Five CIO members of the Information Management Forum, an international organization of senior information technology and business executives, spoke with CIO Deputy Editor Richard Pastore at the IMF’s forum held in San Diego this winter. The discussion revealed how these CIOs are responding to the continuing economic pressures of 2003 and the heightened enterprise focus on value that has resulted. They explain why they are (and in some cases are not) considering outsourcing, maintenance license renegotiation and reduced service levels for further cost cutting. And they tell how they are calming their overstressed department while cultivating their own healthy sense of paranoia.
CIO: This is the third year in a row CIOs have been operating under severe cost pressure and being asked to do more with less. How is that affecting you now and how will it play out in the balance of 2003?
Bill Miller, V-P of Information Services, Harris Corp.: The pressure is still there, but I don’t believe the uncertainty is as great as it was 18 months ago, though that may have something to do with the markets Harris is in. In Information Services, we’ve done everything we can to show our decreasing cost per unit in everything except human resources, where we’ve got some predictable increases in employee costs and the cost of contractor or programmer hours. There’s no longer the sense in the broader business that we’re holding back as an IT organization.
Abbe Mulders, CIO, Dow Corning: We’ve gone through several rounds of cost cutting, including people, over the last three years. There’s been an overriding priority to reduce non-product costs throughout the company. Overall, pressures have not gone away. Dow Corning performed better in 2002 than the previous year, but we’re still hesitant that it might be a temporary recovery. Within IT, our budget is the same or less than in 2002. In Q1 2003, we’ve been asked to stay under budget until we get a better picture of the economic conditions in which we’ll be operating during the fiscal year.
Doron Cohen, CIO, Canada Life: IT is the pipeline in the insurance business. Shrinking the IT costs can improve efficiency, but at the same time it can reduce production capability or slow down the ability to launch new products. Clearly, connecting the business outcome with IT costs is the major challenge for CIOs today.
Cecil Smith, CIO, Duke Energy: We’ve gone through a very hard rightsizing of our energy trading and marketing business. We are highly cash conscious and are not going to spend more capital than we can generate out of the business. For IT, we are reemphasizing the basics with a focus on critical projects such as risk management and converting and integrating acquisitions. We don’t have any large and looming project on which to spend $10 million. We’re continuing to invest in application maintenance and operations baseload support.
Lee Lichlyter, CIO, Butler Manufacturing: We’re in the nonresidential building materials industry and the last 18 months have been brutal, with capital spending way down. It seems the pressure for IT, like all business functions, is polarized. On one side, we have to keep the business running and drive operating costs as low as possible. On the other side, because of economic uncertainty, we’re searching for opportunities to grow. There’s a willingness to invest to make that happen, but you’ve got to show the proof. And that proof has gone beyond the normal levels-I’ve seen more awareness at the board of directors level than I ever saw before. Their questions about value are more insightful.
How else is greater emphasis on value in evidence at your businesses?
Miller: We are so concerned with value that we do an ROI assessment and sign-off for every project over $50,000 now. We have two executive signatures on each project-the business unit CIO and the financial controller or if it’s a larger project, it’s the president-so there’s no finger-pointing down the road. Business units must have very, very specific ROI objectives. So if the benefit is in the supply chain area through better inventory management, those objectives are positioned front and center. This has taken some pressure off of me as the IT guy. I’m no longer perceived as pushing the IT strategic plan on the divisions. The business units are demanding services where the quantified need is most compelling.
Mulders: We’ve come a long way, and I agree with Bill that we don’t have to defend where we’re at with our costs anymore. Our costs are transparent; our services are transparent. People in the business units recognize the IT services they are getting and are willing to pay for them. There’s a dialog with business units to make [IT spending] adjustments when necessary. But I’ve also come to realize we need to market the value of what we do, to show how we’re contributing. I created a position for a marketing person in my organization to help us compose our messages and get key facts out. (That’s not the only thing this person does.) Now we’ve got a strategy around how we will go out and talk to the business unit people. The discussion is about value, where the strategy is going, what we’ve done in the past. It’s, “Don’t forget what we’ve just delivered to the business strategy in the last year and a half.” For example, Dow Corning created a new brand and Web-enabled business model to provide our customers a choice around our commodity product lines. They get low prices for self-service and bulk orders. IT had to build the site and get the transactional capability up and running in seven months. IT was a key player at the table, so we’re reemphasising the value that was delivered and how it aligned with the overall corporate strategy.
Smith: We are putting into place a practice where a business case and true ROI are produced for every IT initiative. This must be reviewed through the proper business unit channel. Now a business leader has to make a decision on which project will be more important to capital fund. Once the raw business case is completed, we turn it over to our financial analysts to apply a standard model. If the ROI is known at budgeting time, it is built into the business plan.
Cohen: In the past, multi-year, multimillion dollar conversion or migration projects were common in the financial services industry. We can no longer afford that. Business processes and market conditions change faster than such IT projects can respond. It is more important nowadays to be agile-to be able to redirect or restructure IT investments “on the fly” as business imperatives change. Any mechanism to do ROI and track ROI that doesn’t have a built-in mechanism to reevaluate or modify is totally misleading itself.
Lichlyter: I’m a bit of a contrarian when it comes to ROI. The problem is one of isolation-there’s often too many changing factors in a business to isolate the direct benefit from an IT project. For example, did that ERP system improve your manufacturing productivity or was it the KAIZEN event that occurred at the same time? I do believe it’s essential to create a business case, but the primary reason you do it is so that when project team members are deep in a project, they can make daily decisions that align with the business case objectives.
Many CIOs we’ve talked with are getting a lot of pressure to outsource in order to cut costs further. Is that happening in your organizations?
Smith: One problem with outsourcing to cut costs is that it can take you a long time. If you started right now and you didn’t already have a short list of pre-qualified companies to consider, you probably will not make it in this calendar year. If you are trying to outsource your IT operations functions, say to IBM or EDS or CSC, it will take them three to six months to come in, analyze your operations and write a contract; and then six to nine months to convert to the outsourcer.
Lichlyter: Even with application outsourcing, you’ve got to develop relationships. You can’t flip a switch and do all of your development in India. It just doesn’t happen. It takes time and effort.
Mulders: We did a competitive assessment of the internally delivered services to compare our costs with the marketplace. The emphasis was to determine whether the businesses would gain further value (mostly centered around costs) from an outsourced provider. Overall the assessment proved that we were delivering the agreed-upon services at or below market rates. We reviewed the assessment results with the business unit leaders to gain their support and approval to continue internal sourcing. Based on the facts presented, the business general managers accepted the recommendations, and also agreed to annual market price benchmarks to keep our internal costs comparatively aligned with what is happening in the marketplace.
If not outsourcing, then what will you do if you have to go back to the well this year and reduce cost again?
Lichlyter: Most of us have already cut all the discretionary stuff. So you sit down with the business functions and take a look at the project portfolio and ask which one hurts the least if you cut it. Or you look at your service levels and ask, “How much do you want them?” Whether that’s responding slower to a help desk call or whatever. Invariably they chose to reduce service levels because that feels less painful to them or seems less real. It’s not always the best choice, but it seems to be the easier decision. It’s also always tempting to want to look at projects down the road and delay them versus stopping something that’s active. But sometimes it makes more sense to cut a current project; the next project may have a better payoff for the business than the one you’re working on right now.
Mulders: We would look to cut services again, and renegotiate the service levels. Also, we’d look to our more discretionary project portfolio and determine the most appropriate projects to stop and eliminate. The businesses have accepted this scenario in the past, and would accept the recommendations again, because of the seriousness of the situation and the strategy and direction that we want the company to move toward.
Miller: That’s the place most of us would go-infrastructure services like desktop support, help desk, account administration. If you have performance characteristics well measured and know what your service levels are, you can give your internal customer a sense of what the degradation in service level will be very specifically as a result of taking down headcount. If you can give them a quantitative sense of what the impact will be, everyone can find a way to live with the results. Most of us have contract labor in operations, and you can ramp-down those resources quickly with low separation costs. You can then turn the knob back up when things get better. Of course, reductions in new project starts are inevitable as well.
Labor is still the biggest IT cost, but software maintenance is getting quite painful too.
Cohen: I agree. Software maintenance costs are becoming the dominant element of IT cost structure. Again, linking investments and expenses directly with business outcomes is the only way to control and manage these costs
Miller: The dilemma has gotten worse because business unit functions each have a component of IT and software licensing in everything they do. They ask us to deploy a tool, we buy software licenses, then begin to pay software maintenance fees, which start looking a lot like fixed cost of operations. You start dragging along this apparent fixed cost in your organization, which becomes a big percent of the total operating cost of your business, compressing the labor portion as a percentage of the total cost of providing IT. So if the business wants to severely decrease costs, they will have to divest of these licenses and the capabilities that have become a very fundamental part of everything they do.
Mulders: We’ve been challenging those maintenance agreements and payment terms. We hedge our bets and manage our risk on the most important software. On the others, we say we haven’t upgraded this particular software in a year or two, so we’ve made decisions to let the maintenance lapse or we’ve renegotiated for deferred payments into the next year. There are obvious implications of stagnating the functionality and putting ourselves in a situation where we must stay with a certain release level longer, but we’re doing this very consciously.
Smith: We established an enterprise contract when putting [acquired] businesses together, and we put a purchasing person from our global procurement department in charge. The real [license and maintenance] negotiation is done by true negotiators. I don’t have to worry about the contract side of it.
Miller: If you can aggregate volume across your business and negotiate flexibility in the way you allocate each seat, you can save yourself a lot of money and still guarantee the vendor some reasonable cash flow. For example, say a vendor offers development seats, and seats that simply allow you to view data, or seats that are intended for generating reports only. You can negotiate terms that allow you to move these seat allocations across different business units at will. If you purchased seats in less flexible fashion, you’d pay a lot more money. It takes a lot of hard work and talent to negotiate that kind of agreement. Your enemy is time; you’ve often got to start negotiating six months before you need to deploy the licenses. Your best leverage point is to work [the deal] across a fiscal or quarterly boundary for the software supplier. You can do wonderful things over a sales commission boundary period.
If anything good has come from this economy, perhaps it’s a shift in the balance of power from vendors to CIOs.
Lichlyter: It’s about supply and demand; it’s in our favor now, but it will probably shift again.
Cohen: A trend we are seeing when people are trying to get funding for upgrades is that when the ace comes out of the sleeve-the statement that the software is not going to be supported anymore-our management is now saying, “So what?” So the application will be three generations behind? The most cost effective IT solutions in many areas are using software that’s five or six years behind the current version. So we say, “So what?” I’m not happy with that, because sometimes we are shooting ourselves in the foot. But when it’s $3.5 million just to migrate to the latest version of an application…
Lichlyter: One thing that bothers me a little bit is that we’ve seen a lot of vendors consolidating and a lot of others disappear. I worry that it’s easy for us as CIOs to go with safer, established choices, but in the long run we may get hurt because there won’t be as much of a supply out there to keep the supply/demand balance correct. There will only be one core vendor and a couple of minor players in each category.
Miller: There’s a certain inevitability about this, because we as CIOs have a very hard time recommending expensive software to our business constituents from a vendor that doesn’t have an established track record or visible liquidity. It’s often very difficult to go with a small business.
Lichlyter: And it’s very possible one day we’ll wake up and not have as many choices.
Given all these pressures, how are you managing your staff and your department differently?
Lichlyter: In tough times like this, there’s more need to focus on communication, because the business is changing a lot and associates need to know how to support those changes and where they fit in. You need to help people understand how their projects drive the business forward. A lot of IT people have never been through a downturn. It’s been 10 years. For them it’s, “Is it ever gonna be good again? Will I be here next week?” So you have to talk them through that, and talk about how to deal with this type of environment-why it’s important to manage cash and stay focused on execution.
Smith: If there’s ever a time to be seen and be visible, it is now. I had an all-hands department meeting last week, and one of the questions asked what’s the thing that gives me the most concern. I answered, “For each of us, it’s maintaining our focus.” Because with all the concern about job security, the economy, a war, and what we’ve been through in rightsizing the company, the staff has got to be wondering -will we be working here next week, will we be working on creative stuff? I said, “This is one where we all have to help each other. We will be OK. We’ll come out of this, but you have to help carry that message yourself. If you see anything you can do to give back cash to the business now, it is paramount to do so, whether it’s cost efficiency or flat-out eliminating something.” I’ve also said in several staff meetings that we are reemphasizing the basics. This means continuing quality and timely deliver of IT operations and services while looking for any and all cost efficiencies.
Miller: We have redoubled our efforts to manage poor performers out of the business. With the industry suffering, there’s very low turnover; everybody is laying low. They’re generally not going to leave on their own. So it’s important to actively work the poor performers out. Make sure your management team understands that they won’t be punished in terms of resource shortages if these people leave. It’s not fair to the rest of the workforce that are busting their humps in tough times to have these poor performers by their side not carrying their weight.
Lichlyter: At the same time, you’d better treat the good performers better than ever, because they will remember how you treat them right now. It’s easy to forget about that when there’s pressure to cut costs. How you treat people now will affect how they feel about the company when the job market returns.
Parting thoughts for IT leadership in the balance of 2003?
Miller: A good dose of paranoia is in order. The folks in this room today run very good IT operations, but things can turn around in a hurry through circumstances such as terrorism, war, security breaches. You could find yourself in difficulty in an area that seemed quite well engineered yesterday. Go back and reevaluate; look at all possibilities for failure.
Smith: Ask, “What if this business turns south, how do I get out of the IT investment? Is there an exit or not?” If it is a next generation architecture build out, then do it in phases, with decision points all along the way. And 9/11 has taught us that you can’t wait for disaster recovery to work itself out. Worry about disaster recovery up front at the beginning of the project.
Cohen: In this fast-changing business environment, our challenge as CIOs is to enhance business flexibility. We know that no matter how smart we think we are, we will look back at the decisions we made a year ago and wonder: “Did I make this call?” Complacency is the CIO’s Enemy One. Being alert to business drivers and being ready with timely responses is the only road to survival.