Cost Cutting: When Less Equals Less

Unless your IT department is part of a U.S. government agency or a Major League Baseball team, there's a good chance you've had a close encounter with an ax-wielding budget officer in the past 18 months.

Rusty Weston, Contributor

August 30, 2002

5 Min Read

Unless your IT department is part of a U.S. government agency or a Major League Baseball team, there's a good chance you've had a close encounter with an ax-wielding budget officer in the past 18 months. In better years, you might have joked around with this person, asked about the kids, the vacation, or the prospect of the Mets returning to respectability. But now it's budget review time, and niceties aren't the same old commodity.

The research study for Optimize magazine that we're highlighting this week shows that four out of five business-technology managers have implemented cost-cutting measures in the past 18 months. What it doesn't show is how many times managers have had to go hat in hand to higher-ups just to keep last year's resources--and last year's projects--from being julienned, pickled, or french-fried.

CUTBACKS HAPPENINGOf course, IT managers aren't the only ones defending their budget allocations. The division managers you support are justifying their sales forecasts, too. It's been a tough couple of years and nearly everyone is bruised, especially vendors of services and products. The irony is that budget cutting hasn't always spurred managers to reduce performance expectations; sometimes investing less yields less.

Take, for example, the semiannual headache of negotiating software site licenses. At some point, you begin to test the limits of your negotiating skills. The vendors can only shave off so much margin. What can you do? The trade-off is unthinkable--telling users they'll have to share software seats.

But it often gets worse. Most managers have opted to trim the biggest part of the budget pie, labor costs, by instituting hiring freezes or, in three out of five cases, reducing head count (a painful expression, but an even worse experience). Only 29% of the cost-cutters have frozen their IT projects, preferring instead to scale back the size of projects, reduce administrative overhead, or outsource work when possible. Perhaps the most interesting question in the Optimize study concerned management's regrets about what they wish they'd done in the past 18 months. Three out of five respondents said they would have preferred to focus on projects with the most immediate impact or payback.

Yet IT vets will tell you: It's not as if all IT budget cuts translate into better bottom-line results.

Still, common sense suggests that when the budget officer stops by your office just to shoot the breeze on a late summer afternoon, it's undoubtedly better just to talk about baseball or taxes rather than what the budget crunch is doing to your well-laid project plans. Or what it means for the enterprise next year.

What do you say when the budget ax swings in your direction? Let us know at the address below.

Rusty Weston
Editor, InformationWeek Research
[email protected]

Proving ObscureCompanies continue to tinker with their business processes as a way to improve operating efficiencies. In fact, four in five of the 300 business-technology executives interviewed in InformationWeek Research's Evolving IT Priorities: 3Q 2002 report say implementing systems that boost business value is a priority at their companies. For some, this means cost-cutting for technology expenses. Yet knowing whether this measure is proving effective

is taking time. While 78 of the 100 companies interviewed by Optimize magazine report IT cost-cutting in the last 18 months, almost one-third say it's still too early to tell whether those cuts have improved the focus of their IT operations.

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Questionable ActionOnly over time can the full consequences of a decision be completely understood. Choices that seem stellar at first don't always pan out over the long term. While putting a freeze on hiring technology staff has proven popular in this down economy as a way of controlling expenses, the merit of this practice is coming into question. Sixty-seven percent of the 78 companies that cut costs in the last 18 months did so by putting a hold on IT hires, but only 29% of those companies say in retrospect that it was beneficial to IT operations.

Truth Be ToldIt's said that you learn more from your mistakes than your successes. Yet admitting to failure is hard to do. For some executives who thought IT cost cutting would improve their companies' bottom line, disappointment looms. It might seem logical that cost savings would improve a company's revenue flow, but that doesn't seem to be the case. For almost three in five sites that cut IT expenses in the last 18 months, a dollar benefit has yet to materialize.

Steady StateWhen times get tough, difficult decisions can't be avoided. While some executives continue to give the green light to certain IT initiatives despite a slowing in company revenue, others are shelving IT projects or canceling them altogether. Yet not all decisions fluctuate between stop and go. Some executives are staying the course. Although no ground is gained, no ground is lost either, offering the best vantage point to push off from when conditions do improve. About one-third of the 100 business-technology professionals interviewed in June says they're holding operating costs steady.

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