Managing Information Technology Costs in a Challenging Economy

Four steps to right-sizing your IT budget and avoiding long-term harm to your company's bottom line


In these challenging economic times all companies are looking for ways to improve margin and overall operating performance. Many are just trying to hang onto the customers and businesses that they have. Achieving revenue lift is problematic, leaving the expense side of the ledger as the most obvious candidate upon which to perform financial triage or even radical surgery. When looking at the expense side of the ledger, the information technology (IT) capabilities of most companies quickly get identified as a potential area for cost restructuring.

In most companies IT represents a clearly visible slice of the operating pie and, as importantly, a very significant slice of ongoing capital expenditures. Yet, particularly for retail, wholesale and distribution companies, IT also represents the nervous system of the company. Its tentacles reach out to every aspect of company operations — from headquarters to distribution centers to stores and even to customers and suppliers. IT represents the sensing and responding mechanisms that allows or causes product to be ordered, moved, sold and shipped.

So messing with a company's nervous system requires more than a ham-fisted approach to "rewiring" the business. Yet when it comes to it, most companies employ a "tried-and-true" method when attempting to achieve IT cost reduction. Typically companies will resort to a time-compressed, myopic four-step process that results in fairly typical and traditional results —capital projects are either eliminated or significantly reduced in scope, all contractors are "thrown out the door," maintenance on existing systems is deferred and in some cases software licenses for maintenance are allowed to lapse, headcount (normally being a significant portion of the IT budget) is cut, training is canceled, and travel is restricted to the absolute bare minimum. These actions will result in margin improvement and often do achieve the mandated financial result.

However, many times these actions have unintended consequences that only result in short-term cost benefit and many times adversely impact the overall ongoing sustainability of the business.

After all, the capital projects were initially authorized for a reason (normally to improve the operational/financial performance of the business), and that need or issue continues to go unmet; people have gone away but many times the work hasn't, so the existing staff become overloaded, things fall through the crack, productivity suffers and operational efficiency deteriorates. Ultimately, after surviving the downturn, the projects get restarted, people get rehired, contractors get reengaged, licenses get reissued, and training gets back on track, many times at a higher cost level than before the cuts. In effect, most companies perform triage when radical surgery will yield longer-term sustainable results. There has to be a better way to approach IT management in challenging economic times. There ought to be a way to achieve short-term margin improvement yield while also positioning the company for long-term, sustainable operations and growth once the economy turns back upward.

Take a step back and examine the whole picture regarding information technology prior to assessing just how much can be done to improve financial performance.

The Four-step Approach

A company ought to utilize a very different four-step approach, which is best summarized as:

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