CIOs Sure About Cost Cutting, Unsure of Future
July 26, 2004 Timothy Prickett Morgan
The past several years have been tough on IT organizations. Budgets and staff have been cut (or outsourced or offshored) and many systems and their applications have been gutted, all in an effort to do more IT with less money. Companies need to show profits, and cutting expenses is a preferred method for doing so in an economic downturn. But though they are pretty sure of their accomplishments, chief information officers are, according to a new study, unsure of what awaits them in the next few years.
London-based PA Consulting Group, an IT consulting firm with 3,000 employees that operates in 35 countries, recently surveyed 175 CIOs to gauge how well they did during the downturn and how well they expect to do in the next two years. The survey had a representative sample of companies, ranging from under $50 million to over $5 billion in annual revenues and located in North America, Europe, and other areas around the globe. The data is skewed toward larger organizations and European and Australasian organizations, but that probably has not affected the validity of the results by much. The sentiments in the report are very likely valid on a global basis, since most companies are facing the same issues these days.
Among the 175 CIOs polled, 45 percent said they cut their IT budgets significantly (more than 5 percent) in the past two years. Another 20 percent reported a negligible change in IT budget (less than a 5 percent reduction), while 30 percent reported an increase in IT spending in the past two years. (What the other 5 percent of respondents said is unclear, but it was very likely no change in budget.) Forty two percent of CIOs said they expect to have to cut budgets over the next two years, while 28 percent expect negligible change, and 26 percent expect to be able to boost their budgets. In effect, the heat is still on IT to do more with less, or at the very least to do a lot more with the same or slightly more.
This is not unexpected. The economy is not booming, and CEOs and presidents have not forgotten the excesses in IT spending and the promises they have been made about IT over the decades. That said, most of the CIOs polled said that the perception in their companies that they are delivering better value to the company had improved. We have to take the CIOs’ word for it, of course. The PA Consulting Group survey was based on responses from CIOs, not users or CEOs, who might have offered different opinions on the cost of IT and how well IT is delivering value. What can be honestly culled from the report is that, as far as CIOs can tell, they are being told that they are doing a better job.
One of the most interesting findings in the report makes intuitive sense, but it is nice to see it quantified nonetheless. PA Consulting Group found there is a mathematical correlation between having a strong business case for IT projects and the perception that a company is getting good value from IT investments. According to survey respondents, only 30 percent who said they have low confidence in the business cases said that they actually get better value out of their IT than they did two years ago. Among those who said that they make good business cases for IT, 65 percent said they are getting good value for IT. PA Consulting Group says that it is the link between a business initiative and its consequent IT projects that allows a company to extract value from those projects. This makes sense, of course, but the situation is probably more complex.
And, interestingly, only 47 percent of CIOs said that they saved money replacing legacy systems, and only 28 percent said they cut their budgets by implementing “best of breed” applications. However, 73 percent said that they saved money by renegotiating their IT services and support contracts. (The study did not quantify how much money each of these different initiatives saved. There may not be a big correlation between the amount of money saved and the prevalence of the tactic among CIOs.)
Getting value out of IT also means not chasing wildly in a lot of directions to try to make money in the first place. As many companies learned during the dot-com bubble, perfectly implementing an IT project, like a Web storefront or a B2B exchange, could not have lead anyone to believe that IT was bringing good value for money when no money was coming in for these fledgling businesses. Some 64 percent of CIOs surveyed strongly agreed with the statement that their IT projects are linked to a business need, but only 36 percent of CIOs strongly agreed that their companies make clear business cases for IT projects (using return-on-investment tools and other methodologies) before starting them.
This might be one of the reasons why CIOs seem a bit worried about the future. While CIOs report that they have made their systems less fragmented, have done a better job aligning business goals and IT projects, and have improved relationships with suppliers and partners, they seem less certain of the future and the ability of IT to generate money. About 39 percent of the CIOs polled said IT did not increase sales. Cutting costs, as they have learned, is only half of the IT job. Increasing revenue is the other shoe that has dropped, and this is much trickier.
Although the PA Consulting Group report doesn’t try to explain why CIOs are nervous, it isn’t hard to figure out. Just as the economy started to tank, X86 servers and Windows and Linux became commercial alternatives to more expensive platforms. Through application and server consolidation, coupled with a jump from expensive proprietary and Unix systems to Wintel and Lintel boxes, many companies have been able to cut costs. Add sophisticated system management programs to manage fewer physical servers, and you can cut more costs. Pare down legacy systems to the bare minimum, standardize as much as possible on the fewest number of third-party applications, and outsource or offshore some development projects, and you can cut a little further. This is how IT has steered the course from late 2000 to mid-2004. Having accomplished these tasks to cut costs, the obvious question is, now what are we going to do?
If you have cut IT expenses to the bone, cutting costs further is a real challenge. The only thing CIOs can do now is to make sure that as many IT projects are aimed at generating money as possible, and to shift the conversation from cost cutting to revenue generation. And given that the majority of IT projects fail to be completed as planned (if at all), this is a tough thing to promise. To put it bluntly, the cost cutting was the easy part; making money is the hard part. This is, of course, the lesson that all company departments have to learn.
The heat is not just still on; it appears to be getting hotter. “If CIOs are to live up to the higher level of confidence that they currently command, they need to do more than control their IT spend,” says David Elton, senior IT strategist at PA Consulting Group. “If they don’t work out how to define and deliver on the business case for new IT–and our survey says they haven’t–they risk another cycle of business disaffection.”
One of the things CIOs have to do is manage the risks from business changes and the ensuing disruptions to IT. Only 21 percent of CIOs said they have a good handle on this. And, given the uncertainty of the business climate right now, it stands to reason that CIOs would be jumpy. So are the CEOs, by the way. The two have to talk, and often, as they plot the course of the company.