March 28, 2008

Budget Adjustments For CIOs In

Lean Economic Times
by Phil Murphy and Alex Cullen
for CIOs

Making Leaders Successful Every Day

For CIOs

March 28, 2008

Budget Adjustments For CIOs In Lean Economic Times
What To Cut And What Not To Cut When The Budget Ax Must Fall
This is the second document in the “Managing IT In Uncertain Economic Conditions” series.
by Phil Murphy and Alex Cullen
with Tim DeGennaro

EXECUT I V E S U M MA RY
CIOs have faced lean economic times with regularity over the past four decades, and they will inevitably
face lean times again — it isn’t a question of whether they will happen but when. Forrester advises
CIOs to base budget cuts on the impact to the business and to IT productivity, not on some misguided
perception of equitable cuts across all areas.

TABLE O F CO N T E N TS N OT E S & R E S O U R C E S
2 Evaluate Spending Categories To Identify Forrester draws on its experiences with IT
Potential Savings Opportunities management for this report.
3 Vary Your Cost-Reduction Techniques By
Budget Category And Impact Related Research Documents
7 Some Considerations Cut Across All Budget “Managing IT When Times Get Tough”
Categories March 25, 2008

RECOMMENDATIONS “Applications Strategies: Reducing Vulnerability

8 Consider The Ramifications Of Timing And In Times Of Economic Uncertainty”
Contrarian Views March 14, 2008
“Making The Right IT Investment Decisions”
July 19, 2007

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2 Budget Adjustments For CIOs In Lean Economic Times
For CIOs

EVALUATE SPENDING CATEGORIES TO IDENTIFY POTENTIAL SAVINGS OPPORTUNITIES

The advent of lean economic times may cause CFOs to direct business areas to cut budgets by a flat
percent. In turn, CIOs may be tempted to cut the budget of all IT areas equally — but that approach
rewards wasteful management while penalizing areas that are already actively managing expenses.
Prudent CIOs will examine IT spending by category to identify the potential for and impact of
various cost-reduction options (see Figure 1).1 These categories can be valuable for constructing and
cutting budgets because:

· It is a jargon-free way to characterize the reason for spending. While the budget detail may
be unknown to business executives, the itemized costs roll up into categories that make sense to
any executive: new capabilities, efficiency measures, operational expenses, etc.

Figure 1 IT Spending In Budget Categories

Average percentage
Budget category Considerations of IT budget
New IT investments:

Projects that deliver new business These projects were likely conceived
capabilities and approved before the lean times 20%
began.

Projects to improve IT efficiency Waste creeps in when IT is busy

completing other work on behalf 9%
of the business.

IT MOOSE:
Maintenance and smaller Maintenance budgets are often
enhancement activity against based on previous year with little 15%
applications year to year scrutiny.

Operational costs of applications and Inattention to detail over time can

services, including software licenses create waste in licensing and 19%
and support contractual maintenance fees.

Data center and networking costs Reduced business can correlate to

reduced requirements for storage 19%
and computing capacity.

End user support, including What level of support/time between

desktop software desktop upgrades is appropriate 10%
during lean times?

Administration, planning, Can you shift deployments of

architecture, and IT management administrative or architecture staff to 7%
more tactical assignments,
temporarily?

45523 Source: Forrester Research, Inc.

March 28, 2008 © 2008, Forrester Research, Inc. Reproduction Prohibited

 Budget Adjustments For CIOs In Lean Economic Times 3
For CIOs

· Successful cost reduction techniques will vary by category. Some categories of cuts are cost-
avoidance — deferring projects that deliver new business capabilities, for example. Operational
cuts may hurt today’s revenues, while everything else is likely to fall somewhere between those
two ends of the spectrum.

VARY YOUR COST-REDUCTION TECHNIQUES BY BUDGET CATEGORY AND IMPACT

The potential effectiveness of a given cost-reduction technique varies by budget category — categories
consume different percentages of the budget, therefore offering varying dollar amounts as potential
cuts. Some techniques don’t apply to or are less effective for a budget category and some techniques
merely defer planned spending, while others have potential for more permanent cost reductions. The
most appropriate decision-makers also vary by budget category: The CIO will make some decisions
while other choices will be made by business-unit heads, and still others will be decided by executive
management. CIOs should consider these variances as they approach budget cuts.

Projects That Deliver New Business Capabilities

Projects that have yet to start are potential opportunities for budget cuts, but act with care —business-
improvement projects should be sponsored and cut by business executives, not by IT. CIOs should
avoid creating the perception of IT as the entity that decides unilaterally which projects to cut. CIOs
who are pressured to act unilaterally should discuss the very real cultural problems that may ensue
with the CEO and CFO. Craft an approach that drives the mandate to cut from executive management,
through corporate management to business units, not outward from IT. Techniques to consider:

· Halt projects. Suggest that the CEO or CFO halt projects that haven’t started or defer
acquisitions until a review of all planned projects is complete. This has the effect of canceling
nice-to-have projects, while crucial projects will resurface for appeal.

· Slow projects. Evaluate whether it is feasible to slow down in-flight projects that can’t be
canceled, based upon position within the project life cycle. Slowdown tactics may include
reducing staff (shift staff to accelerated projects), terminating contractors, and deferring
significant hardware and software purchases to later dates. Use the slower project pace
productively — refine the formal requirements definitions, model alternative (perhaps cheaper)
solutions, and improve the efficiency of other labor-intensive/high-impact activities such as
developing more complete test scripts, data, and processes; improving production turnover; and
writing more effective operational documentation.

· Prepare to advise. Prepare information that will enable intelligent decisions on active and
planned efforts — including projected financial impact (revenue/savings), timing (when
financial impact materializes), cost, and burn-rate of resources, etc. Act as an advisor to the
CFO and business management on the dependencies and synergies of coupling certain efforts

© 2008, Forrester Research, Inc. Reproduction Prohibited March 28, 2008

4 Budget Adjustments For CIOs In Lean Economic Times
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if they go forward, but defer the actual decisions to cut to business management. Propose
alternatives to more expensive approaches, such as software-as-a-service (SaaS) options in lieu
of purchasing packaged applications.

· Look beyond cuts. Don’t just use the information to focus on cuts — help the CFO and business
leaders to identify opportunities to accelerate new revenue opportunities, reduce business costs,
delay the burn-rate of long-term projects, and defer or halt projects that are not cost-focused.

· Reduce staff intelligently. When looking at the option to reduce project staff, consider retaining
project management generalists — a good project manager can switch between projects or
straddle multiple projects with the right combinations of staff. Prune positions carefully — you
may have put your most talented staff on an aggressive technology project that is now being
canceled — don’t penalize your best staff for taking a challenging assignment.

Projects That Improve IT Efficiency

Canceling projects that have the potential to improve IT efficiency can be counter-productive, but
don’t reject the idea out-of-hand. In an atmosphere where no business unit will receive all of the IT
resources it wants, any moves that increase the number of available IT resources would seem to benefit
all. But perception is everything — forging ahead with IT efficiency projects while business units have
their efficiency projects cut may seem to be a double-standard that favors IT. Techniques to consider:

· Focus on near-term cost reduction or avoidance. Accelerate projects that will avoid near-term
expenses. For example, virtualization of smaller servers may enable you to avoid hardware
purchases, decrease licensing costs, or avoid hiring systems administrators. Migrating the last
application from a “burning” database engine could avoid software license maintenance fees for
the coming year.

· Identify labor-intensive areas. Theoretically at least, the largest efficiency improvements should
be possible in the areas that consume the most resources. For example, look at application-
testing processes — testing occurs on every project and enhancement, and test data generation,
test set-up, and test execution can be extremely resource-intensive.

· Scrutinize all proposals. Take a jaded view of all IT proposals — if they can’t pass internal IT
scrutiny for truth and conservative estimation of savings, they’ll never pass business scrutiny.
IT must get in line with its business peers and make the best business case possible using
conservative estimates, then take its place among business units for the budget ax.

March 28, 2008 © 2008, Forrester Research, Inc. Reproduction Prohibited

 Budget Adjustments For CIOs In Lean Economic Times 5
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Maintenance And Enhancement Of Existing Applications

Rationalizing the existing base of applications may be the single largest opportunity to reduce
existing application costs.2 Maintenance budgets often receive little scrutiny year over year; in fact,
84% of IT organizations base their current maintenance budget on the previous year’s budget.3
Techniques to consider:

· Deduplicate. Shed duplicate applications through standardization. A financial services

organization interviewed by Forrester owned 17 travel-and-expense applications in 16
subsidiaries. Consider the resources squandered to maintain and operate 16 duplicate
applications. Pick one as the standard and eliminate the costs of the others. However, shedding
duplicates may require resources to retire the applications, archive data, and retrain users on the
new standard application.

· Accelerate business-efficiency-oriented enhancements. Accelerate small enhancements that

focus on business-efficiency improvements — they may allow business units to defer hiring and
may also reduce the pain of projects that were deferred or delayed to reduce costs.

· Stop the madness. Some maintenance queues are stuffed with enhancements to which users
have an emotional, rather than business-benefit attachment. To separate the wheat from the
chaff, consider cutting all application activity off to a bare minimum level or to the level that
internal staff or service-level-based contracts can cover. Make sure this action is supported by or
emanates from a mandate from senior business management.

· Weed out underperforming assets. Cut underperforming staff to save higher-performing

staff members who are threatened by cost-cutting measures. Reassign the retained staff on
a temporary basis, making it clear that the move saved that person’s job and is a temporary
measure to be reversed as the company’s fortunes improve.

· Spend to save. The early adopters of APM tools estimate an average of 20% increase in
productivity through the use of an application repository created and maintained through the
APM tool. But the tools require investment and implementation cycles that can span several
months, so consider how to measure and report the benefits of increased IT productivity to
satisfy any subsequent detractors of the technique.

© 2008, Forrester Research, Inc. Reproduction Prohibited March 28, 2008

6 Budget Adjustments For CIOs In Lean Economic Times
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Operational Costs Of Applications And Services Including Data Center And Networking
Data center costs aren’t very malleable — driven as they are by physical equipment and locations.
Similarly, networking costs can also be difficult to change as they are based on capacity and quality of
service (QoS). As targets for cost-cutting over the years and as an indication of the level of maturity,
operations groups tend to run fairly lean. However, software licenses and maintenance agreements
can proliferate due to the same lack of scrutiny as application maintenance budgets — it is easier to
just pay the bill than track down the number of people still actively using myriad software licenses.
Techniques to consider:

· Defer upgrades. Defer nonessential hardware and software upgrades unless they contain
specific features that are critical to newly re-approved business plans.

· Anticipate a slowdown. Match the anticipated business-transaction slowdown against business-

as-usual (hence more aggressive) transaction estimates to see whether capacity upgrades can be
deferred. Consider setting these funds aside to enable immediate upgrades as soon as business
transactions increase.

· Re-assess. Re-assess telecom service costs and contracts and outside services for data centers
such as off-site data storage.

End User Support, Including Desktop

Everyone wants a modern PC; however, PC and desktop upgrades are nice-to-have expenses in lean
economic times unless they are required for new business capabilities. If this isn’t the case, offer the
upgrade to the budget ax. Techniques to consider:

· Cancel or defer upgrades. Cancel or defer upgrades until the economy improves.
· Upgrade selectively. Upgrade only those departments that require new equipment.
· Reduce service. People are creatures of habit, immediate gratification, and convenience. But how
much would the volume of help desk calls decrease if the callers are charged, or even tracked and
reported? How many of the calls are business-critical issues? End user support costs are closely
tied to services levels and the service-delivery approach, such as use of desk-side technicians
where users expect this. Use tough messages from the CFO to get business users to reconsider the
service levels they require. Balance the savings and impact carefully however — don’t let lower
levels of support impede revenue opportunities.

March 28, 2008 © 2008, Forrester Research, Inc. Reproduction Prohibited

 Budget Adjustments For CIOs In Lean Economic Times 7
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Administration, Planning, Architecture, And Management

Administration, planning, architecture, and management expenses are almost exclusively staffing-
driven, and so little can be done to affect them short of layoffs or early retirement programs.
Techniques to consider:

· Reassign the highly skilled. High-skill positions such as experienced enterprise architects
with long tenure in the company know both the business and technical environments. As such,
they will be costly to replace when the downturn ends. Instead of reductions in force, consider
reassigning highly skilled staff to more productive assignments on accelerated projects to retain
key staff while reducing the demand for resources on key projects. Since staff is retained, cost
savings materialize through deferred hiring on the accelerated projects.

· Create a SWAT team. The highly experienced staff can serve other functions, such as a special
weapons and tactics (SWAT) team member to lead expense-reduction hunting exercises in other
areas within IT and business areas.

SOME CONSIDERATIONS CUT ACROSS ALL BUDGET CATEGORIES

Some budget considerations aren’t confined to a single budget category — rather, they cut across all
categories. Consider them as you evaluate each category.

Halt Training That Isn’t Crucially Important

Training is an eminently deferrable expense — most staff will more readily accept reduced training
when the alternative may be more drastic measures that affect compensation or even employment.
However, isolate funding for crucially important training that, if it fails to happen, will halt lights-on IT,
doom a crucial project to failure, or prevent planned cost-cutting measures. Techniques to consider:

· Get informal. Cut back the number of formal trainees and select candidates to institute a “train-
the-trainer” program in which attendees go to formal classes and then teach internal staff to
reduce tuition, travel, and expense costs.

· Bring it on. Bring instructors on-site to reduce the travel and expense costs of flying and
housing several students — the threshold for breakeven can be as low as several students.

© 2008, Forrester Research, Inc. Reproduction Prohibited March 28, 2008

8 Budget Adjustments For CIOs In Lean Economic Times
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Evaluate Compensation, Staffing Levels, And Annual Salary Increases/Review Cycles

Most employers have an implied agreement with employees that includes annual salary adjustments
via a review process. Adjust that indiscriminately at your peril — if competitors are not freezing
wages and extending review cycles, you may lose key (disgruntled) staff members. If competitors
are taking steps, consider whether to follow suit or use it to your advantage by ignoring the trend.
Techniques to consider:

· Get and stay competitive. Understand whether your wages are competitive — if they are, make
it public knowledge. People will look to greener pastures less if they believe they are fairly
paid. If your pay rates are on the high side, then publicize that fact to avoid unwanted attrition.
Consider reducing the average percentage of pay increase — while holding performance reviews
and salary increases on time.

· Calculate the true cost of attrition. Consider the full costs of unwanted attrition — recruiting
costs often run 20% or more of annual salary. Consider the cost of lost business and technical
familiarity and knowledge. Compare those costs plus salary increases to bring your wages up to
competitive wages on the open market before risking excessive levels of attrition.

· Reduce staff if you must. Thin productive staff as a last resort, and cut by function and value.
Staff salaries exceed 30% of the IT budget and are an obvious possible cost-cutting opportunity.
But cutting staff often translates to reduced IT capacity. When cutting, realize that not all staff
are created equally — generalists who can do many tasks may have more value in lean economic
times than specialists who often come with higher price tags.

R E C O M M E N D AT I O N S

CONSIDER THE RAMIFICATIONS OF TIMING AND CONTRARIAN VIEWS

Temper your thinking on budget cuts with the following two perspectives.

· Timing is everything. Measure the “when” of budget cuts as fervently as you measure
the “how much.” Lean economic times today demand relief within weeks or months, not
years. Chart out when savings will really accrue — several small savings across the year may
prevent one large cut that occurs later in the year.
· Should your organization be a wolf among sheep? Should you and can you adopt a
contrarian position to budget cuts? In lean economic times, most of your competitors will
throttle back — is now the time for your firm to accelerate and grab market share?

March 28, 2008 © 2008, Forrester Research, Inc. Reproduction Prohibited

 Budget Adjustments For CIOs In Lean Economic Times 9
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ENDNOTES
1
To determine the average percentage breakdown of the IT budget, Forrester polled 317 technology decision-
makers in the May 2007 Global IT Governance And Steering Committee Online Survey.
2
Especially in the financial services industry, the early adopters of application portfolio techniques are
experiencing significant increases in productivity and reductions in the cost of existing applications. See the
January 7, 2008, “APM Trends: Board-Mandated Cuts To The IT Budget Spur Global Bank To Adopt APM”
report.
3
Just 24% of companies surveyed employ a zero-base budget strategy, which requires every expenditure to be
justified annually. See the March 30, 2007, “Application Maintenance Budgets” report.

© 2008, Forrester Research, Inc. Reproduction Prohibited March 28, 2008

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