Now that the economic turbulence appears to have subsided somewhat, CIOs may be tempted to relax a little, and perhaps even to look forward to a degree of budgetary leeway that has been out of the question for some time. Indeed, there are indications that many are doing just that.
But now is not the time to be complacent, experts are warning. For many organisations, the recession has revealed a dangerous lack of understanding and control of their IT costs, and CIOs that seek to return to business as usual rather than addressing that issue will be ill equipped for the post-recession era.
A survey of more than 50 CIOs published by IT consultancy Xantus in July 2010 suggests that their immediate outlook is broadly optimistic. Over half the respondents, drawn from a mix of UK private and public sector organisations with annual turnover above £250 million, said they expect their IT budgets to increase by more than 10% in the coming year.
Cost cutting is still on the agenda, with 30% of respondents citing it as their IT department’s main priority for the next 12 months, but it was pipped by ‘supporting growth strategies’ and ‘improving customer experience’, each with 31%.
Interestingly, when asked what was the single most important factor in supporting the aims of the business, the greatest proportion of respondents (43%) said: “The application of new technology such as cloud computing.” By comparison, “the skills of [our] IT staff” was named the most important factor by just 19% of respondents, and “the leadership skills of IT managers” by just 6%.
According to Steve Watmough, CEO of Xantus Consulting, this finding reflects a change in focus from squeezing the maximum value from existing infrastructure towards seeking opportunities for growth. “People are saying that they’ve focused on the performance of the technology that they have for the last couple of years, and they’ve got it performing as well as they possibly can. Now it’s new technology that they think is the most important factor.”
This might suggest that many CIOs believe they have cut the cost of their IT operations as effectively as possible, and that now it is time to get back to IT’s former role as the technology deployment department. This is, according to Gartner analyst Ken McGee, a pernicious delusion.
As the recession kicked in, McGee says, most CIOs were caught unawares. “Leading up to the recession, the overwhelming majority of CIOs were simply not prepared to take quick action,” he says. “Their executives said go forth and save a lot of money and do it this fiscal year, and they just did not do that as well as one would have wanted them to.”
Some dragged their heels, he explains; others even tried to make the case that increasing IT investment was a viable recessionary strategy. “It took a long time for awareness to sink in that we were in trouble, and even longer for CIOs to put together a plan, and to execute the plan, and bring savings across the finish line.”
Eventually, however, the message got through. “We believe CIOs now have a new-found appreciation of the need for speed when it comes to cutting costs. We have never in history had so many CIOs with recession scar marks.” But there is a danger that this hard-learned lesson will be forgotten amid complacency. “People are people,” McGee remarks. “Some CIOs are going to be lulled into a belief that they dodged a bullet, and that now it’s back to business as usual.”
What the recession brought into focus, however, was that ‘business as usual’ is in many cases woefully inadequate.
McGee says this was reflected in the volume of IT projects that remained in place even as the business was screaming out for further cost reduction. “Over the past two and half years, we would ask our clients: ‘When you think about IT project staff, how would you best describe the aggregate level of activity; not busy, busy, or very busy?’,” he explains.
“Out of the hundreds of clients we asked since October 2008, more than 95% told us those project staff were ‘very busy’.” “Our question is, how can you have so many people, so busy, during the worst recession in eight decades? It doesn’t make sense.”
The reason for this, McGee argues, is that despite having all manner of project governance processes and committees in place, many projects got the go-ahead without the explicit approval of a business executive and without a clear idea of the precise costs, both upfront and ongoing.
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McGee formed part of a team of Gartner analysts that helped clients cut their budgets even when they thought they could cut no more. “We had clients who came to us saying: ‘We’ve gone through three iterations of cost cutting and we think we’ve cut about as much as we possibly can.’ But as far as we’re concerned we never saw a budget that we couldn’t chop.”
To achieve this, McGee and colleagues would ask their clients the five following questions, allowing them only to answer yes or no: “Is there a complete list of all IT projects being worked on? If such a list exists, would it be possible to find the names of the business people on whose behalf they are being undertaken? Would those people be able to tell us the one-time implementation cost of their projects? Would they be able to tell us the ongoing cost of their projects? And finally, is there a document that affirms their understanding of those costs and that has their signature on?”
In the majority of cases, McGee reports, these questions would reveal that the budgetary approval of IT projects was far removed from the authority of the business. Costs had therefore escalated out of control.
This is a shortcoming that many organisations have yet to resolve, one reason why any temptation to go back to ‘business as usual’ must be resisted, says McGee. One way to resolve it is to introduce zero-based budgeting. In traditional budgeting, only incremental budgetary increases require approval; in its zero-based alternative, a given project’s entire budget must be justified every year.
McGee advises that organisations adopt zero-based budgeting as a precautionary defence against a ‘double-dip’ recession. “We are not predicting a recession, but we believe it’s prudent for CIOs to include this as one of the many things they should address in the daily execution of their jobs.”
The issue of executive oversight also lies at the core of another IT management malaise, as diagnosed by US consultancy Diamond Management & Technology Consultants.
“What we’ve observed over the years is that an organisation will build a plan, whether it is to implement SAP or to build a new customer capability or go into the cloud, or whatever,” explains Chris Curran, Diamond’s chief technology officer. “The next step they take is to hire a systems integrator or create a big project team to work on the plan. There is a missing step between the conclusion of a plan and the start of a big project . We call that step mobilisation.”
The often absent mobilisation stage, Curran explains, involves mapping out the financial and human resources required to undertake a given plan, and understanding what the impact of diverting those resources will be on the rest of organisation. This might mean hiring replacements for certain project staff, or evaluating the impact on the short-term profitability of the company.
As this suggests, mobilising a given project requires the input of the finance department. “A lot of projects don’t involve finance enough early on, so they are playing catch-up once the project is up and running,” says Curran. This can be an extremely expensive error. “Over and over, we’ve seen companies spending millions of pounds a month on suppliers, and they are not using them to their fullest,” he explains. “It’s because they are making these mobilisation decisions for the first time two or three months into the project.”
But more than just the cooperation of the finance department, mobilisation of a given project requires the input of an executive that understands the strategic motivation behind the project and can therefore prioritise projects and allocate resources according to the greatest need.
“One of the measures of mobilisation is whether ownership of the strategic roadmap, which would have multiple projects on it to deliver a particular strategic initiative in the business, has been assigned,” says Curran. Unless the ‘ownership’ of that roadmap has been explicitly assigned, he explains, the necessary mobilisation steps will not take place, because “it’s somebody else’s problem”.
Diamond has conducted a survey of CIOs for the past three years and has consistently found that those organisations that show characteristics of good mobilisation are more likely to be top performers as measured by revenue growth. However, the survey has not detected any improvement in the average organisation’s ability to mobilise projects, suggesting that the recession has not made the typical organisation any better at managing IT project finance.
So while some specific lessons might have been learned during the downturn, the overriding message is that standard IT cost management practices are not fit for purpose. For many organisations, the challenge of addressing this issue still lies ahead.