It should come as no surprise to anybody that IT departments are being pushed to take costs out of their operations. But the depth of those cuts, coupled with the unrelenting pressure to deliver high-value services to the business, is taking many IT executives into unfamiliar territory.

As CEOs, MDs and finance directors have reacted to weaker demand by putting costs under the microscope, it has been inevitable that IT spending has come in for intense scrutiny.

While still regarded as a cost centre by many, IT is almost universally acknowledged as vital to day-to-day operations: for office productivity, for manufacturing automation, for design and innovation, and for other critical functions. As a consequence, in contrast to previous recessions, where the temptation might have been to slash and burn, the task of knowing where to cut IT – and by how much – is anything but simple.
 
Such difficult decisions are very much in evidence in Information Age’s latest reader survey into spending plans and strategies, conducted in partnership with IT and communications integrator Affiniti. The research suggests that senior executives at many businesses are eyeing the IT budget, scalpel in hand, without necessarily appreciating what impact their cuts will have.
 
More than ever, organisations need to make smart choices. Reducing operational IT budgets injudiciously can not only impair current effectiveness but also damage any future capability to respond to the opportunities that will inevitably emerge as recessionary pressures ease.
 
The challenge for IT departments today, therefore, is to identify areas where IT costs are not directly supporting demonstrable business benefits: to eliminate unnecessary projects but retain new IT spend that will enhance value; to maximise the value of existing assets by delaying all but the most necessary of new system purchases; and to operate at the leanest of staffing levels but without losing the skills base that will support the post-recession bounce-back. In other words, where cuts are made they must improve efficiency, not reduce effectiveness.

The good news is that among the IT leaders surveyed for this research report ‘improving efficiency’ pipped simply ‘cutting cost’ as the key objective for 2009 – although only just.

Luckily, there is plenty of scope for reducing costs through dramatic leaps in operational efficiency. Cost-optimisation in areas such as server virtualisation, software asset management and data centre consolidation is already delivering substantial results and promising more.

Scheduled surgery

According to historical analysis by management consultancy McKinsey, in three of the past four major downturns IT spending fell twice as much as GDP did. And this time that negative tendency will be repeated.

The typical respondent to our Optimising Operational IT survey is being asked to cut between 6% and 10% of their IT expenditure over the next year.

But that is not inducing too much pessimism. Thanks to years of what now seems like abundant IT funding, finding and removing that amount of inefficiency – without damaging business performance – should not prove an insurmountable task.

Neither do they want to impair future prospects. While few companies could have planned for economic circumstances as grave as today’s, they would be short-sighted not to bear recovery in mind when mapping out corporate strategy.

Indeed, those businesses that have sacrificed their ability to capitalise on the next wave of economic opportunity as a consequence of cutting too deeply and in the wrong places will find themselves in dire straits coming out of the recession.

Industry context

IT expenditure must come down, but equally, the temptation of short-termism must be resisted