how funding decisions are made?
Are control points clearly defined for IT and for your business customers?
Is the business responsible to deliver the benefits promised in the business case?
Is the IT function expected to be a low-cost commodity service, provide great support, or be an innovative thought leader?

If you asked your management team these questions, would you get the same answers? Unfortunately, for many organizations the answer is "no."

In today's business climate, investments in IT are simply too expensive and too important to "wing it" when it comes to governance. Software and technology are just the tip of the iceberg when one considers the potential impact of new systems on customers, suppliers, cost structure, delivery performance, and your own staff. So, if your organization is serious about optimizing your overall level of IT spending and investment, you must start with IT Governance.

IT Maintenance / Operations

In most companies, spending on maintenance and operations represents the "foundation" of an IT organization. Examples of the source of costs (for both third party vendors and internal personnel) that fall into this area include:

Desktop / laptop PCs and various mobile devices (e.g., Blackberry) and various mobile devices (e.g., Blackberry) ous mobile devices (e.g., Blackberry)
Applications / database / file / print servers and other shared devices (e.g., printers / copiers)
Security, authorizations and IT controls
Communications networks (LAN / WAN) and management of telecom contracts / vendors
Backup / recovery and DRP
Help desk operations
Management of software licenses / maintenance censes / maintenance

We have found that a thorough review of key expenditures with 3rd parties will often result in opportunities for immediate costs savings without impacting internal IT headcount. Examples include:

Review costs for telecom
Review costs and configurations for PCs, laptops and servers
Review costs for software license maintenance
Review costs for 3rd party contractors and consultants

For most companies however, the key to managing IT operations / maintenance costs starts with defining an appropriate set of service level agreements (SLAs). If your organization cannot adequately define the service levels it is willing to accept and pay for, it will most likely be challenging to optimize the appropriate level of spending. It's analogous to saying "I need a car," without defining whether you're talking about a Mercedes or a Yugo. From our experience, the process of truly defining the individual services and service levels that the IT function is expected to provide is a critical first step towards optimizing your level of spending on IT maintenance / operations.

IT Projects

The other major category of IT spend for most companies relates to projects. Optimizing an organization's level of IT investment is challenging since most projects tend to be somewhat "discretionary. Given this situation, is it truly feasible to define what the "optimal" level of investment should be?

In reality, the answer is probably "no" from a purely quantitative perspective - there are simply too many variables involved to find a true optimum. Nevertheless, there are a number of best practices that we recommend companies consider relative to IT projects. A few of the most important factors:

Implement strong IT Governance
Mandate business ownership and accountability for benefitship and accountability for benefitsy for benefits
Require the use of "project charters"
Define and utilize a consistent SDLC methodology
Utilize interim milestones to reduce risk (e.g. pre-defined stages / gates)
Apply key principles of portfolio management portfolio management

Summary

2009 is likely to include the greatest economic challenges and uncertainty in many decades. In this environment, most organizations are likely to be "conservative" with respect to managing both operating costs and capital investments. Therefore, spending and investments related to IT are almost certain to receive a high degree of visibility and scrutiny. Therefore, spending and investments related to IT are almost certain to receive a high degree of visibility and scrutiny.

However, perhaps more than any other functional area of an organization, IT exists to support all of the functions and processes within the company. As a result, the level of spending and investment related to IT can be highly discretionary. In addition, the "optimal" level of IT spending can vary greatly based on numerous factors, such as organizational strategy, industry, competition, and level of "maturity" in managing IT investments.

Given these realities, 2009 may be the perfect time for organizations to truly analyze and understand how much they're spending on IT. By establishing a strong approach to IT Governance and understanding the company's spending on operations and maintenance vs. projects, we believe that most organizations will maximize the likelihood that they are optimizing the level of spending and investment related to IT.