By Sandeep Gupta, Director, Kearney
With current uncertainty about future business, most organisations have paused capex expenditure and are conserving cash. CFOs in every organisation would be critically looking at this year’s budget and trying to reevaluate each line item. According to a recent report, more than 50% of the CIOs in India expect a cut in their budget and firms are being asked to plan for as much as 30% cut to their IT budget. For sectors such transportation, entertainment and hospitality the cut may be as high as 60%.
Easy, but the wrong way
As a CIO, it is a matter of time before such demand for an IT budget cut comes to you. organisations still look upon IT as a non-core function and when discussions originate to cut costs, IT is usually the first candidate with the ask “Do more with less”. When such demands come, most of the CIOs under current circumstances either accept the percentage of cut being proposed or negotiate to lower down the cut.
In both the cases, the discussion always steers towards cost reduction and the means to achieve these are short-term inward focus IT initiatives such as stopping existing / new projects, reducing services of 3rd party vendors, deferring purchases, renegotiating contracts, etc. Though these initiatives achieve short term objective of cutting cost but in the long term they cause the maximum harm to the organisation as it loses an opportunity to make foundational changes to technology at a time when others were curbing those investments. The reason most CIOs still accept these solutions is because they do not have to play the hardball in-front of the CEO and these initiatives do achieve their target in short term.
Hard, but the right way
During these times, CIOs will need to build up the trust with business budget owners and CFO. If the IT costs are divided by business units then CIOs need to have the conversation with business budget owners else if IT costs are centralized, then they need to speak to the CFO.
In this approach, CIOs need to work with CFO and business budget owners to explain the IT costs and explore options as to what cuts should be made, if any.
For example, a recent IT project has been started to automate the warehouse. The CIO should then clearly explain why this project needs to continue and the how the aim of cost reduction still gets achieved through automation. As such projects gets evaluated, there would be projects which are not critical and have longer timeline to produce RoI may be halted.
To start with, approval criteria could include projects which meet organisations strategic objective (e.g. Work from Home), reduce costs (e.g. automation) or increase productivity (e.g. using AI/ML for optimization). CIOs need to clearly articulate to business that post crisis they need to be prepared for a potential shift in customers preference to digital channels and services. The investment in these game-changing digital initiatives may change the course of the company once the crisis is over.
Though the above approach needs discussion and may take more time as opposed to simply accepting the budget cut, but ultimately it may result in options to uncover greater savings. Many of these digital initiatives may include automating processes, customer self-service, supply chain optimization, inventory optimization, help-desk automation etc. CIOs in parallel should still actively look for IT focused cost reduction initiatives such as consolidate and standardize applications, cut discretionary hardware replacement and upgrades, renegotiate contracts, optimize license and leverage cloud services.
Conclusion
History has shown that organisations who have taken a holistic view of their spend during these times come out strongly after the crisis is over. Many such examples exist based on the actions taken during 2008 crisis.
One such example is of William Sonoma an American high-end retailer of home furnishing and kitchenware. In 2008, when the recession was at its peak, the company recorded store sales of -17% one of the worst years in company’s history. In contrast, the online sales were down by only -6% generating $1B in revenue. In 2009, company made a bold and strategic move to use brick-and-mortar stores mainly as showrooms and make online stores the primary sales channel. Even though technology costs increased but this move enabled company to save on property costs and even reach out to global customers. Today, William Sonoma sells its products to more than 60 countries and online constitute 55% of its sales.
This is the time when the voice of CIOs may define the eventual future of the organisation. Make sure your voice is clear and loud with the message that cut costs where it is sensible but consider strategic investments which will help the company gain competitive advantage when recovery begins.