Lessons learned from the last downturn have IT confident it can weather any economic uncertainty ahead
(This post originally appeared on Infoworld.com.)
by Dan Tynan
Call it a slowdown, a downturn, or the dreaded “R” word, worries about the state of the U.S. economy have increased across virtually all sectors save one: technology.
But has IT — like the Mafia and the U.S. military before it — succeeded in becoming recession-proof? Certainly not. A survey of the current IT landscape, however, suggests that tech departments are well prepared to weather whatever comes their way in the next year, and that IT — thanks to lessons learned from the last downturn — is much more resistant to economic uncertainty than it once was.
Much has changed since the dot-com implosion and subsequent recession of 2001 and 2002, when the tech sector took a huge hit and many IT jobs were cut. Today, tech companies are faring better than the economy as a whole, with eight of the top 20 tech vendors exceeding Wall Street estimates for the first quarter of this year. More importantly, U.S. corporate tech budgets will rise 2.3 percent this year, according to Gartner — a dip from the research firm’s earlier prediction of 3.3 percent, but still near the 2.8 percent growth IT has averaged since emerging from the doldrums in 2004.
The major shift for IT during the past few years has been a much sharper focus on cost containment and ROI, not to mention significantly leaner staffs. Thanks to IT practices such as SaaS (software as a service), outsourcing, and virtualization, the cost of obtaining essential IT services is much lower than in years past. Most important, technology is now viewed by virtually everyone on the C level as a key strategic component of business success. Enterprises that slash their tech budgets could end up cutting their own throats.
IT projects: Fast, cheap, and in control
IT is a much different animal than it was during the last downturn. The white elephant in the room — the big CRM or ERP project that was going to revolutionize the company and is now hopelessly late, over budget, and mired in political infighting — isn’t there anymore. Like Elvis, it left the building a long time ago.
In its place came smaller, nimbler, more focused projects that had to deliver on their investment or end up red-penciled. So cost-conscious company controllers looking to trim fat off the IT budget this time round may be forced to look elsewhere.
“In the past, there was clearly a ‘build it and they will come’ mentality,” notes Guy Fardone, acting CTO of Evolve IP, a managed technology provider based in Philadelphia. “Everybody got caught up in that. That’s not happening now.”
At the same time, it’s also a lot cheaper to fulfill IT functions than it used to be. The rise of SaaS and the emergence of flexible licensing agreements have made it possible to get the same work done for far less money, adds Fardone.
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“If your business is growing and you need Oracle financials, you don’t have to spend X dollars per CPU to get it,” he says. “You can buy it in a license agreement that didn’t exist five years ago. So you end up spending a few hundred thousand instead of a couple of million. I don’t think CIOs or CTOs have ever been in as good a position as they are now. There are so many ways to do the things you need to do without spending the kinds of dollars you had to in the past.”
Still, companies in cost-cutting mode will likely put off more ambitious IT projects for those that promise a faster return on investment, says Bob Riddell, senior director at Alvarez & Marsal Business Consulting.
“I think as the economy looks more frightening, we’ll see companies saying, ‘Let’s tighten up our business case, make sure the projects we’re doing have a measurable payback,’” Riddell says. “For example, instead of putting in a wireless network because it makes employees more creative and productive, they may say, ‘Let’s invest in new servers because we know our costs will go down.’ That lends itself to smaller-scale, more modular projects.”
But the easiest way to trim costs isn’t necessarily the smartest, adds Riddell.
“Instead of slowing down the rollout of new projects, CIOs would do better to ask the businesspeople which projects have immediate business value, and then put all of their resources on the ones that will improve sales or cut costs,” Riddell says. “It’s better to leverage your IT spend[ing] rather than simply cut it.”
Staffing: Lean, mean, results-driven teams
Another advantage for IT departments that suffered through the last downturn is that they’re still lean and mean relative to their companies’ other departments. When the ax falls, it’s more likely to land somewhere else. Many lower-level jobs have been outsourced or offshored, leaving more highly skilled positions that are harder to fill. This is one of those rare instances where a recession could actually lead to greater job security.
“One lesson we hope companies have learned is that they just can’t cut head count as wildly as they have in the past,” says Imran Sayeed, senior vice president of global industry solutions at Keane. “A recession comes, and the companies freeze hiring, then give one guy a job that used to be done by two or three people. It’s bad news. That leads to attrition, depressed morale, and decreased productivity.
“If you do make cuts,” Sayeed adds, “you need to be smart about it. You might not increase head count for pure Java development because you have better options. But thought leaders who understand their business and end-user requirements can’t cut 15 percent across every department in IT anymore.”
With today’s shortage of tech talent, head-count reduction should be the furthest thing from a CIO’s mind, says Rob McGovern, CEO of Jobfox.
“If you went down to your HR department today and said, ‘We’re contemplating letting one-third of our software developers go,’ they’d say, ‘Are you serious? It took us the last two years to get up to full staff,’” McGovern says. “Long-term demographics suggest an incredibly tight hiring market. There are 77 million boomers about to retire, and 48 million Gen Xers coming right after them. There’s going to be a big shortage. I’d think twice about letting people go, because it’s going to be hard to replace them.”
Even so, enterprises looking to control costs are more likely to look offshore than to new hires. Sayeed says many companies have barely scratched the surface of offshoring, especially when it comes to more advanced tasks such as application development and business process optimization. According to Compass Intelligence, budgets for outsourcing will grow nearly 10 percent in 2008.
But at the same time, organizations will be taking a much harder look at their outsourcing agreements and putting the squeeze on vendors, says Barry Jaruzelski, vice president at Booz & Company.
“There was a big wave of outsourcing five years ago, but now enterprises are going back and re-evaluating their contracts, seeing how hard they can squeeze their vendors,” Jaruzelski says. “There’s a lot more aggressiveness about the prices they got, the terms they agreed to, and the vendors they chose.”
Server virtualization: Cost container
The state of IT is increasingly virtual in 2008. Virtualization software can maximize investments in servers and make datacenters more efficient. As a slowdown looms, enterprises will add more virtualization services when consolidating their datacenters as a means for containing costs without sacrificing essential services.
[ Geta hands-on look at many aspects of the technology and project implementation in the Test Center's special report on server virtualization ]
Before server virtualization, average utilization in a server farm was 20 to 30 percent, says Keane’s Sayeed. “Now using blade servers and virtualization, you can take that up to 75 percent. You can triple the productivity of your server farm without the added costs.”
According to IDC, the worldwide virtualization services market will grow to nearly $12 billion by 2011, more than double its size two years ago.
“According to our April ’08 survey of the Data Center Users Group, 84 percent of our customers had implemented some degree of virtualization,” says Charles Spears, president of Liebert North America, a business of Emerson Network Power, which makes precision power and cooling systems for datacenters.
By using physical servers more efficiently, datacenters require fewer machines, translating into less floor space, reduced energy consumption, and lower capital expenditures. It helps to free up the three most critical constraints of space, power, and cooling faced by datacenter managers today, allowing for growth in computing capacity.
“Any technology that improves IT productivity also substantially drives up the demand for computing,” Spears adds. “And we expect virtualization to be no different.”
At the same time, large enterprises are also reducing the number of datacenters they inhabit — in part because virtualization allows them to get more done with fewer machines, but also because the data they’re crunching is more critical to the business, says Spears. In a world where many enterprises take orders across the Web 24/7, it’s far easier to guarantee availability and security when you have only two datacenters to worry about instead of 20.
“Emerson is a $22 billion company with eight business platforms and a large number of datacenters, all of which have to buy and maintain firewalls and other security software,” Spears says. “That’s a difficult and expensive task. The edict here is to have considerably fewer datacenters in the company.”
By consolidating to eight or 10 datacenters, Spears says, Emerson will not only be much more cost-efficient, it will also make it easier to deploy the most up-to-date security tools.
Yet these benefits also come at a cost: increased complexity, especially for CIOs who must suddenly grapple with the cost of supplying power and cooling systems to machines cranking at top speeds while ensuring 24/7 availability.
“Being an IT manager is probably the most difficult job in any company right now,” says Spears. “Besides having to deal with continuous changes to technology, focus on efficiency, and increased pressure on costs, they now have to demonstrate they can manage the physical infrastructure of their datacenters. It’s a very difficult position to be in.”
IT leads the way
Five years ago, IT was clamoring for a seat at the table next to the C-level execs. Now, without IT, there’d be no table to sit at.
“IT used to be seen as the geeky guys in the big room with the fans and blinking lights who treat us like idiots when we call and ask for help,” says Kris Domich, principal datacenter consultant at Dimension Data. “Now they’re the strategic enablers of the business.”
Over the past three years, Gartner surveyed 1,400 CIOs, asking them to rank their top 10 priorities for the year. Using IT innovations to create new products or services for their enterprises rose from 10th place in 2007 to third this year. IT budgets for companies who said they’re focusing on generating revenue in 2008 see a bigger boost, too — up nearly 5 percent, compared to less than 2 percent for CIOs whose primary goal is to make their departments more efficient.
However, A&M’s Riddell cautions against companies who rush to sell internal services without careful planning.
“This is not something you want to do on short notice,” Riddell says. “Providing IT services to your business has inherently different skill sets, sales and customer service components, and metrics than selling excess capacity or consulting services to other businesses. That usually fails pretty miserably.”
Instead, successful CIOs see technology as so embedded in the business that it’s inherently a part of everything the organization does, he adds.
“I’m working with a client in the advertising and marketing business,” says Riddell. “IT is embedded in everything they do. It maintains information about their customers, transaction histories, and contract repositories. When executives there talk about what they need to do in case of a downturn, they realize that cutting IT by 10 percent is not a good idea. IT is the business.”
Instead of bracing for the downturn and merely hoping to ride it out, Riddel says CIOs should embrace it as an opportunity to show just what IT can do.
“There’s a great opportunity to step up and use the market downturn to change your relationship with your business peers,” he says. “In my personal experience, the times I felt my career surge forward was when there was a big ugly problem no one else wanted to deal with. My advice to my CIO friends is don’t wait for the CFO to come knocking on your door asking for help. Walk in there today and give him your five best ideas for boosting the bottom line.”