Flexibility in an Age of Cost-Cutting

It's no longer news when CIOs have to slash fixed costs. For many IT executives, annual budget cuts have become the norm. In these instances, simply taking from discretionary funds isn't feasible; that well runs dry unless replenished. The trick is to create budget flexibility while lowering overall IT costs.

As the aluminium market has contracted in recent years, Alcoa's Huber has had to cut 30 percent from global spending. In doing so, Huber managed to shift from a 70-30 fixed-to-variable ratio to about a 50-50 level. His primary means of doing so was consolidating 124 data centres around the world into four principal regional centres, cutting the number of applications in use from 3000 to 2000 (with more expected) and standardizing the company's desktop environment. "Complexity drives cost," Huber says. He is constantly on the lookout for ways to keep his fixed costs from creeping back up. For example, although he recently paid for Oracle database software licences, he has decided he can do without some of the maintenance contracts on legacy applications that will be replaced through the ERP implementation. "The trick is to squeeze something out of the operations side so that you can invest in your technical environment and provide value to the business," he says.

In many companies, employee salaries and benefits are the number-one fixed budget item. Outsourcing would seem to be an obvious method of increasing cost flexibility. Greg Meyer CTO of iJet Travel Risk Management, employs 12 internal staff developers and a team of 18 in India. But Meyer has found that outsourcing doesn't save him money; he ultimately spends as much on an overseas developer as an internal staffer, he says. The benefit of outsourcing is in the agility it provides his department. "It's much easier to drop and add a resource in India than to bring someone in here," he says.

Other CIOs avoid outsourcing on the grounds of flexibility, however. Ever since he had to undergo an extreme case of cost-cutting, Chris France, CIO of Little Diversified Architectural Consulting, has been averse to most kinds of contracts, including outsourcing deals. When major clients put the brakes on after 9/11, the company, which builds large retail centres and public buildings such as schools and jails, eliminated 320 people from its payroll of 600 and set out to shave the rest of its budget to the bare bones. A heavy proportion of fixed costs made cost-cutting very difficult initially. "When we were faced with a drastic drop in our revenue, we found out how inflexible our infrastructure and contracts were," says France. He has eliminated all outsourcing contracts and is down to nine full-time IT employees. "The key for us is to avoid as many contracts and leases as possible," he says.

France also sought to eliminate fixed costs while boosting flexibility by buying out long-term software contracts, avoiding long-term agreements and changing how the company buys hardware. He now boasts an almost unheard of 10-90 ratio of fixed to variable IT costs. To maintain such a high degree of flexibility, France has learned to stagger leases, negotiate breakable lease terms and pay cash for as much as he can. Virtually all of his software is purchased by subscription, and he has let maintenance lapse on all of the seats of his design software that are not being used. The 10 percent of his IT spending that is fixed is made up almost entirely of specialized large format printers used by architects for design work - and he plans to buy the equipment when the lease expires soon, thereby reducing his fixed costs to zero.

France's cost strategy reflects a close working relationship with the company's CFO, Jim McGarry, who sits directly behind him in the office's open seating plan. McGarry says that when Little Diversified started to downsize, flexibility became the mantra for the company as a whole. "We project and react and try to control expenses as much as possible in accordance with revenue forecast," McGarry says. "We place trust and responsibility with Chris [France]. He knows that every spending decision must pass the business case test."