How Will the ‘New Normal” Change Your IT Spending?

International Data Corp. (IDC) recently issued a provocative study proclaiming a period of austerity it’s calling the “new normal”. Based on a survey of 140 CIOs and IT managers from Fortune 1000 companies, it suggests that organizations steel themselves as follows:

  • Re-review the 2010 project portfolio. Assume that by mid-year, the funding outlook will turn more conservative. This companies need to look now at how a mid-year reduction in the 2010 capital budget will affect various projects, which ones can be deferred; which cannot.
  • For critical projects, ensure there is clear and unambiguous external validation of these projects’ importance. Be able to re-justify to your business colleagues the consequences of deferral―both in terms of strategic impact and operational cost/efficiency.
  • Update “Plan B”―the capital budget which assumes lower funding, but do so quietly among your senior staff. It is not the time to rattle the confidence of your troops. As you sit in the normal business meetings which fill so many days, keep in mind that you need to quietly remind your colleagues now of the important projects currently underway and their strategic impact for the organization.

“Changes resulting from the recent economic turbulence are resulting in substantial changes to business and technology management models that will echo for several years, creating a ‘new normal’ for IT budgets, capital availability, and technology adoption models,” said Joseph Pucciarelli, program director, Technology Financial and Executive Strategies at IDC. While foretelling that 2010 will be a bumpy ride, he expects slow to modest growth in most industries. As investment dollars are being scaled back in many areas, IT could well be first in line to feel the pinch.

“By late April and early May, many companies will conclude 2010 will be a tight year and begin scaling back discretionary spending and non-essential projects,” said Pucciarelli. “Personally, I think the mid-year dip will be followed by a relatively robust rebound freeing up capital funding very late in the budget year.”

Because of this, projects that would previously have received the go ahead by showing a two- to three-year payback are being mothballed. Today, only those that can demonstrate an immediate need and ROI within 12 months can be expected to receive the green light. And anything left over won’t go to IT. It will be invested in the business, said Pucciarelli, to projects such as rebuilding the supply chain or adopting a more efficient warehousing system. While not directly IT projects, there is a technology component.

“IT-centric projects with a payback beyond 12 months are simply not on the cards,” said Pucciarelli.

A power distribution unit (PDU) upgrade that circumvents the need for additional premises would be funded, whereas a major rework of the entire cooling infrastructure is likely to be put off. Similarly, big software implementations are in trouble, while processor upgrades which can potentially bring big improvements in performance and a drop in software licensing are more likely to be authorized.

This view is backed up by recent research by TheInfoPro of New York City which found a definite slow in big-ticket spending while technologies such as data deduplication are doing well due to the fact that they reduce the amount of primary storage or backup space required.

C-Level Response

So, how are C-level executives taking all this? And do they agree with IDC? Terry Wisner, CFO at TeamQuest Corp. of Clear Lake, Iowa, said his budgeting for the year wasn’t overly optimistic. Far from being exposed to the further constricting of the purse strings, he had already taken a capital-budgeting approach of assessing priorities and required investments, as well as the risk impact to any project deferrals on operations. At the same time, though, he wants to avoid unnecessary delays to ongoing strategy.

“The primary objective for the final capital budget is to implement for the full year to mitigate adverse impact on operations,” said Wisner. “We can no longer afford to derail productive focus in our operations.”

He agrees with IDC that each critical project should have a designated internal customer that relies on the outcome of the project as a critical success factor for their own operations. To ensure delivery and accountability, therefore, he requires that established milestones should be reported to and reviewed with such internal customer as if there were an external customer.

As for Pucciarelli’s advocacy of quiet “Plan B” updates, Wisner disagreed with this tenet of the new normal. His view is that if a company plans wisely and adopts the right strategy, it is better to take a stand, invest in the projects that are crucial to operations.

“If we don’t have this mentality, our competition will be looking in the rear view mirror at us,” said Wisner. “It will come down to who is better operationally prepared to take on the additional market share and demand going forward.”

That said, he sees changes due to recent financial shifts. The “old normal” was one of internally leveraging all company growth from current operations and ensuring profitability. A more conservative “new normal’ means making prioritized and focused investments into operations to position future growth and operational preparedness for such growth to occur. But, he cautions, companies that hunkering down too much could be in trouble. “We will not shrink to greatness.”

Stephen Savage, on the other hand, does anticipate the screws being turned on project spend over the course of the year. As CIO at CA, he is focusing on driving efficiency from the keep the lights on portion of his budget in order to free up capital for new project spend. CA funds projects in two ways. First, there are corporate initiatives that are deemed necessary to either drive growth or meet security and/or compliance concerns. Second, there are initiatives that are funded through the business units.

Through the existing governance process, CA aggregates and prioritizes the project work based on their priority and financial return. With this approach, he said, it is easier to either stretch some projects or delay them based on capital availability.

The new financial reality, he said, has brought about some reevaluation of existing habits and preferences. For example, there is less patience for monolithic projects than there was in the past. “Maintaining capability to do things in house is no longer appropriate―emerging Cloud vendors offer agility and capability more quickly. SaaS and Cloud offerings are increasingly putting pressure on IT to be as agile with its strategic infrastructure.”

Thus CA developed an agreed enterprise architecture that speaks to a defined set of capabilities or applications. Anything ancillary to this is expendable. Internally, the company is focused on the capabilities and applications that support its most strategic initiatives. This approach, he said, enables the use of commodity providers for some of the more tactical projects, thus saving them money.

Differing Prognoses

The prognosis for the remainder of the year varies, of course, based on who you talk to. Michael Nolan, global leader for Risk and Compliance at KPMG International, considers that organizations are operating in a world in which traditional strategies and assumptions are failing. Thus they face ongoing challenges to their old assumptions, and can no longer rely on history to predict the future. His solution is a strong focus on risk management as a means of weathering the storm.

Charles King, principal analyst at Pund-IT, advises budget vigilance. Although the economic crisis seems to have stabilized, there are potential problems on the horizon such as continued roiling of other economies like Spain and Greece, an expected meltdown in US commercial real estate and a so-called “jobless recovery.”

“Every project requires the ‘Nth’ degree of justification,” said King. “That means IT management needs to do its homework. If IT vendors claim significant leaps in system or solution performance/efficiency, they better be able to back it up.”

The biggest change the status quo is more and more companies seeking to escape the “automatic upgrade” cycle. Many are discovering that they don’t need shiny new PCs every three years or the latest software updates. They can get by just fine with slightly out-of-date, existing technologies. When they do upgrade, they want tangible proof of the value of new solutions before signing purchase orders.

“That puts a lot more pressure on vendors but should also result in more customer satisfaction,” said King.