Budgets Remain Flat, IT Demand to Increase

By Allen Bernard

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A new report due out next week will indicate that, while IT budgets will remain relatively flat over the next two years, the demand for IT services will still continue to increase.

Demand for services will also shift towards business intelligence and data management activities as companies try to manage and mine ever increasing amounts of data while, simultaneously, look to avoid being blindsided―again―by the economy. Two other IT demand drivers, regulatory compliance and M&A activity, are expected to remain fairly stable.

"Some of what we saw that was of interest and a little surprising was the growth rate of IT demand was expected to be still 8.6% (per year) through 2011. So, from a business side, people were still expecting IT to be a big part of business enablement," said Hackett IT Advisory Practice Leader David Ackerman, and a co-author of the IT Cost Control Study.

IT budgets and staffing levels are expected to remain nearly flat over the next two years in large part due to the global economic downturn. But demand for IT services will increase by more than 17% (8.6% x 2), creating a significant gap that companies will need to address with improved efficiency and productivity. Hackett’s research, which looks at results from more than 80 global companies, details best practices in three key areas that companies can use to close this gap: IT cost control strategies, demand management, and discretionary cuts.

According to Hackett’s research, companies forecast that IT budgets and staffing levels will each grow by only about 1.0 % annually over the next two years, down from the annual growth rates of 5.3% (for budgets) and 4.3% (for staff) seen over the past three years. This 75% decline in budget growth contrasts sharply with companies’ projections for IT demand, which will shrink by only 15%, to 8.6% annually for the next two years, resulting in an increase of more than 17% by the end of 2010.

"Overall, there is still a higher demand for IT today than there was yesterday and yet IT staff are being reduced ... so there is a productivity gain that has to happen by definition,"said Ackerman.

Hackett’s research found that the drivers of IT demand are also shifting, with organic business growth dropping significantly as a priority while needs driven by process transformation and business reorganization increase. "So, they're really looking to how business can be enabled by additional automation as well as additional business intelligence," said Ackerman.

Three Ways to Manage Costs

Hackett’s research outlines best practices in three key areas that companies can use to close the gap between flat budgets and rising demand. The first, IT cost control, is a well-understood and mature approach that has the greatest potential to reduce IT costs, and includes key tactics such as: offshoring and outsourcing; IT reorganization; technology rationalization; productivity and process improvements; and supplier and contract management.

In this area, Hackett found that offshoring and outsourcing offer the largest opportunity for cost control, more than three times the savings of other IT cost control strategies, primarily because it affects the largest share of the overall IT budget. But the study also found that an across-the-board goal of 10% cost reductions in this area is both realistic and achievable.

The study found that the second area, IT demand management, is a highly underutilized technique by most companies but one that is getting a fresh look. IT has traditionally been more focused on how to meet ever-growing demand than on implementing processes to curb that demand and ensure that the highest value work gets done. As a result, demand management techniques are less mature than other cost control techniques.

The study found that few companies, about one-third, use tactics such as charge backs, service catalogs, or IT portfolio management to reduce costs, despite the fact that these techniques can drive real savings. "Big companies with their reduced budgets are taking a close look at their portfolios to understand what is critical to IT success," said Ackerman.

This research also reinforces findings from a previous Hackett study on IT Business Value Management that identified top performing IT organization’s ability to directly link its discretionary budget to the highest priority business objectives of the enterprise―in and of itself, the most effective form of demand management.

The final strategy, discretionary cuts, which generally involve mandated budget and staff reductions without underlying process improvement or rationalization, is widely used by most companies. But it is also the riskiest of the three approaches. Unless process improvements are an integrated part of any discretionary cuts, Hackett warns that they are likely to result in degraded service levels and reduced overall effectiveness. It can also be very challenging to sustain discretionary cuts on an ongoing basis, the research found, as many companies quickly find that they have very little fat left to trim.

To this end, as in past downturns, companies are turning to outsourcing as a way to augment staff so they will be ready when the recovery happens, said Hackett's Managing Director Mike Atwood.

"If I set myself up properly with the right organization then I can depend on an outsourcer to have the capabilities I need when demand comes back"―provided the initial SLAs and contracts are done right in the first place. If not, you will still get your labor arbitrage but you won't be any better off when you need to add staff to support the business when it begins to grow again.

On a more positive note, IT has been delivering on its productivity promise, said Ackerman. As cuts have come down, service levels have remain consistent or improved. This is due in large part to smart investments in virtualization and consolidation, for example, in past years finally bearing fruit. It also points to lesson-learned from the early part of the decade; to wit, technology investments have to benefit the business or they are not investments but expenses.

"(IT) have reduced their budgets (in the first quarter of 09), they have reduced their investment, yet their still in many ways meeting the needs of the bus," concluded Ackerman.