IT Cutbacks: How Much Is Enough?

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2002 has been a banner year for IT cutbacks, and that banner has been laid down like a shroud. Never has that shroud been more in evidence than at the Denver COMMON Expo last week. Attendance at COMMON generally was at a significant low, with an unofficial census well under 2000. The Expo--already drained of many vendors' booths--was at times more reminiscent of a ghost town than a convention. And even though the level of conversation between customers and vendors was more informative about products and new releases, there was a wary edge in the conversations as eager promoters of iSeries software and hardware products scanned the thin crowds, waiting for a rush that never materialized.

Informal interviews with representatives from a number of IT companies revealed their concern over the economy and its impact on the IT industry as a whole. No one could remember when COMMON attendance had been so low, and few were willing to guess what could inspire the industry to rally.

More Bad News Projected for 2003

Meanwhile, the META Group was preparing to release its annual 2003 Worldwide Benchmark Report, a study that focuses on cost reduction as IT's number one priority in U.S. companies. The report, released on October 16, reveals that although IT spending will appear to rise at the end of this year and into 2003, the perceived rise will really just be an "artificial bump." According to Dr. Howard Rubin, Executive Vice President at META Group and lead author of the report, a rise in IT spending will be only an illusion.

"When revenues drop and IT spending stays flat, IT spending appears to go up as a percentage of revenue. Actually, it just becomes a larger percentage of total revenue without increasing the dollar amount," explained Rubin. "IT spending is currently standing still as most organizations have hit the wall on cost reduction."

Nondiscretionary Spending Projected to Remain Flat

Meanwhile, at COMMON Expo, vendors were cautiously optimistic that an increase in IT spending in the coming year will pump new life into future Expos and future COMMON attendance. "As bad as it is now, it can't get much worse," said one vendor. "IT is too important to the way in which companies do their business. IT can't go away! Sooner or later, those projects that have been delayed will have to be addressed."

However, according to the META report, many companies have required their IT organizations to focus on nondiscretionary costs and reduce discretionary spending. The report findings show that, as a result of the pressure on discretionary costs, businesses run the risk of increasing the strain on existing systems.

"Most companies have already been required to cut into their discretionary spending and can't afford to cut any more without putting their day-to-day operations at significant risk," said Rubin. "IT organizations need to assess the risk versus 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."

The META report revealed other findings as well:

  • The projected top five IT priorities for U.S. companies:

    1. Reduced costs
    2. Business alignment
    3. Increased productivity
    4. Project management
    5. Improved software quality
     
  • IT spending: Spending has increased in infrastructure development. The biggest cutbacks have been in staffing. IT organizations spend 57% of their budget on "run the business" costs (nondiscretionary), 21% on "grow the business" projects (discretionary), and 22% on "transform the business" projects (discretionary).
  • Business alignment: New projects will be evaluated more closely, requiring justification by the business units requesting the new applications and requiring development teams (internal and outsourcers) to prove their skills.
  • Application development: Maintenance and development activities have swapped first- and second-place positions in terms of the percentage of overall work this year compared to last year. The research indicates that many activities that were postponed in 2001 became inevitable in 2002, despite continued budgetary pressure to maximize current systems. Also, with the increase in usage of easier-to-maintain languages such as Perl, HTML, and VB, there is less of a need for maintenance and more resources for new development.
  • Network: Despite the difficulty of developing universal benchmarks in the network area, through increased budgetary pressures, organizations have been forced to scrutinize their network activities. The overall voice and data network costs as a percentage of total IT cost is 8-9% (each), and at least 50-60% of those costs are for carrier services. The percentage of total network spending shows that carrier service costs have increased as a percentage of total network costs during the last five years, while hardware and support costs appear to be a decreasing percentage of total network spending. Depending on the service levels, carrier service costs can reach up to 85% of total network costs.
  • Desktops/help desks: Prolonged postponement of new development and enhancement projects for another year could lead to strain on help desk and maintenance resources, and companies will be forced to reassess obsolete systems and the business risks associated with these elements of the IT portfolio.

A Murky Future for COMMON Expo

If the META predictions prove to be accurate, expositions such as COMMON and COMDEX will certainly feel the pinch in the coming year, and this fall's lightly attended COMMON Conference may one day appear to have been a bright spot of activity. How much vendors are forced to pay to set up and man their booths was a familiar complaint among many vendors. "We ran the numbers," said one vendor. "We figure it's costing us about a thousand dollars an hour to be here when all the expenses are tallied. That's a lot of money to spend for such a poor turnout."

Yet, though the attendance was low, many attendees were enthusiastic about the information and the products that they encountered. "Let's face it!" said one attendee. "There's no other place where I can find all of these AS/400 solutions at a single show. The education is top-notch, and I saw a lot of things we can use in our shop." However, asked if he will be attending the spring COMMON Conference and Expo in Indianapolis, he replied, "That sort of depends. We just barely got this one past our management. A lot depends on the economy and our budget."

Thomas M. Stockwell is the Editor in Chief of MC Press, LLC. He has written extensively about program development, project management, IT management, and IT consulting and has been a frequent contributor to many midrange periodicals. He has authored numerous white papers for iSeries solutions providers. His most recent consulting assignments have been as a Senior Industry Analyst working with IBM on the iSeries, on the mid-market, and specifically on WebSphere brand positioning. He welcomes your comments about this or other articles and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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