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Some CFOs see the downturn as an opportunity to revamp how their companies manage IT.
John Zhu, CFO Europe Magazine
February 2, 2009
Among the gruesome numbers to come out of the financial crisis are the ones hitting corporate IT, especially at major banks. In a recent round of cuts, 650 IT jobs will go at Credit Suisse, 500 at HSBC and up to 1,800 at Barclays. Many are also slashing their spending with contractors. Goldman Sachs and Citigroup, for example, have demanded that contractors accept a 15% cut in daily rates, while HBOS and Barclays made take-it-or-leave-it offers of 10% reductions.
But CFOs wanting to help get their companies through the downturn could find that across-the-board cuts in IT result in unintended consequences. Indeed, "CFOs should ask where cost reductions can be made without harming long-term strategy, and which innovations need to be ring-fenced," says Carole Murphy, global head of finance and employee transformation at CapGemini, an IT consultancy. She also notes that cutting particularly scarce resources — notably staff with a deep, strategic knowledge of IT — should be done with care. "CFOs must distinguish between employees who [have] difficult-to-replace skills, such as expertise in dealing with business-critical processes like product control, and those whose jobs can be outsourced safely."
Having a clearer understanding of IT investments is also important, and diversifying project portfolios is one way to help do this, says Simon Orebi Gann, a former CIO. "Aim for a balance portfolio with staggered returns — think of planting seeds every year for harvests that come over several years, not just quick crops to harvest next spring," he advises. As a rule-of-thumb, he uses a ratio of spending on new or existing IT of around 40:60. "If the ratio is 20:80, for example, that is a sign that you are spending too much on old systems," he explains. "Conversely, a 80:20 steady state could mean that IT spending is unfocused or profligate."
However a project portfolio is balanced, cost containment has now become "job one" for corporate IT departments, as a report from IT research firm Forrester notes. Any tech investments getting the green light need to be "small, quick-hit wins," while larger, capital-intensive projects will be postponed or downsized. Paul Hamerman, one of the report's authors, predicts that this will be the case until at least the latter half of this year. He adds that faster time-to-value projects will be more prevalent in 2009, resulting in the rollout of more "smaller scope applications such as budgeting systems rather than traditionally large scope projects such as ERP."
For CFOs, the choice boils down to "absorb the hits to keep a project going, put it on hold, or cut losses and scrap it altogether," he concludes. So how are finance chiefs managing the three options?
Open a New Window
One CFO opting to keep a project going can be found at Amplifon, a €668m, Milan-based distributor of hearing aids. Ugo Giorcelli, Amplifon's finance chief who is also in charge of IT, says that though the company is feeling the impact of the downturn — its long-term growth rate of 5% to 7% has been revised down to 0% to 2% for 2009 — it is continuing the company-wide rollout of a customer-relationship and salesforce platform, which is scheduled for completion in several stages over the next three years. "Because only about 1% of sales is spent on IT, we decided that the deployment costs are still affordable despite the economic downturn," he says, adding that, "The system is critical to our retailing business, which serves 3,000 stores globally."
And Giorcelli is looking on the bright side. Because he reckons that the medical supplies industry will continue to be relatively robust, he doesn't expect to reduce IT staff numbers, which currently comprise 22 employees in Milan and 60 at its subsidiaries. What's more, he notes that the downturn is providing corporate IT staff with welcome breathing space. "As we expect little [M&A] activity until 2010 at the earliest, IT teams have more time to go back and make sure that existing systems are integrated properly," he explains.
That's important for a company such as Amplifon. It has grown rapidly by making one acquisition every year on average since its debut on the Milan stock exchange in 2001. Such growth has often put a strain on IT staff, requiring quick, but not always perfect, post-acquisition systems integration. Now the company has a window of opportunity to focus on internal process improvement.
Having responsibility for both finance and IT certainly comes in handy. Giorcelli says his dual role makes it easier for him to bring finance and IT teams together in regular meetings to evaluate performance, make forecasts and discuss projects. One strategy they are putting under a lot of scrutiny at the moment is the outsourcing of IT.
As at other companies, cost will be big factor when considering outsourcing. "Companies will outsource because it gives them access to more cost-effective third-party IT expertise," says Gard Little, research manager at IDC, a market research firm. Although IDC forecasts growth in IT outsourcing spend in EMEA to fall to 7.2% this year from 8.3% in 2008, the figure looks more robust when compared with the cost of other IT-related services such as IT consulting, projected to grow by only 0.9% next year compared with 4.2% in 2008.
But while there is a labour-cost case for outsourcing, firms should be wary of undertaking outsourcing purely as a cost-cutting solution, cautions Forrester's Hamerman. "Outsourcing doesn't inherently save money," he says. "There are always start-up and transaction costs to consider."
Amplifon is no stranger to outsourcing. It began moving all of its hardware to third-party servers in 2006, and completed the move last year, leaving one internal staff member to oversee hardware. Now Giorcelli is weighing up whether software should also be handed to a third party so that development, for example, is done by external programmers and consultants called in for major projects. Amplifon staff, meanwhile, will focus on process improvements and other key services. But it's not just the prospect of reduced costs that will tip the scales in favour of outsourcing — he insists that a guarantee of reliable, round-the-clock technical support also needs to be factored into the decision to outsource more.
If outsourcing is a step too far, another way to hold down software investments while keeping costs on track is to adopt a pay-as-you-go consumption model, such as software as a service (SaaS). At Dubai World Centre, a $33 billion (€24 billion) commercial-development business, a new scenario planning programme uses "hosted" software from Adaptive Planning. The basic version of the software is free and open-source, so Ahmad Lutfeali, DWC's budgeting and finance manager, says he was able to modify and evaluate it himself.
For Lutfeali, SaaS isn't just about costs, however. Simplicity, too, is important: "I didn't want to hire extra IT staff [in addition to the 11 it currently employs]." Another attraction has been its rapid rollout and payback. "We spent four months starting in July 2008 evaluating five different applications before selecting Adaptive, and IT transferred budgeting and planning data from spreadsheets quickly because the interface was customised to be Excel-like." DWC's subscription costs less than $5,000 a year, a far cry from some of the on-premise options considered, which could have cost as much as $100,000. An added bonus is that if DWC decides not to renew the contract, it can still use a localised version of the software.
Drop, Don't Drag
However, even if the case for culling an IT project is crystal clear, actually pulling the plug may be tricky, particularly if staff have spent a lot of time on a project and have become attached to it, says Orebi Gann, now a UK-based non-executive director at Next Generation Data, a data centre services provider, who has been a CIO for Marks & Spencer, Liffe and British Petroleum. "It's up to CFOs to spot warning signs and kill off pet projects," he notes. According to Orebi Gann, infrastructure replacement, such as servers for internal data centres, is one area that should be viewed warily. "Today, CFOs should question such investments much harder than before, given that third-party server hosting is effectively commoditised," he says. "It would be very poor use of scarce capital, with only small economies of scale while saddling the company with upgrade costs and costs in maintaining staff with the relevant skills to maintain servers."
It's not just the cost of a project CFOs should consider when weighing up whether to kill it off, says Martin Bergler, finance chief of Vienna-based S&T Group, a €522m provider of IT consulting and services. The duration is also important. "A project's time to production is even more important than return on investment," he says. "In this volatile climate, an ROI of several years is like centuries."
But in general, he prefers to cut projects loose rather than postpone them. "You may save a little bit of money from putting a project on hold, but the nature of IT investment means that achievements already made are jeopardised, internal human-resources investment wasted and momentum is lost," he explains. "If you want to kick-start the project again, it could end up costing you more money than you saved from putting it on hold."
Currently S&T is rolling out standardised ERP and CRM software platforms. As for outsourcing, there's not much debate — almost all of its IT services (system design, user support and the like) are outsourced to S&T's own IT service units across central Europe.
Bergler says the company won't cut its IT staff of 35, but will reassign them from low-end support roles to its higher-value consulting business. "It won't be easy," he admits, adding that the firm will have to invest 3% of costs for retraining. But he adds that "people are now more ready to adapt given the current pressures." CFOs, too, will need to be just as flexible in their approach to IT spending in an uncertain 2009.
John Zhu is senior staff writer at CFO Europe.
The key to reining in IT spending may require CFOs and CIOs to finally reconcile their differences, says Nick Bray, CFO of Microfocus, a UK software house. As he sees it, "CIOs tend to have grand visions, while CFOs over-react, cutting too quickly and too deeply."
To support his view, Bray cites a survey of more than 400 CFOs and CIOs conducted by Microfocus and French business school Insead, which found that "CFOs are most concerned with improving core systems, but the majority of IT spending and hiring is focused on new technologies."
The question now is whether the current pressure to cut costs and conserve cash will force each side's views to converge.