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When economic times got tough in the past, IT departments usually turned to PCs and other hardware-servers, network equipment and storage arrays-to make the budget cuts that management demanded to pare operating expenses.
With the current U.S. credit crisis and the uncertain condition of Wall Street banking and financial firms promising to dominate the economy through the rest of the year, IT departments might have to step up again to provide the budget cuts needed in these tough times. While hardware is an easy area to target, that might not always be the solution to reducing an enterprise’s expenditures.
“What I’m hearing from my colleagues is that this is not like the post-9/11 time, which saw some pretty severe belt-tightening,” said Bob Keefe, president of SIM (Society for Information Management), which represents some 3,000 senior IT managers. “There’s a lot of uncertainty more than anything else, but I haven’t heard too many of my colleagues bemoaning the current situation.”
Keefe, who is also senior vice president and CIO of Mueller Water Products, in Atlanta, said in the past when his colleagues were asked to cut IT expenses during tough economic times, it usually meant putting off purchases instead of upgrading PCs, or perhaps buying fewer servers. Now, with IT more closely tied into the overall day-to-day operations of the company, it’s no longer a simple matter of holding off on buying new desktops or notebooks.
“When you decide to cut out something like new PCs next year, you can say, ‘Yes, we can do that,’ but there’s a downside,” Keefe said. “On the one side, if we don’t put new PCs in, it’s going to save us ‘X,’ but there is an offsetting cost that will probably incur more break-and-fix activities, and that is ‘Y.’ So maybe it comes down to that we are not saving 10 percent or whatever number we were trying to get to. It’s all a balancing act.”
While the financial crisis on Wall Street started with the failures at Freddie Mac (the Federal Home Loan Mortgage Corp.), Fannie Mae and Lehman Brothers in September, the economy has been slowing down since the first signs of trouble from the subprime mortgage mess started in 2007. Consequently, spending on IT infrastructure, software and hardware has been down since the start of 2008. While IT spending increased about 8 percent in 2007, it’s only expected to grow about 4 percent this year, according to IDC.
The financial sector accounts for about 20 percent of all IT spending in the United States. While spending on servers and PCs is likely to slow down within financial services and the banking sector, other industries such as health care and media still seem to be buying a fair amount of hardware and IT infrastructure.
Still, no company or IT department is immune to an overall slowdown in the economy, which means that some cuts might happen sooner than later even if budgets have already been set for the year.
What Matters to the Business
Roger Kay, an analyst with Endpoint Technologies Associates, agreed that hardware purchasing, especially PCs, is the first area that IT managers tend to cut. After PCs, IT departments tend to look at how far they can stretch their budgets when it comes to other hardware pieces such as servers, networking equipment and storage arrays.
“When a corporate manager has low visibility on future revenues the easy thing to do is to throttle back on current expenditures and try to save cash against a rainy day,” Kay said. “Hardware purchases can almost always be delayed because most companies already have something doing that job now. Companies can go with the existing solution and put off the new planned one more or less indefinitely. This can certainly go on for a quarter and maybe even longer than that.”
In Kay’s estimation, a business can hold off on upgrading to Microsoft Windows Vista from XP and save money by not buying newer PCs that have better but more expensive technologies, such as newer processors, chip sets and graphics cards, to support the new operating system. The company can still function, and this allows the IT manager to save money by delaying purchases by three to six months or even longer.
“The plan [to upgrade to Vista] is still in place, it just gets put in the deep freeze,” said Kay.
With this current round of economic concerns, Keefe said there are no clear-cut answers for IT. Some of his organization’s members, such as insurance companies, are preparing to spend money on IT, as they have already received new business after the financial failure at AIG-the world’s largest insurance company. Other SIM members plan to invest in technology such as virtualization to consolidate servers and save money in the data center.
Still others are willing to put up with older networking gear and server systems even if it means there’s a bottleneck in a company network’s bandwidth in order to save some capital.
“For the most part, there might be some delays in some investments, but you have to look at what truly does matter to the business,” Keefe said. “If it’s a concern about cash flow, that inventory project you are working on is still going to go forward, but maybe you cut back on that next-generation CRM software or that sales force automation application.”
Pam Taylor, president of SHARE, an IBM user group that represents over 2,000 organizations, said some of the group’s members are also contemplating what do with spending as the crisis continues on Wall Street. For some, it could mean a return to past practices that included delaying spending on hardware, wringing more life out of existing hardware or postponing software upgrade projects.
However, there are some cost-saving measures that could be accelerated to help save money that could actually have some benefit beyond dollars and cents. Taylor referred to some of the efforts by her group’s members to develop more green computing methods to save power and cooling costs.
“Many organizations were already starting to think about green computing and what their power consumption is and what those costs are associated with the continued disbursement of computing around their organization,” Taylor said. “There could be a potentially interesting side effect that some of these cost-saving measures that were planned for the long term actually get accelerated as an alternative to all of the postponement that we see.”