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Resourceful recession news
Probir Roy
09 July 2002
Mumbai: By the time you read this you are well into your budgets for the year. For others in various financial year cycles, it is still not too late.

Intels Craig Barrett says you dont spend your way out of a recession, but emerge from it by new products and technologies. For a savvy marketer, a recession is often seen as a godsend a time to make hay while the sun doesnt shine, because you spend less money for the same share of voice. Moreover, a smart marketer feels that the products value gets enhanced as consumers get close to brands that are getting advertised and hence are visible in a recession.

On the other hand IT practitioners are presented with a classic dilemma since the senior management contends that IT expense is too high, though the IT department tends to think otherwise.

Of course, the battle for funding in such times between the management and functional heads is not limited to IT alone. Most good managers will attempt to increase his or her departmental funding in order to add organisational value. Savvy CIOs should recognise that recession is a temporary phenomenon, driven by external factors, and is no reflection of their capabilities or importance of their function. And they should wisely use this opportunity to visibly visit the basics of their role, functions and investments to date.

Alternatively, they can seek refuge in the oft-used and time-tested technique of wanting to protect their legacy systems under the rationale of soft-rupee expenses to preclude any failure or degradation of business-critical applications so as to avoid the larger hard-rupee implications of loss of customer or business.

It is quite clear that there is nothing stylised about the relationship between IT spending (capital plus operating expenditure) and the economic slowdown that ought indicate an adverse relationship between the two. While it is true that in times of a slowdown the overall capital spends do dwindle, the greater proportion of the capital items still tend to consist of IT.

This indicates that infrastructure rollouts and upgrades can be often expected to be offset by savings made in operating expenditures and discretionary spending. Ultimately it depends on a complex interplay of forces among three crucial factors.

First, the particular IT adoption profile of the company whether it is a leading-edge adopter, mainstream adopter or conservative adopter of technology. The more aggressive adopter of technology will show continued growth in IT-spending as a proportion of revenues, while enterprises migrating from one type to another could also exhibit significant increases in spending.

Second, the industry group the one (to many) to some extent predetermine the spending ratios, like financial services, companies that have higher spends in IT than hardware manufacturers, chemical manufacturers or retailers. For example, an organisation might use a percentage of the gross sales or a percentage of gross profits. The caveat to this approach is that while in reality the companies in an industry segment might have the same basic issues, they also face unique issues to be resolved. Therefore, a one-size-fits-all approach is not necessarily a good indicator.

Third, in which an enterprise is located on the maturity curve of e-enablement itself. As brick-and-mortar enterprises derive revenues from their Internet-enabled businesses or have cost savings and benefits accruing to them, they show higher proclivity to spend. Government enterprises are good examples of where an interplay of moving from a conservative adopter of IT to a leading-edge deployment of technology, coupled with e-governance initiatives, can lead to increased proportion of IT spending.

Todays business managers rationale for IT spends will generally be dictated by imperatives such as managing and protection of critical infrastructure (which include investments in business continuity and disaster recovery) as against the earlier credo of expansion and growth.

This more conservative approach will take the form of cautious equipment purchases and cannibalisation, re-architecturing around central server and WTS/Citrix metaframe, cap on head count of staff (including consultants) with a view to extract more from less, re-centralisation in IT budgets that can be expected to lead to cost savings and service level benefits as also reduce hidden costs, deferment in custom developmental projects and/or major enhancements and adoption of ASP partner for migration plans whether they be office applications or non-critical enterprise applications.

The trick is to try and convert some types of capital costs into monthly expenses and in the long run reduce TCO while at the same time reducing typical recurring costs such as travel, training, communications, consumables and software. Alternatively CIOs can look to passing some of these recurring costs to the respective user groups on a user-pays-principle on mutually agreeable basis.

Notwithstanding the traditional dilemma of what to outsource or not there will be a trend to continue dependency on external service providers to render many of the support and service, help desk, network management and administration and other infrastructure services. However, these will be still under extreme pressure to demonstrate net savings to the company on the whole. Further companies will need to be better (read ruthless) at renegotiating or managing their deals and reducing multi-sourcing to reduce management overheads associated with it (often said to add a clear 10-to-20 per cent to the overall ESP costs).

As organisations rationalise their outlays, they need to refocus on other areas and reverse the short shrift they have given to security, business continuity, web services, and how to reclassify Internet-enabled initiatives. Not a bad word anymore, but very much a part of a companys smart business ( strategy.

Security has been the most neglected component of IT, whether it may be tools, infrastructure, training or policies. Traditionally, security has constituted only about 1-to-2 per cent if at all. But this can be expected to be anywhere up to 10 to even 25 per cent in highly data intensive, mission critical and front facing enterprises, especially after 9-to-11. Business continuity and disaster recovery provide yet another area, which could do with additional investment.

Typical spending has been between 3 to 4 per cent of the data-centric budget and would represent spending on resources committed to almost faultless real-time recovery in the event of any incident. Web services have not been sufficiently leveraged. There are innovative ways to utilise smart applications, which are easily configurable around platform independence and language-neutral web protocols to carry out collaboration and business-management integration.

Finally, another area of opportunity is e-business. Once e-innovation becomes part of core business processes, enterprises will redefine cost categories and cannibalise other non e-business-related spending Companies will find it hard to differentiate between an e-business initiative and an ERP project hitherto owned and budgeted for by the IT department.

As such there isnt a single right answer to an organisations level of IT funding. Rather, the funding level will depend on the organisations IT goals. If there are no clear IT goals or expectations, the right level of funding is probably whatever you are currently spending on the function. So while CIOs can remain bullish about spending, the rate of spending will certainly be a whole lot lesser than the previous years.

On a positive note it is a known cyclical phenomenon that companies come back after a recession stronger, leaner and meaner. And this will inevitably provide the impetus for the next cycle of growth. Perhaps sometime in 2003.

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