The Hindu Business Line : Of slowdowns and blind IT budget cuts

David Mitchell, Senior Vice-President, IT Research at Ovum, hits the nail on the head in his recent research report: “The impact of the credit crunch on the 2008 CIO agenda.”

According to him, this year looks likely to be one of the most challenging years for CIOs since the dotcom crash of 2000. That is saying something.

eWorld caught up with Mitchell recently to know more. Excerpts:

In the report, you see the possibility of CIOs going for blind IT budget cuts when they see a downturn.

I have seen it happen quite a lot. Sometimes a CIO has no choice. I have seen some strong CEO behaviour, walking the CIOs down to the basement and telling them how much of a cut they want. They tell them they want costs cut by 40 per cent. Then the CIO has no choice. It happens.

It’s an irrational cost cutting move that happens with CEOs. CIOs have been used to it in the past few years, with their budgets trimmed — sometimes up to 20 per cent in the worst cases. But there’s only so long you can cope with budget customers, taking a small piece out and then another piece out before you break ship.

Don’t CIOs have a voice in what happens in these conversations?

Sometimes they do. We typically describe CIOs as coming from two sets of evolution. Some evolve from primeval lizards and some from birds.

The former know all about engineering and are technically sound, but not so well versed about business value of IT. They typically come from engineering backgrounds, and are unlikely to make it to the boards rooms by themselves.

The birds — having different genetic material — come from more general management backgrounds and are used to managing a business more generally.

They may have even worked in an HR function. They are good at evaluating the IT-business alignment and have a voice in the boards as to where IT is going.

Those from Lizards background will have mud dropped on them by the CEOs.

It can’t be avoided. So we will absolutely see blind and harsh cuts. We have already seen these in the last three years, we will now see more, across all geographies and all verticals.

If they have been happening often as you say, they have not been widespread enough to cause concern?

No. People ask about an average CIO-budget. The ‘average’ is a meaningless term. Some budgets have grown very well, others have gone down. The average is 8-9 per cent growth but hides all the relevant detail.

If there are harsh cuts, how would that impact offshoring momentum for the top six Indian IT services companies as well as for the likes of IBM and Accenture?

It’s interesting. Because the CIO is making those harsh cuts, he has to do something dramatic to cut costs. That could augur well for the IT industry.

Clients who have not tried offshoring earlier may now be forced to. Someone says to you that 40 per cent of the budget is gone and you have never offshored before, offshoring may be just the thing to keep your job.

Since so many people would be looking at offshoring, are there any alternative geographies that would attract attention? Obviously talent availability is an issue here in India.

In the offshoring market, I have seen some strange examples. A Singapore-based company sent work to Scotland based on costs.

A couple of countries in the Nordic region offshore to Argentina, claiming common business culture between parts of the respective regions. Some countries that are French speaking are offshoring to North Africa — Egypt, Morocco, Algiers. India is very popular, of course. Malaysia is an option. New Zealand is a bit popular for several companies.

For CIOs driven to a corner, would captive work attract?

I don’t think it would be captive. It would take too long for them to ramp up. If they need to do 40 per cent savings this year, they have to do something dramatic. A captive set-up is too slow for that.

In a recent report, you had dwelt on SMEs, that they could be the ones to blink first and go off the picture.

(It’s a different kind of animal.) Anyone claiming to serve the SMB market does not know the SMB market. If you notice, no one introduces himself as the CEO of an SMB! He says, “I run a small manufacturing unit”,”… or a small HR unit,”… “or a small retail business”. Those who address the SMB market actually miss the point, they need to address the SMB utilities market, or the SMB retail market, etc. If you are selling accountancy software, you need to know if the client is a retail firm, utilities firm, etc, for they each have unique requirements.

You also touched upon solutions offering. We notice that Business Intelligence is quite the flavour now. Is it because it is easier and quicker to see returns?

One of the reasons I have said people should not cut back on BI projects is that it is difficult to drive a business when you have no dashboard.

It’s like taking the controls away when driving a car. If you are heading into a potential recession, you want signals to point out what’s going wrong and where, as quickly as it can be done.

You don’t want to wait six months to a year to know you have been pursuing an unprofitable line of business. If you can’t present a good dashboard to your executive team on what is making money and what is not, then that is a bad thing.

But wouldn’t clients require prerequisites in terms of systems/processes that need to be in place before a BI system comes in. Are companies prepared for that?

BI has been around for at least two years now. BI and corporate performance management (CPM) — includes planning and budgeting solutions as well. You have that, basic CRM and accounting systems feeding into that. Most people have elements of that covered.

Do you see cutbacks in BI happening?

I don’t but what I thought CIOs should be saying is that one of the things they need to protect is BI.

BI helps me defend an IT spending decision — if I don’t have a dashboard to begin with, then I have nothing to defend myself with.

When the slowdown happened in 2000, there was a lag period. Only in 2002-2003, what do you see happening different this time around?

One thing that would be different now is the new range of contracts — you would see a greater focus on finance. Some of the deals have been influenced in timing or content by financing. Assume you have two offerings from two vendors who are approximately the same.

One says you pay upfront and another says you pay nothing for nine months and they pay equal instalments for the next few months.

We find that 80 per cent of deals that are $2,50,000 or above are influenced in timing or content by financing.

If a supplier talks about the financing structure at the beginning of the sales cycle and not when the customer raises objection to prices, then the sales closure rates are twice as high; and, deals typically are also larger, and depending on which provider, they are between 18 and 85 per cent larger.

If you are a sales person from a provider and you want to talk financing you need to talk business value to talk about financing, which means you are talking at a much higher level in your client organisation.

That’s why they are more influenced by, not a solutions architect or even a technical architect, but by a financial architect. In which case, outcome-based or value-based pricing would figure a lot more. You would also see a lot more risk-reward sharing opportunities.

In short, commercial innovation is a big thing now compared to service innovation.

Any examples you have seen try these things out?

I can’t name names. But guaranteed cost reductions are one. Some outcome-based pricing based on customer retention is happening. For example, if you are a telecom company, compensation for your vendor would be based on customer retention or increase in ARPU. If it’s a billing application, then cost per bill…etc.

In your report, you also touch upon infrastructure simplification.

Assume you are a reasonable-sized enterprise with 100 servers and each server has a set of stacks, one version of Oracle, then BEA, an application on top of that and so on. Each box has a unique stack. You could try to consolidate the number of machines into lesser, virtual numbers. But what you are doing is only taking physical complexity and making it complex in one place. It is still difficult to manage. But if you say, even if I have 100 boxes, do they all have identical stacks so that I don’t need 20 people to manage myriad applications but fewer and better skills to manage identical boxes?

So, standardisation and simplification is the answer, not consolidation.

Would this trend drive growth for Indian remote infrastructure management market?

Yes. It would — those who can help customers with simplification, rather than just consolidation and cost-cutting, have another advantage.

Would it mean ripping apart existing systems?

There might be some re-engineering required. One model is I would manage complexity for less. The other is I will take your complexity, and when I give it back to you at end of the seven-year contract, it would be simpler and easier to manage, and I would have taken part of the benefits of that. Over time, such providers make more margins on contracts because they can offer higher quality service at lower cost — they can share those benefits with clients.

Is a CIO’s tenure less than three years nowadays? If so, why?

Yes — it’s now 18-24 months. Part of it is to do with IT taking time to yield results. Some things take longer than 18-24 months, so people lose patience with them. For instance, ERP is a three-five-year program. If people think nothing has changed in 18-24 months, you get fired. People want IT to be faster than IT truly is. People are having less patience with IT. It could mean that they are losing on long-term benefits.

Here’s an analogy with Politics — for the sake of the public, politicians should focus on programmes that could bear fruit in the long term, 10-30 years or so. But because politicians are not sure of their longevity, they focus on smaller term goals. The same is true with CIOs.

bharatk@thehindu.co.in

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