March 28, 2008

Budget Adjustments For CIOs In Lean Economic Times
by Phil Murphy and Alex Cullen for CIOs

Making Leaders Successful Every Day

For CIOs

What To Cut And What Not To Cut When The Budget Ax Must Fall

Budget Adjustments For CIOs In Lean Economic Times

March 28, 2008

This is the second document in the “Managing IT In Uncertain Economic Conditions” series. by Phil Murphy and Alex Cullen with Tim DeGennaro

EXECUT I V E S U M MA RY
CIOs have faced lean economic times with regularity over the past four decades, and they will inevitably face lean times again — it isn’t a question of whether they will happen but when. Forrester advises CIOs to base budget cuts on the impact to the business and to IT productivity, not on some misguided perception of equitable cuts across all areas.

TABLE O F CO N T E N TS
2 Evaluate Spending Categories To Identify Potential Savings Opportunities 3 Vary Your Cost-Reduction Techniques By Budget Category And Impact 7 Some Considerations Cut Across All Budget Categories
RECOMMENDATIONS

N OT E S & R E S O U R C E S
Forrester draws on its experiences with IT management for this report.

Related Research Documents “Managing IT When Times Get Tough” March 25, 2008
“Applications Strategies: Reducing Vulnerability In Times Of Economic Uncertainty” March 14, 2008 “Making The Right IT Investment Decisions” July 19, 2007

8 Consider The Ramifications Of Timing And Contrarian Views

© 2008, Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, RoleView, Technographics, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each figure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to www.forrester.com. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. To purchase reprints of this document, please email resourcecenter@forrester.com.

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EVALUATE SPENDING CATEGORIES TO IDENTIFY POTENTIAL SAVINGS OPPORTUNITIES The advent of lean economic times may cause CFOs to direct business areas to cut budgets by a flat percent. In turn, CIOs may be tempted to cut the budget of all IT areas equally — but that approach rewards wasteful management while penalizing areas that are already actively managing expenses. Prudent CIOs will examine IT spending by category to identify the potential for and impact of various cost-reduction options (see Figure 1).1 These categories can be valuable for constructing and cutting budgets because:

· It is a jargon-free way to characterize the reason for spending. While the budget detail may

be unknown to business executives, the itemized costs roll up into categories that make sense to any executive: new capabilities, efficiency measures, operational expenses, etc.

Figure 1 IT Spending In Budget Categories
Average percentage of IT budget

Budget category New IT investments: Projects that deliver new business capabilities Projects to improve IT efficiency

Considerations

These projects were likely conceived and approved before the lean times began. Waste creeps in when IT is busy completing other work on behalf of the business.

20%

9%

IT MOOSE: Maintenance and smaller enhancement activity against applications Operational costs of applications and services, including software licenses and support Data center and networking costs Maintenance budgets are often based on previous year with little year to year scrutiny. Inattention to detail over time can create waste in licensing and contractual maintenance fees. Reduced business can correlate to reduced requirements for storage and computing capacity. What level of support/time between desktop upgrades is appropriate during lean times? Can you shift deployments of administrative or architecture staff to more tactical assignments, temporarily? 15%

19%

19%

End user support, including desktop software Administration, planning, architecture, and IT management

10%

7%

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March 28, 2008

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· Successful cost reduction techniques will vary by category. Some categories of cuts are cost-

avoidance — deferring projects that deliver new business capabilities, for example. Operational cuts may hurt today’s revenues, while everything else is likely to fall somewhere between those two ends of the spectrum.

VARY YOUR COST-REDUCTION TECHNIQUES BY BUDGET CATEGORY AND IMPACT The potential effectiveness of a given cost-reduction technique varies by budget category — categories consume different percentages of the budget, therefore offering varying dollar amounts as potential cuts. Some techniques don’t apply to or are less effective for a budget category and some techniques merely defer planned spending, while others have potential for more permanent cost reductions. The most appropriate decision-makers also vary by budget category: The CIO will make some decisions while other choices will be made by business-unit heads, and still others will be decided by executive management. CIOs should consider these variances as they approach budget cuts. Projects That Deliver New Business Capabilities Projects that have yet to start are potential opportunities for budget cuts, but act with care —businessimprovement projects should be sponsored and cut by business executives, not by IT. CIOs should avoid creating the perception of IT as the entity that decides unilaterally which projects to cut. CIOs who are pressured to act unilaterally should discuss the very real cultural problems that may ensue with the CEO and CFO. Craft an approach that drives the mandate to cut from executive management, through corporate management to business units, not outward from IT. Techniques to consider:

· Halt projects. Suggest that the CEO or CFO halt projects that haven’t started or defer

acquisitions until a review of all planned projects is complete. This has the effect of canceling nice-to-have projects, while crucial projects will resurface for appeal.

· Slow projects. Evaluate whether it is feasible to slow down in-flight projects that can’t be

canceled, based upon position within the project life cycle. Slowdown tactics may include reducing staff (shift staff to accelerated projects), terminating contractors, and deferring significant hardware and software purchases to later dates. Use the slower project pace productively — refine the formal requirements definitions, model alternative (perhaps cheaper) solutions, and improve the efficiency of other labor-intensive/high-impact activities such as developing more complete test scripts, data, and processes; improving production turnover; and writing more effective operational documentation.

· Prepare to advise. Prepare information that will enable intelligent decisions on active and

planned efforts — including projected financial impact (revenue/savings), timing (when financial impact materializes), cost, and burn-rate of resources, etc. Act as an advisor to the CFO and business management on the dependencies and synergies of coupling certain efforts

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if they go forward, but defer the actual decisions to cut to business management. Propose alternatives to more expensive approaches, such as software-as-a-service (SaaS) options in lieu of purchasing packaged applications.

· Look beyond cuts. Don’t just use the information to focus on cuts — help the CFO and business
leaders to identify opportunities to accelerate new revenue opportunities, reduce business costs, delay the burn-rate of long-term projects, and defer or halt projects that are not cost-focused.

· Reduce staff intelligently. When looking at the option to reduce project staff, consider retaining
project management generalists — a good project manager can switch between projects or straddle multiple projects with the right combinations of staff. Prune positions carefully — you may have put your most talented staff on an aggressive technology project that is now being canceled — don’t penalize your best staff for taking a challenging assignment.

Projects That Improve IT Efficiency Canceling projects that have the potential to improve IT efficiency can be counter-productive, but don’t reject the idea out-of-hand. In an atmosphere where no business unit will receive all of the IT resources it wants, any moves that increase the number of available IT resources would seem to benefit all. But perception is everything — forging ahead with IT efficiency projects while business units have their efficiency projects cut may seem to be a double-standard that favors IT. Techniques to consider:

· Focus on near-term cost reduction or avoidance. Accelerate projects that will avoid near-term

expenses. For example, virtualization of smaller servers may enable you to avoid hardware purchases, decrease licensing costs, or avoid hiring systems administrators. Migrating the last application from a “burning” database engine could avoid software license maintenance fees for the coming year.

· Identify labor-intensive areas. Theoretically at least, the largest efficiency improvements should
be possible in the areas that consume the most resources. For example, look at applicationtesting processes — testing occurs on every project and enhancement, and test data generation, test set-up, and test execution can be extremely resource-intensive.

· Scrutinize all proposals. Take a jaded view of all IT proposals — if they can’t pass internal IT
scrutiny for truth and conservative estimation of savings, they’ll never pass business scrutiny. IT must get in line with its business peers and make the best business case possible using conservative estimates, then take its place among business units for the budget ax.

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Maintenance And Enhancement Of Existing Applications Rationalizing the existing base of applications may be the single largest opportunity to reduce existing application costs.2 Maintenance budgets often receive little scrutiny year over year; in fact, 84% of IT organizations base their current maintenance budget on the previous year’s budget.3 Techniques to consider:

· Deduplicate. Shed duplicate applications through standardization. A financial services

organization interviewed by Forrester owned 17 travel-and-expense applications in 16 subsidiaries. Consider the resources squandered to maintain and operate 16 duplicate applications. Pick one as the standard and eliminate the costs of the others. However, shedding duplicates may require resources to retire the applications, archive data, and retrain users on the new standard application.

· Accelerate business-efficiency-oriented enhancements. Accelerate small enhancements that · Stop the madness. Some maintenance queues are stuffed with enhancements to which users

focus on business-efficiency improvements — they may allow business units to defer hiring and may also reduce the pain of projects that were deferred or delayed to reduce costs.

have an emotional, rather than business-benefit attachment. To separate the wheat from the chaff, consider cutting all application activity off to a bare minimum level or to the level that internal staff or service-level-based contracts can cover. Make sure this action is supported by or emanates from a mandate from senior business management.

· Weed out underperforming assets. Cut underperforming staff to save higher-performing

staff members who are threatened by cost-cutting measures. Reassign the retained staff on a temporary basis, making it clear that the move saved that person’s job and is a temporary measure to be reversed as the company’s fortunes improve.

· Spend to save. The early adopters of APM tools estimate an average of 20% increase in

productivity through the use of an application repository created and maintained through the APM tool. But the tools require investment and implementation cycles that can span several months, so consider how to measure and report the benefits of increased IT productivity to satisfy any subsequent detractors of the technique.

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Operational Costs Of Applications And Services Including Data Center And Networking Data center costs aren’t very malleable — driven as they are by physical equipment and locations. Similarly, networking costs can also be difficult to change as they are based on capacity and quality of service (QoS). As targets for cost-cutting over the years and as an indication of the level of maturity, operations groups tend to run fairly lean. However, software licenses and maintenance agreements can proliferate due to the same lack of scrutiny as application maintenance budgets — it is easier to just pay the bill than track down the number of people still actively using myriad software licenses. Techniques to consider:

· Defer upgrades. Defer nonessential hardware and software upgrades unless they contain
specific features that are critical to newly re-approved business plans.

· Anticipate a slowdown. Match the anticipated business-transaction slowdown against businessas-usual (hence more aggressive) transaction estimates to see whether capacity upgrades can be deferred. Consider setting these funds aside to enable immediate upgrades as soon as business transactions increase.

· Re-assess. Re-assess telecom service costs and contracts and outside services for data centers
such as off-site data storage. End User Support, Including Desktop Everyone wants a modern PC; however, PC and desktop upgrades are nice-to-have expenses in lean economic times unless they are required for new business capabilities. If this isn’t the case, offer the upgrade to the budget ax. Techniques to consider:

· Cancel or defer upgrades. Cancel or defer upgrades until the economy improves. · Upgrade selectively. Upgrade only those departments that require new equipment. · Reduce service. People are creatures of habit, immediate gratification, and convenience. But how
much would the volume of help desk calls decrease if the callers are charged, or even tracked and reported? How many of the calls are business-critical issues? End user support costs are closely tied to services levels and the service-delivery approach, such as use of desk-side technicians where users expect this. Use tough messages from the CFO to get business users to reconsider the service levels they require. Balance the savings and impact carefully however — don’t let lower levels of support impede revenue opportunities.

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Administration, Planning, Architecture, And Management Administration, planning, architecture, and management expenses are almost exclusively staffingdriven, and so little can be done to affect them short of layoffs or early retirement programs. Techniques to consider:

· Reassign the highly skilled. High-skill positions such as experienced enterprise architects

with long tenure in the company know both the business and technical environments. As such, they will be costly to replace when the downturn ends. Instead of reductions in force, consider reassigning highly skilled staff to more productive assignments on accelerated projects to retain key staff while reducing the demand for resources on key projects. Since staff is retained, cost savings materialize through deferred hiring on the accelerated projects.

· Create a SWAT team. The highly experienced staff can serve other functions, such as a special

weapons and tactics (SWAT) team member to lead expense-reduction hunting exercises in other areas within IT and business areas.

SOME CONSIDERATIONS CUT ACROSS ALL BUDGET CATEGORIES Some budget considerations aren’t confined to a single budget category — rather, they cut across all categories. Consider them as you evaluate each category. Halt Training That Isn’t Crucially Important Training is an eminently deferrable expense — most staff will more readily accept reduced training when the alternative may be more drastic measures that affect compensation or even employment. However, isolate funding for crucially important training that, if it fails to happen, will halt lights-on IT, doom a crucial project to failure, or prevent planned cost-cutting measures. Techniques to consider:

· Get informal. Cut back the number of formal trainees and select candidates to institute a “trainthe-trainer” program in which attendees go to formal classes and then teach internal staff to reduce tuition, travel, and expense costs.

· Bring it on. Bring instructors on-site to reduce the travel and expense costs of flying and

housing several students — the threshold for breakeven can be as low as several students.

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Evaluate Compensation, Staffing Levels, And Annual Salary Increases/Review Cycles Most employers have an implied agreement with employees that includes annual salary adjustments via a review process. Adjust that indiscriminately at your peril — if competitors are not freezing wages and extending review cycles, you may lose key (disgruntled) staff members. If competitors are taking steps, consider whether to follow suit or use it to your advantage by ignoring the trend. Techniques to consider:

· Get and stay competitive. Understand whether your wages are competitive — if they are, make

it public knowledge. People will look to greener pastures less if they believe they are fairly paid. If your pay rates are on the high side, then publicize that fact to avoid unwanted attrition. Consider reducing the average percentage of pay increase — while holding performance reviews and salary increases on time.

· Calculate the true cost of attrition. Consider the full costs of unwanted attrition — recruiting

costs often run 20% or more of annual salary. Consider the cost of lost business and technical familiarity and knowledge. Compare those costs plus salary increases to bring your wages up to competitive wages on the open market before risking excessive levels of attrition.

· Reduce staff if you must. Thin productive staff as a last resort, and cut by function and value.

Staff salaries exceed 30% of the IT budget and are an obvious possible cost-cutting opportunity. But cutting staff often translates to reduced IT capacity. When cutting, realize that not all staff are created equally — generalists who can do many tasks may have more value in lean economic times than specialists who often come with higher price tags.

R E C O M M E N D AT I O N S

CONSIDER THE RAMIFICATIONS OF TIMING AND CONTRARIAN VIEWS
Temper your thinking on budget cuts with the following two perspectives.

· Timing is everything. Measure the “when” of budget cuts as fervently as you measure
the “how much.” Lean economic times today demand relief within weeks or months, not years. Chart out when savings will really accrue — several small savings across the year may prevent one large cut that occurs later in the year.

· Should your organization be a wolf among sheep? Should you and can you adopt a
contrarian position to budget cuts? In lean economic times, most of your competitors will throttle back — is now the time for your firm to accelerate and grab market share?

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ENDNOTES
1

To determine the average percentage breakdown of the IT budget, Forrester polled 317 technology decisionmakers in the May 2007 Global IT Governance And Steering Committee Online Survey. Especially in the financial services industry, the early adopters of application portfolio techniques are experiencing significant increases in productivity and reductions in the cost of existing applications. See the January 7, 2008, “APM Trends: Board-Mandated Cuts To The IT Budget Spur Global Bank To Adopt APM” report. Just 24% of companies surveyed employ a zero-base budget strategy, which requires every expenditure to be justified annually. See the March 30, 2007, “Application Maintenance Budgets” report.

2

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