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The Pitfalls of IT Cost Cutting

Companies that choose to cut 25% or more of their IT budgets risk experiencing "blow-back costs" that can often reduce their realized cost-savings to less than one third of the initial cut

The statistics are depressing—2009 budgets are only growing ~1.5% (in nominal terms), 47% of companies surveyed have introduced hiring freezes and 24% have increased hurdle rates for new projects. In addition, 55% of CIOs indicate plans to make cost-cuts of 10% or more, with 25% indicating cuts will top 20% according to a survey conducted by the CIO Executive Board of more than 50 CIOs at leading organizations throughout the U.S.

Most CIOs intuitively understand when cuts begin to undermine performance, but are unclear about exactly when that happens, how much risk it entails, and how to communicate that to business partners and CFOs.

For example, CEB analysis shows that companies looking to cut $50 million from a $200 million IT budget might actually experience "blow-back costs" of ~$35 million and realize a total savings of just $15 million. Within this $35 million are risks including a loss of $12 million in potential business value in reduced project delivery and speed to market, possibly $6 million or more in fines and $3 million in lost business productivity just to name a few. Even cuts that are below 25% of the original budget are unlikely to realize the full cost savings, so any cut must be done with care in order to fully maximize the savings.

CIOs need to quickly understand, quantify and communicate these risks with those funding IT, so that the enterprise can benefit from an informed conversation about the choices they are making. Otherwise the organization may end up realizing only a fraction of the savings they desire and will hamper the IT department's ability to deliver on important business objectives.

Provided by Corporate Executive Board —What the Best Companies Do™

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