Given the uncertainty of today's economy, IT departments may be asked to cut expenses. In January 2008, Insurance Networking News reported that overall IT spending for 2008 will increase—although, forecasters predict the increase to be relatively small.
“Based on benchmarking data, insurers’ IT spending has been rising slightly in the past few years, and we expect that to continue,” says Jack Tyniec, senior manager, Insurance Benchmarking Center, of New York-based Deloitte Consulting LLP.
In September and October 2007, Computer Economics Inc., an Irvine, Calif.-based adviser and research provider, surveyed 125 IT executive decision-makers in the United States and Canada that indicated they already scaled back their expectations for IT spending increases in 2008.
But what about in the middle of the year—how does the IT department cut back on already-started or planned projects?
The reality is that any business—at any time—may need to shift its executive focus toward running lean, whether due to possible recessions or just normal competitive pressures combined with investor expectations, according to“Managing IT When Times Get Tough,” a report from Cambridge, Mass.-based Forrester Research Inc. The CIO must know how to maximize business value during these times as well as during periods of growth. The keys, Forrester says, are to work in concert with the CFO and other executive team members, provide sufficient emphasis on improving the business’ overall cost profile and ensure risks from cost deferrals are understood.
Every well run IT shop has minimal fat in its budget because performance measurement, combined with good business-case discipline, drives out this fat, says Forrester. When cuts are made, the CFO and business leaders must understand the impact and associated risks of not spending in an area. They also must understand that cutting the cost of business transactions by just 5% will, in almost all firms, have a greater bottom-line impact than killing all discretionary IT investments.
In another Forrester report, “Budget Adjustments For CIOs In Lean Economic Times,” the company advises CIOs to base budget cuts on the impact to the business and to IT productivity—not on the perception of equitable cuts across all areas. Prudent CIOs will examine IT spending by category to identify the potential for and impact of various cost-reduction options, Forester says.
“The insurance industry relies heavily on information-processing technology, and much of the processing occurs in mature, stable, older applications that have accumulated over the years,” says Phil Murphy, principle analyst at Forrester and co-author of both reports. “But waste, duplicate/obsolete technology have also accumulated over the years. Mature IT organizations that streamline their application portfolios typically see reductions in the total cost of the portfolio of 15%, 20% and 25%—not by moving away from a language or platform, but by assessing and evaluating the applications to drive decisions on how to rationalize the portfolio and free trapped resources for innovation.”
Projects that have yet to start are potential opportunities for budget cuts, but Forrester cautions to act with care. Business improvement projects should be sponsored and cut by business executives, not by IT personnel. CIOs should avoid creating the perception of IT as the entity that decides unilaterally what projects to cut. CIOs who are pressured to act unilaterally should discuss the cultural problems that may ensue with the CEO and CFO. Forrester advises CIOs to craft an approach that drives the mandate to cut from executive management, through corporate management to business uni s, not outward from IT.
Murphy believes canceling projects that have the potential to improve IT efficiency can be counter-productive, but CIOs shouldn’t reject the idea out-of-hand. In an atmosphere where no business unit receives all of the IT resources it wants, any moves that increase the number of available IT resources would seem to benefit all. But forging ahead with IT efficiency projects while business units have their efficiency projects cut may seem to be a double-standard that favors IT, Forrester warns.
Sources: Forrester Research Inc. and INN archives
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