IT cost reductions "hit the wall," warns META Group

According to the 2003 Worldwide IT Benchmark Report, an annual study released today by META Group, reducing cost is the number-one IT priority for companies, yet IT organisations seem to have hit the proverbial wall on cost reduction. After making a series of drastic IT cuts over the last couple of years ? staffing reductions, server consolidations, contract renegotiations, etc. ? most CIOs believe any further cuts, large or small, might put business at significant risk.

While other reports have predicted a rise in IT spending by the end of the year and into early 2003, META Group believes the spending increase will just be an "artificial bump." According to Johan Theron, director of META Group South Africa and META Group Consulting Africa, IT spending only appears to be on the rise as a percentage of revenues.

"When revenues drop and IT spending stays flat, IT spending appears to go up as a percentage of revenue. Actually, it just becomes a larger percentage of total revenue without increasing the cash amount," explained Theron. "IT spending is currently standing still as most organisations have hit the wall on cost reduction."

As a result of their financial woes, many companies have required their IT organisations to focus on non-discretionary costs and reduce discretionary spending. META Group current findings show that, as a result of the squeeze on discretionary costs, businesses run the risk of increasing the strain on aging systems.

"Most companies have already been required to cut into their discretionary spending and can`t afford to cut anymore without putting their day-to-day operations at significant risk," added Theron. "IT organisations need to assess the risk versus reward when deciding whether to stop investing in new systems and initiatives. They risk hurting existing systems and ultimately facing higher costs to fix these capped systems."

Some industries are quicker to react than others to a poor economy, in terms of shifting or reducing spending. Agility is a new way to benchmark an organisation`s ability to deal with financial constraints. IT organisations in the banking, financial services, utilities, transportation, and professional services industries will need to develop new approaches to respond faster to economic conditions.

Top five IT priorities for companies:

1)       Reduced costs;

2)       business alignment;

3)       increased productivity;

4)       project management;

5)       improved software quality.

IT spending: Spending has increased in infrastructure development. The biggest cutbacks have been in staffing. IT organisations spend 57% of their budget on "run the business" costs (non-discretionary), 21% on "grow the business" projects (discretionary), and 22% on "transform the business" projects (discretionary).

Business alignment: New projects will be evaluated more closely, requiring justification by the business units requesting the new applications and requiring development teams (internal and outsourcers) to prove their skills.

Application development: Maintenance and development activities have swapped first and second place positions in terms of the percentage of overall work this year compared to last. Our research implies that many activities that were postponed in 2001 became inevitable in 2002, despite continued budgetary pressure to maximise current systems. Also, with the increase in usage of easier-to-maintain languages like Perl/HTML/VB etc., there is less of a need for maintenance and more resources for new development.

Network: Despite the difficulty of developing universal benchmarks in the network area, through increased budgetary pressures, organizations have been forced to scrutinize their network activities. The overall voice and data network costs as a percentage of total IT cost is 8%-9% (each), and at least 50%-60% of those costs are for carrier services. The percentage of total network spending shows that carrier service costs have increased as a percentage of total network costs during the last five years, while hardware and support costs appear to be a decreasing percentage of total network spending. Depending on the service levels, carrier service costs can reach 85% of total network costs.

Desktops/help desks: Prolonged postponement of new development and enhancement projects for another year could lead to strain on help desk and maintenance resources, and companies will be forced to reassess obsolete systems and the business risks associated with these elements of the IT portfolio.