Budgeting and cost-cutting

Looking for procurement cost cutting and governance stories

In the course of writing today’s story on spend management software and cost transparency tools, I talked quite a bit with Shane O’Sullivan, group CIO for Skandia Group Cos., about his methods for tightening up operational costs in procurement. O’Sullivan touched on many aspects of his organization’s program, and noted that having a procurement-related governance model in place from early on has been invaluable when it comes to being responsive to marketplace conditions, contract negotiations and the like.

That attitude makes sense to me: SearchCIO.com has looked at IT governance from a number of angles, and we’ve seen that — especially in a recessionary environment — organizations are finding that establishing protocols with regard to purchasing, hiring and other operational areas is imperative in order to run a lean-but-effective business.

I’m looking to write a longer story about procurement cost-cutting and governance strategies. Are you an enterprise CIO with experience in cost-cutting or governance related to procurement? If so, please email me at rlebeaux@techtarget.com.

What’s behind declining prices for application hosting services

While writing my story this week on CIOs looking to renegotiate IT outsourcing contracts to take advantage of cost savings, I found the drop in pricing for application hosting services particularly interesting.

As my story said, analyst firm Gartner Inc. predicts that the cost of outsourcing IT infrastructure will decrease 5% to 20% during the next two years, both domestically and abroad (with particular pressure on Indian outsourcers thanks to, among other factors, the Satyam scandal). The potential average outsourcing price reductions in 2009/2010 broke down as follows:

IT infrastructure outsourcing services and the average outsourcing price reductions:
Data center services – 5% to 15%
Desktop/help desk services – 5% to 10%
Network services – 10% to 15%
Application hosting services – 10% to 20%

Why might application hosting decline more than other areas? Gartner’s Richard Matlus explained:

“We think the reason that percentage is a bit higher is because people are going to be looking at SaaS as a solution,” Matlus said. “We’ll see more of those access-ready services delivered.”

Matlus went on to say that enterprise organizations’ decision to invest more deeply in Software as a Service, as well as virtualization and automation, will drive the price of application hosting lower, as IT outsourcing companies scramble to retain customers — even if it means dropping their prices. This is an area in which we can expect to continue to see big growth in 2009 and 2010.

Are you a CIO or IT executive renegotiating an outsourcing contract? Or seeking change your approach to application hosting? I’d love to hear your story.

Is IT innovation possible now?

Before the economy crashed and the word recession was officially applied to the economy, the buzzword of the IT conference circuit of 2008 was innovation. The trend, we were told, would be that as the more basal functions of IT move inexorably to service providers, the internal IT shops would focus more on strategic initiatives — those that differentiate the business and generate revenue.

This was not just idle chatter. Between 1994 and 2005, IT did indeed generate revenue. IT accounted amazingly for two-thirds of the all productivity gains in this country! And there is no doubt that since 2005, IT innovation has been, if anything, going on at an even faster pace, with technologies like virtualization and Software as a Service (SaaS) fundamentally transforming how IT is done.

But the signs are not good, at least for the immediate future.

In our TechTarget September 2008 survey of some 1,000 IT professionals, nearly three-quarters said the economy is now the single biggest factor in their decision making — and this was before the November market nosedive. Three-quarters of the respondents said their IT budgets would be further curtailed if things do not turn around in the first six months of the year.

So, what is on the chopping block if budgets shrink?

According to the TechTarget survey, what is still safe is compliance, followed by disaster recovery and business continuity, the network, security and custom apps. What’s not safe? Not surprisingly, people — job security always goes down in tough times. What’s also likely to be jettisoned are the newer technologies — SaaS, mobile enhancement, wide area network optimization/acceleration, SOA.

The fierce urgency of now means that technologies that save money, that provide transparency and allow companies to absorb change will be implemented before any newfangled innovation.

So is innovation in jeopardy? It depends on how you define innovation.

Two quick examples. One is from a government CIO I talked to recently. All of the new projects he was planning on for next year have been put on hold. The one new project he has been told to go full steam ahead on is automating a business process that was previously done by human beings, because, guess what? Those human beings are no longer there. Re-engineering a business process is not a new technology, but it’s new to him for next year.

Here’s one more, from a CIO of a large building services company. He’s building a social networking site - an au courant technology, to be sure. But it’s not just to show how cool the company is. It is to save his company money on consulting fees and leverage its workforce. The site is tapping a database of former, retired employees to act as consultants to his employees who still have their jobs.

Will the recession kill IT innovation at your shop? Let me know.

Can Yahoo or Gmail help IT departments cut costs?

There’s a lot of good information in Linda Tucci’s report from the SIMposium 08 conference in Orlando this week, including an interview with Sunoco Inc. CIO and incoming Society for Information Management president Peter Whatnell discussing his company’s approach to budgeting in this recession. Sunoco prepared three budgets for next year: what IT would have proposed had the recession not occurred; what happens if the budget stays flat; and what a 20% reduction in budget would look like.

Here’s one part, toward the end of the story, that jumped out at me:

“One game changer [Whatnell is] pushing is using providers like Google Inc. and Yahoo Inc. for email service. The move to cloud providers for email would eliminate the need for disaster recovery for email, since that is baked into the service. If the tradeoff is 90% of the service for one-tenth of the cost, this is an option CIOs must consider.”

Especially in a recession, CIOs and their technology departments are looking to cut costs. So why isn’t this option being discussed more often? Are companies just so used to Outlook and the like that they don’t consider alternatives? Is it because business addresses including @yahoo.com and @gmail.com would appear unprofessional?

If it’s because of some of the well-known scares associated with using cloud email for business purposes, I fully understand. Remember when Sarah Palin’s Yahoo email account was hacked? Nobody wants sensitive company information floating around channels that are not secure. Before overhauling one’s email-server approach, a CIO and his staff would need to methodically review and implement email policies aimed at protecting passwords and other personal information.

Trimming IT costs: What are the best methods?

I’ve noticed that our readers have a penchant for a list-based story now and then, and Linda Tucci’s report from the Gartner Symposium/ITxpo 2008 in Orlando was no different. Her list of 25 tips for cutting costs in IT, via Gartner research vice president Ellen Kitzis, provided a lot of solid, applicable advice for CIOs and IT executives looking to trim organizational fat.

A few “favorites” from the list jumped out at me:

1. Focus initially on cutting “people costs”: Freeze headcount, reduce/eliminate special bonuses, reduce regional support.

Kitzis said 37% of an average budget is spent on people costs, including money paid to contractors. According to Gartner, companies were planning to spend $13,454 per employee, and that is already down $200, or 1.7% per person. Painful to talk about, this area is a big target — but use a scalpel. Keep people who ensure the greatest transmission of business knowledge.

You keep hearing the “scalpel” versus “hatchet” debate between the presidential candidates, and it’s true in the IT arena as well. As difficult as this is, you must consider staff cuts, and look to remaining employees and/or outside contractors to fill some of the gaps.

2. Flatten organization structure: Move to collaborative, team-based models.

More people are working in virtual teams, and the model is reducing overhead administrative costs, Kitzis said. It’s not unusual for managers who oversaw seven people to now manage between 15 and 20 people.

To continue on this point, fostering teamwork and offering the option of telecommuting can bolster employee satisfaction, so you’re not as likely to lose the good people you choose to keep on board.

7.      Use invoice verification.

The industry has seen a slew of acquisitions. Big vendors have snapped up small fries with 1,000 customers apiece. It’s easier for them to apply their boilerplate policies to inherited customers and wait for the complaints than it is to review contracts individually. You can save 5% to 10% by correcting those invoices or play hardball when you agree to a new contract.

Maybe it’s the perpetual bargain hunter in me, but this sounds like a no-brainer. Don’t wait until a series of invoices rolls in before you raise your concerns with a vendor. Everybody is looking to come out ahead, and compromise is key: If the vendor is refusing to budge on the price, perhaps you can inquire whether it’s possible to throw in any additional services in exchange. 

12.  Use “best-for-need” rather than “best-of-breed” products.

You could be paying as much as a 50% premium for best of breed.

Sure, it’s nice to be able to boast that you have the latest and greatest in technology at your firm. But this isn’t the time to be showing off. Purchase and maintain the items that fit your needs, and apply the savings toward other areas in your company.

13.  Move to corporate liability for wireless services (save 15% to 30%).

Who’s responsible for the bills of individuals, what devices they use? The enterprise should take control and set standards, Gartner analyst Phil Redman said.

Delineate your policies clearly, so you don’t have employees knocking on your door asking why their iPhone isn’t being covered or how many work-related text messages they’re allowed to send per month.

What did you think of the suggestions on the list? Have you tried any of these? Do you have any to add?

Gartner: IT budgets in 2009 are like a ‘ham and cheese sandwich’

From the Swan and Dolphin resort hotels in manicured (hot as blazes) Lake Buena Vista, Fla., a quick dispatch before the day’s fun begins. I am here at Gartner Symposium/ITxpo 2008. I actually arrived a day early this year to get a bead on what’s in store for CIOs in 2009.

Gartner did something a little different this year, offering three sessions called Jump Start 2009 — one on strategy and planning, another on financial management and the third on managing people. The sessions came with a little activity workbook, with, yes, exercises and self-assessment quizzes to do in class, or in this case, in session, and pointers on how to get a grip on what your business is really all about and how IT can help. I’m going to include details from the two sessions I attended under “Homework You Need to Finish Before 2009” but wanted to give you the gist here on what is shaping up as a big theme at the conference. And I’ll give you the preview of where IT budgets will be next year according to Gartner’s Mark McDonald (channeling Hardball’s Chris Matthews! … more on that later, too.) from the 2009 CIO Agenda session that closed out the day.

Results, results, results

Basically, in what sounded like a bit of a fresh twist on the old business and IT alignment meme, the big message we’ll hear this week is that CIOs have to focus on IT’s impact on business results — assessing, measuring, promoting what IT does for the business. So Dave Aron, in his Jump Start session on strategic planning, made a distinction between doing things right (a given) and doing the right things for the business (what CIOs should be focusing on). IT organizations that fall into the bottom 25% of all IT organizations are distinguished by bad delivery, so it is never good to screw up on the fundamentals. But Gartner research shows that top performers are not distinguished by good delivery but by good strategy. CIOs need to figure out what makes customers choose their company or their organization over the competition and then focus on how IT can push that strategy.

In the Jump Start session on financial management, Barbara Gomolski said CIOs have got to come up with a new template for presenting the IT budget that reveals what IT does for the business. One insight: try presenting your IT budget in business terms, as the CIO of a Florida county did this year. It’s tricky, judging by the (unreadable) flow chart used in the Florida example. And there is apparently a big danger of duplication of IT spend. But the idea is to map IT spend to business programs. Another suggestion? Start by showing what percentage of IT spending goes to running the business, growing the business and transforming the business, and map the IT projects to business initiatives in each of those categories.

Let’s play Hardball

How should you think about next year’s budget, given the financial ruin of the past few weeks? Try a ham and cheese sandwich, says McDonald. Back in July, when he started to think about IT in 2009, it was shaping up as a roast beef dinner, “not the fanciest of meals, but satisfying.

“Unfortunately, the rest of 2008 came and everyone is living on a diet,” he said.

Instead, 2009 is looking more like a ham and cheese sandwich — appealing or lousy, depending on the quality of the meat and cheese, but with room for little flourishes like hot mustard and a pickle on the side. The good news? It isn’t bread and water.

Now, for the money part. According to MacDonald, based on the Gartner polling so far, IT budgets could be anywhere from UP 3.3% next year, compared with 3.18% growth in 2008, to DOWN 2.5%. Most likely? Flat to up 2.3%.

Here’s the big hunk of salt: Gartner’s budget polling started Sept. 15 and won’t close out until mid-December, McDonald said, so anything could happen to that forecast. Another way to look at it is that, again — so far, anyway: For every one CIO who is cutting the IT budget, 2.8 CIOs say their budgets will go up next year

A postscript on just how much presidential politics is on the brain: I’ve heard McDonald talk many times. He’s an animated speaker. Entertaining. He likes to do impressions — the deep-throated, self-important, clueless CIO who doesn’t listen to Gartner and pays dearly is a favorite. He likes to poke fun at his girth. Maybe I’ve been watching too much cable news, but at yesterday’s session he sounded exactly, I mean exactly, like Hardball’s Chris Matthews — the cadence, a lot of “et cetra, et cetras,” the talking through a grin … I’ll post an audio clip and let you be the judge. Off to Day 1.

In economic meltdown, CFO is a CIO’s BFF

As if you didn’t already know, your buddy with the middle initial F is back. And I do mean buddy. A memo out this morning from consultancy Gartner Inc. reminds that in economic crises, CIOs need to “build a powerful alliance” with their CFOs to improve business value.

That would seem to be a wise step in light of the dark news today that stocks plunged more than 600 points, and that according to the latest Wall Street Journal (WSJ) survey, a majority of economists believe gross domestic product (GDP — the total value of goods and services produced) will shrink in the third and fourth quarters, as well as the first quarter 2009. If true, the WSJ piece says this would mark the first time U.S. GDP has shrunk for three consecutive quarters in more than 50 years.

Ugh. Back to you and the Gartner memo.

It seems that despite years of being told you need to “demonstrate the business value of IT,” doing so has proved a Sisyphean labor for CIOs “because of misaligned mind-sets between the CIO and CFO,” writes Dave Aron, a Gartner VP and research director. The path to reconciliation?

“The CIO and CFO have to devote time to aligning the economic architecture and the enterprise architecture of the business. In order for CFOs and CIOs to ally closely, they must come to a shared view of value. The most powerful tools for achieving this alignment are portfolio management and enterprise architecture.”

In 2008, 23% of CIOs report to the CFO, while 38% report to the CEO, but the trend is listing toward CIO to CFO.

Ugh again. CIOs with their IT shops in order and looking to have a bigger impact on business value have a harder time busting loose when they report to the CFO, Aron said.

“There are two clear pieces of evidence for this. First, only 45 percent of CFO-reporting CIOs have leadership roles outside of IT, compared with 63 percent of CEO-reporting CIOs. Second, CFO-reporting CIOs spend one day less per month with the board and senior executives than do CEO-reporting CIOs.”

Not to despair.

“The message here is not that CFO-reporting CIOs are doomed to failure,” Aron said. “Rather, it is that these CIOs need a focused plan to break out of the box, which should include influencing the CFO to be more IT-savvy and to understand the CIO’s full capabilities as a contributor.”

The memo, sent out in advance of the big Gartner show in Orlando next week — with promises, naturally, of more helpful advice to come — can be read in entirety on Gartner’s website.

Lehman and IT and Bear Stearns, oh my!

When I saw the pictures of Lehman Brothers employees leaving the New York headquarters with cardboard boxes of belongings and dressed down in weekend wear, I wondered if there were IT people among them. Was the guy in the Bermuda shorts a trader or a database administrator? Everybody looks the same carrying a cardboard box.

The layoffs in the wake of the Wall Street quake will top 100,000, according to news reports: Lehman, more than 20,000 people; Bear Stearns, 7,000; thousands at Merrill Lynch after its sale to Bank of America. At some point, the damage has to hit IT, no?

I called a couple of analysts to get a sense of what the big research houses think will be the fallout for IT, on the employment numbers, which have proved so resilient, and IT budgets.

Ken McGee, who does the big-picture IT spending stuff for Gartner Inc., sounded a bit exasperated when asked about the meltdown’s impact on tech spending. “You see not-cool heads prevailing, with people believing the doom and gloom,” McGee said. Yes, IT budgets will be lower next year than the growth rates of this year or the year before.

“But you should also know that we are going to advise clients to have a growth budget prepared and that they keep it in their hip pocket, because these periods tend not to last that long, and part of 2009 could be a return-to-growth period. So we want our clients to be prepared when that happens,” he said.

What about this crisis being categorically different from other downturns? A once-in-a-century event, as former Federal Reserve chairman Alan Greenspan said?

Hype, McGee said. Take a listen:

“I think there is great danger when you have the center of the financial world reside within the same center as the media world. If you go back and back and searched enough I think you’d find that similar notions were presented in 2000 and 2001. … The fact remains that we have a smaller contingent of people working in the former Bear, the former Merrill, the former Lehman, but they have not entirely gone away. They have not entirely evaporated. So, these statements of terrific downturns in IT do not seem to be supported by the facts. And the point should be made that as horrible as this year has been - business-wise and economic-wise, the fact remains that IT spending did grow this year,” McGee said. “A withdrawing tide does not lower all boats at the same rate.”

Gartner has the clientele to prove it.

“We haven’t found one client, not one, who has cancelled all their IT projects for this year,” he said. “So, clearly the spending is down, but the IT vendors continue to do well. And if anything they have a common mantra, ‘Thank God for the developing world.’”

Ellen Carney, who covers banking and insurance IT spending for Forrester Research Inc., also doesn’t see the latest events on Wall Street as having a big impact yet on tech spending numbers, pointing to –wow! - IT’s fiscal discipline. It seems that while the traders and lenders were playing fast and loose, CIOs were minding their stores.

“The interesting thing, especially with the investment banks, is that they have really strong vendor management organizations. Even in the good times, they aggressively manage their vendors, the rates, the concessions they extract from them,” Carney said.

She said CIOs at financial service companies have been aggressively cutting spending all year, reminding me of the Forrester research published earlier this month showing that 49% of IT shops in the financial services sector cut their budgets this year. That was the highest percentage of all the sectors responding to the poll. A lot of IT money has gone to improving productivity in banking, she said, and the employment rolls show that. “The banks have been shedding heads for a while now, quietly and now not-so quietly.”

And while overall IT budgets in financial services might be down next year, CIOs can expect plenty of money allocated to compliance as more regulations come barreling down the pike.  The current compliance environment for financial services, pretty onerous compared with other industries, is going to look like a walk in the park compared with what’s coming, Carney warned.

As for IT people who have lost their jobs in the past few weeks, she doesn’t expect to see them waiting in long unemployment lines.

“All these really smart IT people gone from Lehman Brothers — it’s a great opportunity to pick up some talented people,” she said, but … “I don’t think we’ve seen the other shoe drop in the banking sector.”

Gartner’s McGee was unwilling to pronounce the layoffs a silver lining for other businesses, but he said he expects the current situation will be nothing like that in 2000 and 2001, “where IT workers were pretty much savaged.”

Let’s hope they’re right. Maybe the optimists have a point. This morning, Oracle reported profits up 28% in the first quarter, on an 18% jump in revenue. Somebody’s spending.

Give us the 411: We’d love to hear directly from IT people at Bear Stearns, Merrill, Lehman, AIG, Washington Mutual … about how they’re faring. Email me at ltucci@techtarget.com.

Dude, the world is getting a Dell

The slowing U.S. economy has apparently encouraged Dell to reexamine its international growth model. Today, the computer giant unveiled four low-cost computer models for China, India and other emerging economies.

The two notebook and two desktop PCs are the first Dell models designed especially for emerging markets, according to Steve Felice, the U.S. computer maker’s president for the Asia-Pacific. They are meant for small-business users and are to be sold in 20 countries across Asia, Africa and Latin America, according to the AP.  Prices for the new Vestro notebooks will start at 3,299 yuan ($475) and for the desktop PCs at 2,999 yuan ($440).

Now, I know the SearchCIO.com readers aren’t “small-business users,” but this statistic struck me: Dell’s first-quarter sales in China India, Russia and Brazil grew by 50%, about 10 times the U.S. rate! No wonder Dell is one of many companies turning to foreign markets!

I’m trying to find out if these are available for purchase to American companies with foreign outposts. In the meantime, read the full article and let us know what you think of Dell’s strategy. I know SearchCIO.com has some international readers, and it would be great to hear from you, too.