When the U.S. economy tanked in 2008, companies were quick to rein in information technology spending. Now, amid signs of recovery, they risk problems by ramping up IT budgets too quickly to compensate. Market researcher Gartner (IT) forecasts that global IT spending will swing from a 4.6 percent decline in 2009 to a 4.6 percent increase this year, to $3.4 trillion. To ensure that new money is put to work wisely, CEOs should advise their chief information officers to focus on five strategies for smarter spending.
Take stock of what's broken and devise a plan to fix it
Deep budget cuts during a recession trigger ripple effects that can last long after sales growth resumes. As business rebounds, the consequences of deferring maintenance of computer systems become apparent when they strain to handle more transactions.
A big consumer electronics company we worked with responded to the smaller downturn last decade by cutting its IT spending nearly in half. When business improved, the company discovered that more than a third of its most critical systems were operating on outdated technology no longer supported by its vendors. Before signing off on new spending, companies need to look for hidden vulnerabilities as a result of earlier cutbacks.
Get full potential from new spending
A recovery unleashes pent-up demand for new corporate initiatives and the IT systems that support them. The usual rationale for boosting spending is that it's a competitive necessity. Managers may have a hard time resisting that argument.
Yet for the 15 cents of every IT dollar spent on new computer systems, like state-of-the-art customer management software, companies are spending 85 cents on less visible efforts to "keep the lights on." These costs are for running ongoing operations, maintaining hardware, and patching software bugs. We've found that these follow-on expenses can cost anywhere from two to 10 times the original outlay on a system for many years.
Companies need to recognize the full cost of their new spending over time, and weigh that against the benefits a project will generate. That way what initially looked like a smart investment won't turn into a money pit.
Banish the complexity
As companies retrofit old computer systems by installing software patches to improve performance, or fail to fully integrate systems after a merger or acquisition, complexity ensues. The result is IT systems that can be slow to respond and out of sync with the processes they're supposed to support. To strip out complexity, organizations must first stop adding more computer systems that only make the problem worse. They should also consolidate those with subpar performance.
Unnecessary complexity can be rooted in the businesses IT supports. The surest way to eliminate it is for each business unit to calculate what its costs, including support, would be if it offered just one bare-bones product. Then calculate how those costs increase as features are added back in. Most companies find their costs jump sharply at the points where added complexity starts to overload their IT capacity.
Knowing where those points occur and how to avoid them can mean the difference between profitable growth and middling performance. This disciplined approach let one financial-services company we worked with eliminate more than 40 middleware programs that sat between its operating systems and business applications, greatly simplifying vendor relationships and software maintenance.
Take advantage of "good enough" technology
As executives look for a competitive edge in an improving economy, they should resist the temptation to write new software, or heavily customize vendors' applications in every case. More than 80 percent of the time, our clients can meet their needs by taking advantage of off-the-shelf applications configured for their purposes.
The cost of customizing business applications can escalate in ways that aren't always obvious. Modifications can prevent companies from taking full advantage of the usually superior, and less costly, enhancements vendors create themselves. Companies that rely too much on writing software themselves can also misuse in-house talent. Scarce IT resources should be tapped to give companies an edge in customer service, or boost revenue, profitability, or market share.
Make outsourcing more strategic
Smart companies see improvements in business conditions as chances to reevaluate their outsourcing approach. Outsourcing companies can often be more productive and cheaper and produce higher-quality work than in-house employees. If they're not, it may be time to consider new options.
Especially when a recovery is tentative, as this one is, outsourcing is a prudent way to accommodate increased demand that may not last, without committing capital to new assets or fixed costs. Outsourcers can also help companies offer cloud computing services. By locking in contracts on favorable terms early in a recovery, companies gain an edge over competitors.
When IT organizations start using these strategies, CEOs find they can get more out of their information technology investments. Taking these approaches can also make IT departments lean enough to keep delivering benefits when the next downturn inevitably arrives. That's a deal most technology and line-of-business executives would be happy to make.