Sunday, March 15, 2009

What bothers the CIO?

Pervasiveness of IT Systems

It is no news that IT systems have grown with astonishing maturity and can now supplant human effort and assist in the improvement of business in much more scenarios than we had initially envisioned.

There is a host of software that will either entirely or significantly facilitate every conceivable business process. From large-scale ERP systems to disparate information management systems, inventory systems, HR systems, CRM systems, POS systems or even front desk token management systems, the “software population” and correspondingly hardware has increased exponentially and permeated every process of the organization.

We are aware that IT is required for the completion of most tasks and is “central” to the functioning of almost every firm. Once a well-designed piece of software is installed and has been imbibed in the routine of the business, there is no questioning its necessity, at least not when the organization is in good health.

However, firms are grappling to fight the corollary to this increasing pervasiveness of IT systems in business – drastic increase in cost of managing the IT infrastructure. IT infrastructure costs stand glaringly at the top of the expenses column for any firm with sizable IT operations.

The Cost Problem

With the recession being this vicious, organizations are under incredible pressure to slash costs and post even a half-decent bottom-line figure to the P&L statement. Obviously, the pressure for costs management comes trickling rather tumbling down to the IT department to review the cost allocation. CIOs and senior IT managers are grappling to find a solution to maintain the existing service levels offered by the IT department to the firm and decrease costs. Likewise, individual business units are under tremendous pressure to manage their IT needs with a reduced budget allocation. In turn, departments are required to scrutinize their IT operations and possibly find ways to reduce the charge-back costs.

Organizations are responding to cost pressures in different ways. In most cases (except in cases where the IT management is already mature and is governed using best practices), IT cost pressures are managed through a combination of one or more of the following reactions:

1. Scrapping development projects 2. Placing projects on hold 3. Lay-off development folks 4. Renegotiating vendor contracts 5. Reducing service levels 6. Outsourcing development work

Rationalizing Reactions

Each of the above scenarios gives rise to further questions.

1) If a development project could be scrapped it needs to be non-critical to the success or future growth of the organization. This begs the question on why it was being developed in the first place?

2) If projects are placed on hold, do firms typically do a cost assessment on the delayed availability of the application and hence any loss in opportunity or business cost?

3) The most unfortunate event is the lay-off of employees. In which case, the painful and unfortunate truth is that large firms do not measure and retain the best and brightest talent during these times. Or do they? Is the cost of re-hiring and nurturing talent to existing levels of competence lower than supporting them for a stipulated period?

4) Does outsourcing really derive cost-efficiency? If so, why was it not considered earlier?

In these cases, we could rationalize that while several firms do mechanically go through the above motions as a reaction to cost pressure, the “smart, well governed” firms would not do so without weighing in future consequences of the current downsizing or considering the competitive advantages to be reaped by consolidating the best systems and talent during lean times. Experts constantly state that turbulent times are best for organizations to strengthen their R&D, strengthen their value proposition and gain market share. So, the answer that presents itself to rationalize the above actions taken by firms is that “firms are forced to make trade-offs”. Sometimes excruciatingly painful trade-offs!

My interest is in learning how different organizations respond to costs pressures in the treatment of their IT or how does the treatment of IT get affected during turbulent times? How do firms rationalize and approach these trade-offs (related to downsizing IT)?

Also, do organizations open themselves more to embrace innovative processes or consider previously untested processes in the wake of cost pressures? For instance, do organizations that have not outsourced before consider outsourcing as an option?

Leonard George


  1. Quite an interesting post! Note that there exists a cause-effect relationship even between the various steps that companies take towards reducing costs. Scrapping development projects/putting them on hold results in an under-utilized workforce which eventually will lead to further layoffs. Companies which look at the big picture, realize and account for these interdependencies and take cost-reduction actions in one go tend to come out as cleaner and more efficient organizations.

  2. Thanks for sharing your post and it was superb .I would like to hear more from you in future too.