CIO Debate: The economic downturn will affect IT sourcing choices

The economic downturn now affecting the UK is unlikely to have a major impact on overall IT spending by enterprises, but CIOs are exploring a broader range of IT sourcing options to help them better manage IT costs and also deliver cost efficiencies to business.

Enterprise IT spending is set to dip – but only marginally

It’s no surprise that there’s been a huge amount of industry debate over the past months regarding how overall IT budgets are likely to be affected by the economic downturn. On one hand, it’s clear that few executive boards are going to be in the mood to grant significant IT budget increases in the coming year. But on the other hand, it’s not necessarily the case that a tough business environment automatically means that CIOs will find their budgets squeezed until the pips squeak.

For example, where economic problems drive industry consolidation, mergers and acquisitions are notoriously dependent on IT development effort for their success. What’s more, there’s strong evidence that company board members are much more savvy today regarding the role that IT plays in keeping business moving, enabling growth, and driving efficiency than they were in previous recessions; and they’re actively pushing business agendas that they know depend on strategic use of IT. Many CIOs I speak to are currently spending a lot of their time helping to drive business transformation programmes that are focused on a blend of standardising and improving business processes, streamlining back office functions, improving customer knowledge, enabling multi-channel sales and marketing, and enabling more effective partner collaboration. All of these business goals have clear links to a desire for greater efficiency and flexibility – not at the level of IT systems, but at the level of the business model. Where these transformation programmes are underway (and there are a lot of them), this work isn’t going to be switched off. In fact, it’s likely that many efforts will be redoubled.

What I’ve gathered, from the small sample we obtained in our first CIO UK poll and also from my conversations with CIOs, is broadly in line with what I’m hearing from firms like Gartner and Forrester. Overall it’s likely that IT spending in enterprises will decrease slightly in 2009. Let’s be careful, though, how we react to this expectation. In better times, we might hear that IT spending is set to grow three per cent - but that might be set against an inflation figure of two per cent; in real terms, we’re only talking about a one per cent increase in this example. Likewise, it’s wise to remember that a modest decrease in IT spending will occur against a backdrop of near-zero inflation.

CIOs are looking to broaden their sourcing options, rather than radically rebalancing resources

So against this backdrop, what can we expect in terms of the ways that enterprises source their IT and IT people?

Of course, we already know that most large enterprises (our research suggests 70-80 per cent) already outsource a combination of network operations, desktop IT infrastructure management, and IT helpdesk management; and commission significant amounts of software development and integration work from third parties, too. We also know that a significant minority of large enterprises have longer-term “umbrella” software development outsourcing agreements in place, with many of those agreements being placed with offshore providers.

You might think that one big impact of the economic downturn would be a rush to send more software development, integration and legacy application management work offshore. But recent conversations I’ve been having with CIOs of enterprises across Europe, which back up the data from our first CIO UK poll, indicate strongly that this isn’t the case. Yes, many CIOs are considering increasing their use of outsourcing and offshoring as a response to expected downward budget pressure: but a similar number currently predict that they’ll retain their current in-house delivery / outsourced delivery balance, and some also predict that they’ll do more work in-house.

What comes through very clearly, though, is that when it comes to sourcing new IT capabilities, the changing economic conditions are driving CIOs to look much more aggressively for opportunities to use both open-source software technologies and third-party application hosting, delivery and management services (software-as-a-service / SaaS offerings, in other words). In our CIO UK poll, both these were strongly identified as areas where people expected to do increase their activity.

As well as turning increasingly to options for new projects like open-source technologies and SaaS that minimise capital expenditure, we see a couple of other important tactics in play.

Firstly, we expect CIOs to work hard to minimise fixed IT infrastructure costs: partly by pursuing today’s “business as usual”, use of server and storage virtualisation; and partly by deferring hardware refreshes and software upgrades. Secondly, although we don’t expect new projects to disappear, we do expect projects to be smaller, with quick delivery and payback timescales crucially important. Lastly, we expect more IT organisations to focus on projects which will help business cut its variable costs and boost productivity. Classic areas for consideration are those which help support interpersonal collaboration (improving efficiency, reducing the need for travel, and so on) and those which drive business process standardisation and automation (particularly in the areas of customer support, sales, marketing and product/service fulfilment).

Maximising opportunities in the current environment

It might be tempting to go all-out to reduce IT spending - but be careful. Responding to pressure by agreeing to cut IT spending is honourable, but if you do no more, then the inevitable result is that IT budgets will be trimmed accordingly. The more you cut back, the more those cuts will be accepted as the "new IT cost baseline" by the business. Next year, you can bet that budget negotiations will start at a lower level.
In the current economic environment it's still far better to commit to reducing spending, but at the same time provide a plan that shows how a proportion of the savings could be re-invested in IT capabilities to drive the business forward. The trick is that in order to do make a convincing fist of this, you have to be able to clearly articulate the ways in which IT, effectively applied, can add value to your business in the context of its strategies and goals. In other words: the closer you can get to your business leader peers, and the more you can speak their language, the better the position you’ll be in.

CIOs respond

Enterprise IT spending is set to dip – but only marginally

Tania Howarth, CIO and HR Director for frozen foods maker Birds Eye Iglo

“I think businesses generally will make drastic cuts. In recessionary times people follow very predicatable patters of behaviour, which are: how can we cut costs, protect the business and build contingencies. CIOs will be asked to do their share.

“What we have to be aware of is that there is an opportunity to do both cost cutting and find ways of running the technology at cheaper costs.

Duncan Scott, CIO at property management company DTZ

Related:

“Well I think it is already happening, in our organisation. We are already cutting back on heads and being very prudent about the spend that we make.. “It’s not a case of we are coming into a recession, in our industry we are already in a recession.

“You are going to have to be ruthless with your staff. And the fact is that people do cost a lot of money in the UK. Look at to move people off-shore, but also go back to your partners and make them sweat a bit. Look at the way the retail giants manage their partners, look at Tesco. We’ve all got to get tougher and the world is moving into that mindset and if you are not up for that fight, then maybe you are not in the right place.
“The trick is to push back on the business and say we can lower costs, but your services will be affected, so let’s negotiate on that basis.”

CIOs are looking to broaden their sourcing options, rather than radically rebalancing resources

Tania Howarth, CIO and HR Director for frozen foods maker Birds Eye Iglo

“We have to support the other functions that need make efficiency cuts. So if I can help another function, then maybe I need to invest a little bit, or redeploy people.

“CIOs that have outsourced already may potentially look to in-source, as a way of getting some costs benefit or change their vendors, or their sourcing differently. Those that have not outsourced may well go down that path as it is a way of spreading costs so they get a short term benefit.”

Duncan Scott, CIO at property management company DTZ

“We are actively looking at outsourcing as everyone is. I don’t think we are doing more or less. There is a danger that you throw the baby out with the bath water and I think in-sourcing may become more attractive, so it’s business as usual in terms of outsourcing, I don’t think there is any new paradigm there.

“We are looking at in-sourcing some of the things that might have automatically been outsourced. Some things will always be in-sourced, such as security will be looked at on a case by case basis and you’ve got to get the bang for your buck.

“We are very interested in software-as-a-service (SaaS) for a slightly peculiar reason, that we are behind the curve in terms of application development as an industry. So for us, coming into the market, we don’t have the legacy issues that a lot of organisations have, so I think SaaS is the future and we will investigate that more and more.”

“We are in the middle of a virtualisation project and it will save us money on hosting, it is as simple as that.”

Will open source be considered to reduce costs?

Tania Howarth, CIO and HR Director for frozen foods maker Birds Eye Iglo

“I don’t see that the recession will make open source more or less appealing.”

Duncan Scott, CIO at property management company DTZ

“I’m not such an advocate. I’ve seen too many projects where open source purports to be very cost effective and it ends up costing a lot of money and all there’s all the peripheral costs around the core non-investments.”

Be part of the Debate

This article draws in part on the first of a series of monthly CIO UK polls carried out in conjunction with UK-based analyst firm MWD.
Our next poll is designed to find out what CIOs are doing in the area of collaboration and social software: your input is highly valuable. We’d very much appreciate your thoughts – just go to http://cio.mwdadvisors.com/polls/. The results of the poll will inform our second article, which will appear in early January 2009.
If you would like to contribute your thoughts to the above discussion and you are a CIO in the UK or Europe, please join the CIO.co.uk group on LinkedIn or contact the Editor, Mark Chillingworth via LinkedIn.