The new IT goal: reducing expenditure. So what now?

Reposted, original on the “IT Governance, the Kapteyn’s view” blog on Computerworld UK in March 2009

If IT were to be considered just a cost center the answer would be easy: pull the plug and save a bundle of cash each month!

The fact that you do not see that happening even in the worse of circumstances indicates something we all know. Though we might not always be able to prove it: IT helps business to create value. By pulling the plug we might inadvertently stop whatever is left on the income side of the cash flow balance.

For instance if a bank were to close down its internet bank this might lead to the loss of any remaining confidence in that bank with the possible devastating result.

So a stale mate: we need to reduce expenditure for the enterprise (including IT) but ensure we do not worsen the income side of the cash flow equation while doing so. To answer the question were we can safely trim down the IT expenditure we need to know how we add value to the (individual sections of) the business.

When we look at the IT function and the services it provides for its customers, or business divisions, you will find it contains two basic sections:

• services currently in operation
• services under development

Each of these has to be reviewed in a different context:

- Services in operation, hopefully these deliver IT-value to the business on a day-to-day basis. It is here we need to check if we would not hurt the income side of cash-flow by shutting them down. Think of Amazon deciding so save on IT-operating cost by shutting down their website. Not likely!

- Services under development, since these do not actually deliver value yet these are the obvious candidates to shut down. And indeed every so often you will find that companies that are in ‘bad weather’ decide to stop all their development projects. But now imagine you have a project that is close to completion, let’s say all that is needed is one more month and an investment of let’s say 10,000 (US$, Euro, Yen). Upon completion the value to business is let’s say an out-of pocket cost reduction of 10,000 per month. The break even for the remaining investment would be two months and after that time it would help with a sustained improvement of the cash flow position. Wouldn’t it be a good idea to try and find that remaining investment money? The example goes to show that there is no black and white decision making. Yet in the panic of the moment, blunt cost-cutting exercises tend to do just that. In this calculation the money spent in the past is not relevant, it is about time and money still needed before the solutions starts generating value.

A word of caution when going through this exercise, think of the follow (fake) example: Imagine IT decides a certain service is very important for the manufacturing facilities of a Detroit car maker and they focus their effort on enhancing that service so the manufacturing plant can generate even more value. And then the enterprise decides to shut down manufacturing since they have more than enough cars in stock already!

Bottom-line: This re-evaluation exercise needs to be a joint effort between IT and its customers.