Looking At IT Budgets Through The Magnifying Glass

The economic slowdown has spread its tentacles across markets globally and has got a rigid hold on Indian verticals as well. A major area that has been significantly affected is the IT budget, cascading a host of challenges on the CIO.

According to Gartner, despite enterprises around the world being faced with global economic conditions that have not existed for a very long time, IT budgets in India, in contrast to many other regions of the world, will grow at 5.52 percent in 2009. However, this is a sharp fall from the 13 percent IT budget increase reported in 2008.

Impact of Economic Slowdown on IT Budgets

Satish Pendse, CIO, HCC shares, “The economic slowdown is definitely showing its impact on many industries in India, although the severity as of today is less compared to that in the US or Europe. Availability of funds is a challenge and hence, funds obtained are first deployed for direct business activities. Barring some industries as exceptions, IT investment falls under the category of ‘discretionary investments’ in most verticals. Thus, deferment of some new IT initiatives may lead to loss of the advantages that new technology could provide, but businesses, being in the current crunch situation, may choose to do without them. For this reason, new IT investments are being looked at more critically in the budgeting process.”

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IT expenses required to keep the current IT engine running are being included in the budget; however there is a pressure to reduce these too. Some IT investments that can give high payback and immediate results in terms of cost savings are definitely being considered even during these times. Attempts, however, are being made to evaluate OPEX models for the same as against CAPEX investments.

Manikkam Subramaniam, CIO, Henkel, says, “Organisations are increasingly looking at virtualisating the entire enterprise—from servers to security, from software processes to production utilities, as a means to control costs, better allocate resources and increase their return on IT investments. Virtualisation provides a smaller footprint while our company tries to achieve more benefits across the enterprise. It promises tremendous savings because it offers ways to create discrete environments in which to develop and test software functionality. In addition, while virtualisation has been of tremendous assistance in the development environment by helping us introduce new applications into a complex operational environment, the real benefit can be realised by moving virtualised machines into the production and operating environment at the enterprise level.”

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Budget Constraint Challenges

Pendse feels that the first challenge is to keep the team motivated. HCC is using this scenario as an opportunity to further strengthen the business alignment in the team. “Each team member now knows that we will get IT assignments provided they are giving the expected value to the business and that too within a short span of time. Thus, they now understand that our job doesn’t end with the delivery of IT solutions but we also need to facilitate the leveraging of that solution to offer the intended value to the business within the intended time. This change in approach is going to help us a lot when the economic scenario improves.”

The next challenge for HCC’s CIO is to learn to look at the short term for the next few months and then again start looking at the long term. Many IT initiatives are capable of giving fantastic returns in the longer run. The need of the hour, however, is to give instant returns and that too in defined ways. At times, it may involve sacrificing long-term goals for the next few months.

“Managing expectations of mid and junior level internal customers is becoming difficult. Facing IT vendors is also proving to be a challenge. Within the current scenario, the number of calls from vendors, the number of e-mails from them has increased multifold,” he adds.

Subramaniam feels that consolidation is a huge challenge, which includes centralising, consolidating services, operations, resources and infrastructure. This in turn would translate into shared services; budget and cost controls; pervasive security policies; electronic records/ digital preservation/ e-discovery; an ERP strategy; green IT; transparency of operations; health information technology and governance.

PKX Thomas, CIO, Cleartrip, says, “CIOs now as often, have constrained budgets, which makes us sharper and wiser in spending. As we make more use of open source, our major spend is on servers, networking equipment, security devices, database and services.”

Surmounting Challenges

Subramaniam feels that CIOs can swim ashore safely through the treacherous waters of the current crisis by improving and building internal skills; using a slowdown to improve the team such as looking at bringing in great people, who have been laid off elsewhere; keeping a hold on the best people; cutting training and development last of all; using the recession to make tough decisions; accelerating virtualisation and other IT/ BT efficiency as well as negotiating best contracts when possible.

Thomas says, “We are looking to overcome these challenges by dedicating a large chunk of the budget to automation and scalability followed by new products. We also plan to opt for Intel-based servers rather than other branded servers and we will be continuing our loyalty to open source software.”

Pendse, on the other hand, is looking for unutilised capacity everywhere within the company so that the same can be deployed somewhere else without the need to make fresh investments. He is also exploring savings opportunities through re-negotiations and monitoring of invoices against the PO, work order terms and conditions and SLAs. Pendse is also concentrating on careful monitoring, which easily leads to about 10-15 percent power saving; he is promoting audio-video conferencing to reduce travel cost. “CIOs should be on the lookout for those who are not using IT-based cost-saving facilities.”

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Areas of Spending

Henkel as a company is looking at implementing master data management. Subramaniam informs, “The speed of change in the business not only drives the need for master data, but also the need for master data management. The key behind greater data accuracy lies in better co-ordination of how data gets into the system in the first place. A critical component of MDM is data governance. This determines what data should be defined and the manner of definition, how exceptions should be handled and how data will change. From the CEO downwards, each organisational layer has a reason to manage data in a certain way.”

Pendse feels that this year, a large portion of the IT budget will be directed towards running the existing IT setup and extending the same for exploring new business opportunities in terms of new infrastructure projects that the company is getting. This will be followed by business-critical, new IT investments that promise to give quick and sizable returns in terms of cost savings or new business creation. “Based on the economic scenario improvements possibly in the second half of the financial year, we will invest in other IT initiatives.”

For Cleartrip, the major spend is going to be on increasing capacity (servers and databases), BCP (again servers and networking equipment) and automation tools (software development).

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What do IT Budgets Look Like for the Next Year?

“There has been an overall cut of 30-40 percent in the CAPEX budget for the year 2009. Looking at the economic situation, the business growth and the subsequent cut in budgets, the growth could be slow. We suppose only essential implementations/ projects will be taken up based on the criticality of the requirement. The matter will be reviewed in the month of June ‘09 and a global decision will be taken to either enhance the budget or reduce it. We expect it to be positive,” says Subramaniam.

Pendse feels that there will be minimal expenses required for running existing IT deployments and there will be pressure on reducing these further.

Business-critical IT investments that can give quick value to the business in terms of reducing costs or generating higher demand / higher revenue will come into place, in addition to other IT investments being examined critically. Basically all ‘frills’ are going to be out.

“Some of the IT hardware, which was under warranty for two to three years since the time of procurement is now going out of warranty. These AMC costs, which were not there in last year’s budget, have figured in the current budget. One may even see the IT budget growth in absolute terms, but it will be to cater to the business growth. The percentage growth in IT budget will certainly be less than the percentage growth in business. Thus, IT expenses as a percentage of turnover have shrunk, although in pure number terms the IT budget may have grown,” explains Pendse.

Cleartrip plans to increase booking capacity, add two new product offerings for customers and expand its customer base from B2C to B2B. “There would be a growth of about 30 percent in revenue,” says Thomas.

CIO Priorities for 2009

“Indian companies will have to rapidly adapt in order to maintain their value proposition in the current volatile global economy,” says Peter Sondergaard, global head of research at Gartner. “CIOs in India need to recognise that IT’s contribution to their enterprise extends beyond just cutting costs. They must have confidence in their ability to use IT to significantly increase business performance.”

Major technology priorities include BI, ERP, server and storage technologies, SOA, collaboration technologies, networking, security technologies, legacy application modernisation, technical infrastructure management and development and workflow management.

“In the current economy, enterprise cost optimisation has become the most critical factor for the CIO,” informs Partha Iyengar, head of research at Gartner India. “Despite worldwide IT budgets remaining flat in 2009, the Indian IT budget is still expected to grow at a modest 5.52 percent. The majority of this budget—up to 60 percent—will be used to run day-to-day operations of the business, while 23 percent will be utilised to grow the business and 19 percent will be used to transform the business.”

Meeting the challenges of 2009 requires Indian CIOs to lead their enterprises through decisions that have no simple answers. It’s time for CIOs to look at IT with a fresh perspective.