IT Spending in an Uncertain Economy

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Do you think it's time to cut back? Maybe a different approach makes better sense.


MC Press Online Editor's Note: The following article was previously published by Klee Associates, Inc., publisher of JDEtips Journal and SAPtips Journal. A sample issue of either journal may be requested by clicking the respective links. 


Klee Associates Publisher's Note, October 2008: As a result of the economic downturn occurring in September 2008, companies worldwide tightened their belts and started cutting budgets for everything that didn't appear to drive sales and profitability, including IT budgets. But is that the best strategy? In March 2008, we published an article by Dr. CJ Rhoads in which she anticipated the current events and advised companies to remain level-headed and even take advantage of the coming slowdown. That advice was true in March, and even more so today.


Here's what Dr. Rhoads has to say regarding the current economic situation:


"I was asked recently, 'Did you know in the spring when you wrote this that there would be a financial crisis and stock market meltdown?' The answer is yes, of course. Anyone with a brain who ever worked in the financial industry and understood how securitization worked knew there was a crash coming; it's just that no one knew exactly when it would hit. But I could see the signs that the crash was imminent, and traditionally fall is the time for stock-market meltdowns.


Some people were paying attention and got out before the bust. Others were so busy raking in tons of money and overextending their own credit[that] they forgot to pay attention and got caught with their pants down," explains Dr. Rhoads of her assessment of the world's current financial state. "For a normal, healthy organization, panicking and cutting the budget everywhere right now would be a big mistake. But so would ignoring the fact that sales are going to plummet for most industries. It is possible to not only survive but thrive in the coming economic times, the climate of which will exist over the next several years. Leadership and planning are critical."


Klee Associates Publisher's Note, March 2008: We're all reading the headlines about the downward trends in the economy. We're tightening our own belts, while our companies are doing the same. So it should come as no surprise to anyone that IT budgets will be among the likely victims during this economic crunch. But is this the right response? Dr. CJ Rhoads has the answer--and you might be surprised at what her verdict is.


Impact of Economy on IT

The human decision-making psyche is very predictable. During feast times--when sales are up and the volume of business can be likened to drinking from a fire hose--we tend to spend more money on Information Technology (IT) projects. During famine times--when sales are down and we fear for our future--we pull back and stop spending money on IT projects.


While it may be common, this behavior is flat out wrong.


"Wrong?" you say? "How can spending when you have money and tightening the belt when you have less be wrong?" I'll tell you several reasons. When sales are up, we have a tendency to...

•·      Plan as if they will always increase at a constant rate

•·      Think we can afford more than we really can

•·      Try to quickly put together large projects that will help us deal with current volumes


Growth at a constant rate over the long term rarely happens. Instead, growth tends to occur in spurts. It makes more sense to adjust to the growth spurts and effectively use the downtime. Furthermore, a project that sounds great when it only costs 2 percent of our sales may turn out to be a terrible idea when it costs 25 percent of our sales.


Perhaps the worst mistake is planning big projects in the midst of overwhelming volumes of sales. At this point, our focus should be on our current customers, and planning a big project takes our focus away from the customer.


Furthermore, when sales are down, we...

•·              Often panic and cut expenses--sometimes too much

•·              Don't have a sense of urgency about smoothing out our processes

•·              Don't see the disconnects in our processes that will cause problems later


Again, the reasons for this are psychological. When times are good, we believe that it is due to our own superior products, services, and efforts. When times are bad, we tend to blame the economy. As a result, we have a hard time focusing on improvement when we have the extra bandwidth to do so. After all, why should we work hard to improve our products and services when they were obviously good enough during good times? So instead of taking advantage of the slow times in order to increase our capabilities, we think that there is nothing that we can do (after all, we can't fix the economy, can we?).

Recently, I was reading a new booklet by Jim Collins (author of the bestselling Good to Great), and I was surprised by the answer to two questions he asks:

•·                    Which currently profitable company outperformed all others for the long haul?

•·                    Which company topped the charts in return on investment?


The answer was not Wal-Mart, nor was it Microsoft. It was Southwest Airlines. Despite 9/11. Despite drastically rising fuel costs. Despite being in an industry where every other major player went bankrupt. Southwest Airlines has turned a profit for 24 consecutive years. Southwest Airlines has seen its stock soar 300 percent since 1990, and they did this while maintaining an unequaled position as the safest airline in the world. Southwest Airlines also ranks number one in the industry for service, on-time performance, and lowest employee turnover rate.


Jim Collins points this out as he describes what his in-depth research has revealed about business success: Great companies do well both in boom times and in poor economic times. Great companies know that high sales are likely a result of external forces (a good economy, for example), but when sales lag, they focus inward to see what they can improve.


The "R" Word

After the Internet Boom came the crash, when many lost fortunes as stocks sank. Value in stocks started returning in 2004, and we've had a pretty robust economy since then (though, as many people pointed out, it is often called a "jobless" economy because value returned to companies without increasing employment much).


But now things are starting to slow down again. There has even been mention of the dreaded "R" word (shhhhh; no one wants to admit that there might be a recession). The subprime credit crisis looms, and investors are getting nervous again. The war in Iraq has been going on for years, with no clear-cut end in sight. The stock market has been a bit, shall we say, variable. Pretty much everyone agrees: We should be preparing for less growth in the coming year than we had in the last few years.


Preparing for less growth, however, shouldn't mean that we stop spending on IT. If you've been following my advice, you weren't spending a lot on huge IT projects not related to your hedgehog concept anyway. You would also be slowly (but surely) consolidating and simplifying platforms and applications because you know that the costs associated with complexity sap your resources and don't add value. You would also be taking a look at potential replacements for your current technology by purchasing and playing with new cutting-edge technologies in a research lab. You would be waiting, patiently, for just the right time to implement a new technology (i.e., pounce like a panther).


During Slow Times

None of these common-sense IT management policies should change. However, during slow times, we could take advantage of the situation and focus our efforts on implementing those large projects that will enable us to improve our processes--just in time for the next growth spurt in a year or two.


Think of it this way: when there is a raging snowstorm outside, we could haul on our gear and get out in the snow. We could spend our time and energy shoveling the walk and putting chains on our tires. We could brave the elements and drive to somewhere. Or we can use the time to clean out our files, update our contact database, work on the flyer that we will need for our new products. Which one helps us more in the long run?


Now is the time to really focus on our processes. Ask yourself:

•·      During peak volumes experienced in the last few years, where were the bottlenecks?

•·      Which processes didn't run as smoothly as they could have run?

•·      What tweaks do we need in people and processes in order to get maximum value?

•·      What training can we get now that will improve our abilities later?


If we use the periods of slowness to improve our processes, we are utilizing our resources most effectively and efficiently. What many companies do when the economy slows is to increase the amount they spend on marketing in order to bring in more customers (i.e., go out into the storm). But if customers don't have the money to spend on the products and services of those companies, these companies are wasting their money. If, instead, the company increases the amount of money spent on IT, then resources are used more effectively. Using the downtime to plan for, install, and implement new technologies (that fit into the hedgehog concept, of course) will enable the company to better meet the needs of the customer. When the economy returns, the company will be able to take advantage of the smoother processes and increased volumes to put money away to cover the increased costs during the next recession. Both the company and the customer win in the long run.


So the next time the CEO of a company goes to the CIO and asks the IT department to cut their budget while increasing money for advertising, consider whether that is really in the best interest of the company.