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The Unbearable Lightness of Budgets

The Unbearable Lightness of Budgets

Whether the belt-tightening which has gone on in most IT shops over recent times has been merely discouraging — perhaps even with some positive spin-offs — or disastrous, seems to depend on where those making judgements sit.

A generous and growing IT budget? In fact it is a rare organisation over the past couple of years that has had the luxury of having loads of cash to pour into IT. For most, belt-tightening has been the order of the day, and predictions for this year remain just as gloomy.

In the third year of relentless cost pressure for enterprises, CIOs remain under enormous pressure to tighten their IT belts. This is starting to sap the morale of some CIOs, not to mention dishearten an industry which was clinging to the hope IT spending would end its decline in 2002 and stage at least modest growth in 2003. Those hopes, it now appears, were unrealistic. But whether the belt-tightening which has gone on in most IT shops over recent times has been merely discouraging - perhaps even with some positive spin-offs - or disastrous, seems to depend on where those making judgements sit.

In October, META Group warned that some great Australian companies, obsessed with savings, were putting great strain on ageing IT systems without realising most organisations had hit the wall on cost reduction. The research and analysis firm said most Australian businesses had already cut into discretionary spending and could afford no more cuts without putting their day-to-day operations at significant risk. Executive vice president Dr Howard Rubin advised IT organisations to assess the risk versus the reward when deciding whether to stop investing in new systems and initiatives. "They risk hurting existing systems and ultimately facing higher costs to fix these capped systems," he said at the time.

Peter Hind, IDC Australia's manager of user programs and InTEP Forum and CIO columnist, says his discussions with CIOs provide anecdotal support for the warnings. He says the most potent emotion emanating from many of the CIOs he talks to is frustration. CIOs feel they have worked beyond the call of duty and that they are spending the bulk of their time shuffling deck chairs on the Titanic.

"And I don't think it's just IT, I think in business per se. There has to be a change of focus from cost reduction to growth. No one cost cuts themselves to greatness; and I don't think that penny has dropped," Hind says. "The thing I most notice when I talk to people is that few are doing creative, innovative IT projects. It's a battening down of the hatches, weathering the storm type of mentality."

Hind says the situation is compounded by widespread community unease about the war and an increased risk of terrorism. Even so, IT unemployment, he notes, is now twice the national average.

But whether many Australian organisations have been short-sighted enough to allow cost cutting to actively jeopardise their IT capability remains to be seen. ANZ COO David Boyles thinks it is unlikely. Boyles was in the United States in November, and says his visits to selected US companies left him in no doubt some had already cut IT spending to the bone. But he sees no sign of a similar situation here. "I don't think that necessarily applies to the corporates that I am familiar with in Australia," he says. "I don't think many of us have really started cutting into the bone or into the muscle yet, if you want to look at it that way."

And HP Australia, director IT Kerry Holling says general statements of the kind issued by META fail to account for differences between industries. Holling says too many analysts fail to differentiate between the different industry sectors.

"I guess being a CIO I have a strong view as to how much extra efficiency or added value IT can bring to the business, but I wouldn't go so far as to say that business was being damaged because of the cuts that are being made," says Holling. "I think that general managers and CEOs do have a reasonable sense of what role IT has to play within their organisations, and I think that they would be derelict in their duty if they allowed the organisation to be damaged because of the cuts that they were making."

Siemens CIO Heiner Karst says the sense he gets from his network of colleagues is that where there is a requirement for the organisation to keep investing to support a need, IT expenditure is still available. That especially applies to any proposals that can bring measurable, bankable savings, he says, or to investments that will help the organisation generate more quality in revenue.

"If you look at the overall economic situation, a CIO today is far more focused on getting value for IT spend than perhaps in the past," Karst says. "You go back a couple of years to the big heady days of e-business and the scaremongering that was attached to that, there were probably investments made there that a lot of people regret today. I would suggest in today's climate those kinds of investments would probably never get to the starting line, let alone the finishing line."

Karst says at Siemens, which is committed to moving entirely to Windows 2000 and XP by the end of this year, when there is a business need for IT expenditure the money is always available. "If a project or an investment leads to measurable bankable benefits, then it's got a fairly good chance of making it," Karst says. "But when it comes to further IT investment, I suspect the business case will determine more so than ever in the past where we are going to spend our money."

It's in the Percentages

According to META's Rubin, companies have already made drastic cuts including staffing reductions, server consolidations and by renegotiating contracts.

While other reports had predicted a rise in IT spending by early 2003, META claims it will remain flat and any spending increase will be an "artificial bump" because IT spending is only increasing as a percentage of revenues. "When revenues drop and IT spending stays flat, IT spending appears to go up as a percentage of revenue. Actually, it becomes a larger percentage of total revenue without increasing the dollar amount," Rubin says.

Gartner EXP research points to the same dismal picture. At the time of writing, Gartner was putting the finishing touches to its latest survey of executive program (EXP) members, which shows while the IT budgets for the large Australian companies and large enterprise members of their executive CIO program have stopped growing, they're not showing declines, but are showing zero growth. "Now we can argue whether that actually means they are declining in real terms," says Gartner EXP research director Andrew Rowsell-Jones. "On average we're not seeing people cutting their budgets. We're seeing them holding their budgets."

The findings make an interesting comparison to the overseas picture: Goldman Sachs' survey of major US corporations' IT spend in Q4 2002 showed a drop in corporate IT spending so dramatic it surprised even the investment banking and securities firm. The survey showed the IT market as set to decline by 1.0 per cent rather than grow by the modest 2.3 per cent predicted earlier.

But Rowsell-Jones points out spending figures can be deceptive. "You have to look behind that number, which suggests doom and gloom, to see what is actually happening in the industry and in the broader context," he says. "If you look at prices of hardware, if you look at prices of services, if you're buying consultancy, if you're buying software development services, what you're finding there is the prices are going down there too." He says the cost of consultants has been dropping, and organisations are also saving by moving to offshore processing.

"So again, what holding the budget is doing is forcing CIOs to really begin to focus on alternative sources of supply and to take strategic sourcing much more seriously, I think, than they have been forced to do previously."

Rowsell-Jones says the climate is forcing CIOs to find further efficiencies and provide services at a lower price point, which is in turn encouraging them to put pressure on the suppliers. He says that although the META Group comments are good headline-grabbing stuff, no CIO worth their salt will neglect the stewardship of the IT asset.

There are signs CIOs are turning away from more speculative investments and showing less willingness to invest in new technologies, but sees no sign of companies reaching a point where systems will fall over. "If that happened, you wouldn't be a CIO for very long, so there's sort of a very strongly Darwinian selection going on," he says.

And he sees signs that in the new climate, a different kind of CIO is needed. His discussions with head-hunters suggest the ideal CIO a couple of years ago was someone who was future oriented and able to talk a good strategic story. Now organisations want a "tyre-kicker": someone who can take a supplier by the throat and shake them gently until they squeeze a discount from them.

Less of an Appetite

NRMA CIO David Issa agrees few businesses are likely to put their organisations at risk by failing to spend on systems. On the other hand, he sees no appetite among large organisations for "multi-year, multi-tens-of-millions of dollar" projects.

"I think as CIOs we've got to try and give the business the options of how they can move from some of their ageing legacy applications without getting into these scenarios of you have to wait three years, or you have to spend $50 million to get it done. That's what I think the challenge is," he says.

The NRMA is going through a major integration with CGU, driven by the new business model of the merged entity, and is looking to get the best of breed for the new organisation by rationalising systems. That means the organisation is hardly operating under business-as-usual conditions, Issa says. There was a reduction in spend for NRMA's IT budget last year, but that was partly due to the fact that a lot of work was put on hold for a while after the acquisition of CGU in October.

At international construction consulting firm Dywidag-Systems International (DSI), information systems manager David Caldwell says that although DSI Australia is spending less on IT, he is not unhappy with the situation because it is spending what it needs. Having been recently separated from a larger group, DSI has had to build its own WAN and LANs and buy and implement its own ERP system, so it has spent a lot of money on IT over the past few years. Now it is "enjoying the peace". "Obviously our expenditure is planned to be less than it has been over the last few years," Caldwell says.

And he believes many companies, having had to spend huge amounts of money over the past few years on the ERP boom, not to mention Y2K and GST, are now content to give their IT teams a bit of a break, while giving the new technologies a chance to settle. Most IT people were worn out and really did not want another major project that would keep them busy for 12 hours a day for yet another 12 months, he says. A period of less pressure would give CIOs and their teams a chance to regenerate and come back refreshed. It is a time to consolidate and at least briefly rest on your laurels, he says.

"From some point when you've decided to set yourself up to be state-of-the-art, or close to it, I think you need to sit back and start to pay back that investment," he says. "And we give ourselves a payback period, and we like to make that payback period, rather than just keep pouring money into this huge IT hole as some companies do."

At HP, Holling says the company is still spending at the levels it was when it was two separate companies - HP and Compaq - but can see many opportunities for efficiency and reduction of the overall cost of IT across the new company. In that respect he says HP is in a quite different situation from organisations in a run-rate environment just looking to achieve year-on-year stability from an organisational perspective. "We're looking to make significant reductions in the overall IT spend as we bring the two companies together, which is what you would expect, and that's part of the reason for merging in the first place," he says.

At the ANZ Bank, Boyles says thanks in part to the problems banks had in the late 1980s and early 1990s, ANZ endured a fair period of time with a relatively small amount of capital investment.

"ANZ have been in fairly substantial CapEx renewal for the last three years," he says. "With the exception of our telling equipment, which starts getting replaced this year, we will have replaced all of the desktops and all of the servers and all of the switches and all of the computers and storage and everything else in our data centres throughout the network and throughout the world. So our amortisation costs have gone up and what we have done is actually reduce - as the projects roll off - we've actually reduced our operating expense and incremental CapEx expense will start coming down."

He says a lot of the decrease in expense has been in staff costs, with the bank first eliminating contractor positions to minimise the impact on staff, and also using a substantial number of developers sited in India. This effort would increase this year. Boyles expects the end result will be a lower level of spend but a level of spend that is entirely appropriate for the future.

As well as looking to relocate some development work to India, he says organisations can save money through an intense focus on suppliers. "It is a never-ceasing quest with suppliers," says Boyles. "We want them to make money, we just don't want them to make lots of money. We want them to make a reasonable and sustainable level of profit, which is typically a lot lower than they shoot for."

Boyles says after he took up the CIO job ANZ went through a period of two years of intense scrutiny of all suppliers, before it reduced the number of suppliers, reduced the complexity of the environments they supplied to - the platforms the bank runs - and renegotiated most of its contracts around the cost of hardware, software and services.

The Queensland University of Technology has taken a similar approach, via an annual process of tightening up its contract maintenance budget. Information technology services director Neil Thelander agrees with Gartner EXP's Rowsell-Jones when he says the META Group analysis strikes him as simplistic headline grabbing which does not stand up to close scrutiny.

"I guess this is what META are saying: If we were to make wholesale cuts in our IT infrastructure we would have to turn off a host of electronic services which are now fundamental to the running of the university and it would have a dramatic impact on the operation of the university," Thelander says.

"Not only would I be failing in my duty, the university would not be able to operate as it currently operates."

Supply and Demanding

Findings from IDC's August 2002 survey of senior IT and business leaders from organisations with 100 or more employees confirm the key business priority over the past 12 months to have been increasing productivity, as companies faced the reality of meeting financial expectations under demanding conditions.

Research director for e-business and solutions research at IDC Brooke Galloway says with technology now essential to many business processes, companies are looking for effective ways of deploying technology to drive inefficiencies out of the business and increase the productivity of employees by providing them with the tools and processes essential to performing effectively.

"The key IT priority has been systems infrastructure," Galloway says. "Legacy applications and existing systems often form the backbone of a company's IT architecture. The challenge for these companies is to move forward with new applications whilst continuing to work within the realms of their existing infrastructure.

"Over the last couple of years, we have seen a proliferation in the number of hardware components in computer rooms. As a consequence, most organisations' IT and systems infrastructure are becoming more complex, resulting in an exponential increase in the cost and difficulty of managing these environments," says Galloway. "Through the consolidation of servers and making the existing environment easier to manage, organisations are benefiting from efficiency gains and lower support costs. By optimising the performance of the current systems infrastructure, organisations ensure future IT investments complement - rather than complicate - their overall architecture."

IDC found 22 per cent of respondents cited systems infrastructure as their key IT priority and 25 per cent ranked increasing productivity as the key business priority.

The research company believes the focus on systems infrastructure directly supports the business challenge of increasing productivity and making all resources within an organisation more productive. While technology has enabled many other business functions to become more efficient, management today is asking IT also to become more efficient, Galloway says.

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