If IT leaders aren’t already thinking about the impact of an economic downturn, their CEOs certainly are. In fact, nearly 8 in 10 business leaders expect a recession in their core business region within the next 12 to 18 months – or think a recession is already underway, according to the C-Suite. Conference Board Mid-Year Outlook.
Among CEOs surveyed globally, 15% believe the recession has already set in, while 61% expect it to happen before the end of 2023.
“Although recessions are inevitable, we never know when they will hit,” says Dan Roberts, president of Oullette & Associates and host of the CIO whisperers podcast.
“There is a delicate balancing act at play. C-suite leaders cannot hold back and risk missing market opportunities. But on the other hand, if they continue to invest at the same levels and the economy collapses, they run the risk of spending exceeding income.
A decade after the last recession, many CIOs have never had to steer their organizations through such economic challenges, Roberts points out. But they will be tasked with cutting costs and boosting efficiency to sustain their business through the cycle.
Companies that are underinvested in technology will be in the worst position. “They will have little choice but will go into survival mode collecting coins from the couch to save money,” says Peter Pisciotta, managing director and senior consultant at Fine Line Partners. “It’s not pretty.”
IT costs can represent a significant portion of operating expenses (SG&A) and capital investments, so when cost reduction is needed, IT can be at the top of the list for reductions.
“It’s critical that IT leaders have a plan,” says Patrick Anderson, director of technology, strategy and architecture at global consultancy Protiviti. “Without a plan from the IT manager, other managers will step in and it could have devastating consequences.”
Here are steps CIOs can take to realign investments ahead of a possible recession.
Turn fixed costs into dynamic costs
In a recession, cash is king. IT can help the company maintain cash by converting some fixed capital expenditures into more dynamic operating costs, says Shawn Fitzgerald, senior research director at the Hackett Group’s financial advisory firm. Moving more workloads to the cloud before the recession can help.
According to a Hackett Group report from June 2022, organizations that migrated the majority of eligible workloads to the cloud experience three times the average cost savings compared to organizations that were slower to migrate to the cloud.
Reassess IT service contracts
In some cases, contracts can be renewed automatically without re-evaluation or optimization. Now is a good time to review the outsourcing portfolio.
“Vendors who can deliver demonstrated and quantifiable financial value can and should continue to be rewarded by their clients and customers, as this is key to successful growth in a recessionary environment,” says Marc Tanowitz, Managing Partner of consulting and transformation at West Monroe.
“That said, buyers need to be confident that their value-added partners are financially sound and not at risk of reducing their investment in their products and services to the point that performance and quality may suffer.”
IT managers can work with partners to identify cost reduction opportunities. “Work closely with your external partners, as they are likely to be in a similar position,” advises Erik Bailey, CIO of IP software and services company Anaqua.
Redesigning a service to reduce costs, rather than eliminating it altogether, can be mutually beneficial. “Lean on your partners,” says Michael Fuller, director of The Hackett Group. “They can find ways to streamline their delivery, move more work to lower cost locations.”
Asking for significant price concessions may not work as IT service providers face rising labor costs. But “clients have many options for relaxing contractual restrictions to reduce costs,” says Brad L. Peterson, partner and global head of technology transactions at law firm Mayer Brown.
“They can reduce supplier obligations, take on more risk, enable transformative change and commit to helping the supplier further. Saving money isn’t about getting the lowest contract fees – it’s about lowering the total cost.
Prioritize volume adjustments over price cuts
IT managers can reduce their unit costs by requesting a discount from suppliers or seek quantity savings by rationalizing the units used. They can, for example, optimize the number of software licenses they pay for.
“From experience, the price reduction is not an undue success,” says Pisciotta. “Sellers [may use] the ability to get back terms they didn’t like, like reduced SLAs in exchange for reduced fees. »
Shut down redundant systems
Take the time to assess your software and hardware asset base. “There could be opportunities to reduce those costs, particularly if some of those assets are close to retirement or are good candidates for retirement,” says Anderson of Protiviti. “There could also be opportunities for consolidation or streamlining.”
Redundant systems are a good target for reducing costs. “It can be hard to kill an application, but risk-taking CIOs will shut down a system and see if anyone complains,” says Rick Pastore, senior research director and IT advisor at The Hackett Group.
CIOs should, however, ensure that the release makes financial sense. “If you downgrade something that’s still depreciating, you’ll take a financial hit,” says Fitzgerald. “You need a team sport approach to smart cost management, partnering with finance and those who can do that analysis and provide decision support.”
Press pause for low priority projects
CIOs should also reassess their project portfolio to ensure they are still aligned with business strategy.
“Priorize your pending investments,” suggests Ryan Prindiville, consulting partner at accounting and business advisory firm Armanino. “Don’t stop at the critical investments that will get you through a recession. But third, fourth, fifth, sixth on your list – you might want to take a break.
Revisit open job offers
Most CIOs have a large backlog of vacancies they are trying to fill. Eliminating these openings may or may not make sense given how thin many computer stores are right now. But reducing the number of contractors, at least for a while, might be worth it for most IT managers. “This may be the first wave of labor cost reductions,” Pastore says. “It may be the only wave.”
Scale up successful pilots
Experimentation and evaluation are important, but pilot projects are always more expensive than large-scale adoption. “Accelerate these deployments so you can get out of pilot purgatory and empty the bridges of what doesn’t add value,” said Fitzgerald, senior research director of the financial advisory practice at The Hackett Group.
Whatever reductions CIOs consider, it is essential to be thoughtful: consider not just the potential short-term benefits, but the possible long-term consequences.
“I can lose 50 pounds today by cutting my leg, but I’m not going to run tomorrow,” Fitzgerald says. “You have to be smart and selective when doing this. Being myopic about cost cutting will be punitive.
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