"Draconian" IT Spending Cuts Putting Business at Risk, Analysts Warn

META: Excessive cost-reductions prompt maverick spending, reduce enterprise agility

META: Excessive cost-reductions prompt maverick spending, reduce enterprise agility

Stamford, CT — October 14, 2003 — Draconian cuts in information technology (IT) budgets may in fact encourage the kind of "maverick spending" the cost cutting was intended to prevent and could wind up putting companies at risk of losing business agility and competitiveness, according to a report from technology consultancy META Group.

In their report, "2004 IT Budgets: Battling for the Basics," META analysts Doug Lynn, Louis Boyle and Jed Rubin, along with First Albany consultant Gerard Hallaren, wrote that many chief information officers have already filed their initial 2004 budget requests, with typical growth rates expected to be 1 to 3 percent over 2003 spending.

The budget process should run more quickly this year, the analysts believe, "mainly because spending has already been cut so drastically. With tight spending restrictions in place for the past one to two years, IT budgets are already close to the bone."

The problem is that, as IT budgets have assumed increasing visibility in enterprises' "sales, general and administrative" (SG&A) budgets, senior management has increasingly looked at IT for cost-cutting opportunities. And therein lies the challenge for CIOs, since, after back-to-back years of reduced or highly constrained spending, additional cuts could actually wind up being counterproductive and hurting the business.

"If spending is cut or restricted in a draconian way without regard to essential needs and urgent priorities, shadow spending [that is, backchannel technology spending by business managers] occurs and is problematic to control," META wrote. In fact, in a separate study, business consultancy McKinsey & Co. found that this type of shadow spending can amount to as much as 40 percent of a company's total spending for application development. META itself believes that shadow spending now accounts for 10 to 20 percent of total IT spending. In either case, the consequences of this maverick spend can be significant.

"The pitfall of shadow spending is the lack of future control over the technology environment by the CIO and IT organization," said META analyst Jed Rubin. "Business and IT process architectures and environments become disjointed and lethargic in performance. From a financial point of view, the CFO cannot gain a holistic view of IT spending. Redundant spending occurs (e.g., multiple projects deploying similar solutions without being aware of each others' activities). The potential of increasing technology and process reuse that contributes to organizational adaptiveness swiftly vaporizes."

META's analysts also warned that further severe cuts in IT spending could put critical enterprise processes at risk and could impede a business' agility. The analysts reported that many non-discretionary improvements have already gone by the boards this year, "leaving an increasingly brittle IT services infrastructure that, when called on to perform, will not be adequately provisioned or prepared."

"People have forgotten core operational and non-discretionary expenses must be paid for, like the infrastructure maintenance bill that includes servers, storage, middleware, database and network components," said report co-author Lynn. "If an organization doesn't pay to maintain those assets, when they do break, the vendor many not have the experience or skill (or enough of it) to help out. What does an organization do then?"

Lynn believes that it may take a "significant experience" — whether external, such as a catastrophic power failure or an enterprise's failure to meet a compliance deadline, or internal, such as the failure of a critical system — to impress upon top management the necessity of funding non-discretionary work. "The recent power outage in the northeast United States exposed the fact that many organizations are inadequately prepared and must devise manual processes to cope with such events," Lynn said.

Among its advice to chief information officers for how to address these issues, META advised CIOs entering the budget battle this year to take a "categorized spending strategy," for example, by clearly delineating which projects are core, non-discretionary, discretionary, investment and "venture spending."

In addition, the analysts recommended emphasizing the enterprise's "vulnerabilities and risks to business performance" from further cost-cutting. "The most popular method to accomplish this task includes the use of risk management as a discipline to portray various levels of risk and cost to resolve/address the risk," said Boyle. "An impact discussion with the business is necessary to have rational discussions on what should be spent and where. This discussion will help users develop a deeper appreciation for the value of IT."