An IT bailout for business?

With global equity markets on a roller coaster ride, it’s hard to tell the extent to which the pain on Wall St. has extended to Main St. Unemployment figures, the Consumer Price Index and other macro-economic metrics offer conflicting views as to how non-financial services businesses are faring.

But some things are guaranteed to occur in a down economy. One of them is cost-cutting pressures that CEOs are placing on the shoulders of CIOs. But doing so is a big mistake, warns Howard Rubin.

Rubin, professor emeritus of computer science at Hunter College in New York and a Gartner senior advisor, spoke about the importance of IT investment optimization to an audience of about 300 CIOs and senior IT leaders at the 2008 CIO Executive Leadership Summit which was organized on behalf of the Fairfield, Conn./Westchester, NY chapter of the Society for Information Management in Stamford, Conn. the other day.

U.S. Fortune 500 companies have roughly $9.4 trillion in aggregate operating expenses and $511 billion in technology-related expenses, noted Rubin. By comparison, general operating expense "dwarfs" IT costs, said Rubin.

So rather than acceding to the cost-cutting demands of CEOs, Rubin said CIOs should fight back and argue the case for targeted IT investments that can be used to reduce operating expenses.

CIOs "have an economic lever that we’ve never had before," said Rubin.

Cutting IT spending can backfire on companies in a number of ways, Rubin noted. For instance, he claims that every dollar that a company invests in strategic technology initiatives creates a $2 gap for competitors to play catch-up. Citing a study from Diamond Management & Technology Consultants, Rubin said companies that have delivered superior financial performance through recessions have cut costs in the right areas while increasing their percentage of variable costs. I speak periodically with Howard and it’s a point that he has stressed for some time now: companies with high fixed IT costs lack the agility to respond to volatility in their revenue streams. He said the typical IT organization only has 36% of its budget structured as variable costs and there are opportunities for many of them to drive those figures closer to 60%.

So instead of cutting IT costs across the board, Rubin argues that CIOs need to make the business case for making targeted IT investments that can ultimately have a significant impact on business performance. Headcount reductions, renegotiated vendor contracts and postponing projects won’t do the trick, said Rubin. Here’s what will, according to Rubin:

-Optimize, resize, reclaim, reinvest and target IT investments for maximum ROI.

-Rebalance IT portfolios to protect revenue, reduce costs and manage risk.

-Seek economies of scale.

-Leverage the IT supply chain.

-Attain 'zero population growth’ in servers and resources as much as possible.

-Target discretionary funds for maximum return on IT investment.

-Invest where others can’t to create competitive gaps.

-Trade fixed costs for variable costs.

One of the opportunities that CIOs need to take greater advantage of is to create IT infrastructure 'commons’ to more cost-effectively support non-critical, non-strategic IT operations. He points to investment banks that have thousands of servers in their respective arsenals to support businesses "that no longer exist" such as mortgage and derivatives operations. Rubin likens these banks to 'IT empty nesters – you have this big house with all this extra capacity that you own that you no longer need."