Wise Managers in Tough Times

by Dennis A. Adams, Associate Professor, Decision and Information Sciences, University of Houston (USA)

The year 2009 is set to become one of the most turbulent years ever seen in the IT industry worldwide. We anticipate many changes and a substantial amount of restructuring both in the industry and in companies that make use of IT.

As we have done at this time for the past four years, this issue of CBR starts off the new year by looking at IT trends and technologies for the coming year. However, since the information in this issue's survey was captured toward the end of 2008, many more changes have occurred since the results were gathered and computed. To set the stage, the survey was distributed as we were experiencing the beginnings of a worldwide fall in the price of equities and commodities and as those of us in the US were in the midst of electing a new president. These market uncertainties led to the failures of several large insurance companies, banks, and bank holding companies and are even today affecting the health of many manufacturing and service companies such as automobile manufacturers and transportation providers. Worldwide labor markets have also been substantially impacted with layoffs and unemployment at levels not seen in decades. All of these factors combine to set the stage for future investment priorities in IT.

Past CBR trends surveys have shown an important distinction between information systems designed to save money and those designed to make money. Systems that make money have historically tended to be built only during robust times. These robust times are typically characterized by increasing industry purchases, increased market share, or other traditional measures of business success. During times of intense competition, we tend to see companies focusing on systems that help them make money by increasing their potential customer base, by adding features to existing product lines, or by developing new products and therefore attracting new customers. In times of recession or other economic slowdowns, there isn't as much money to be made. Consequently, companies focus on those aspects of their information systems that help them save money and retain market share by keeping product costs down.

The current economic situation, however, may be experiencing periods of deflation. Deflation is defined as the general fall in prices across the board and is often accompanied by increasing unemployment. The cause of deflation can be, on the positive side, an increase in worker productivity. Unfortunately, as in this case, it can also be caused by a recession. When productivity declines, we see a fall in the output of manufactured products and a weakening in the demand for services. In general, demand for what the company is in business to do falls. The result is that companies will begin purchasing fewer raw materials in an attempt to decrease the levels of their finished goods inventories. This is accompanied by a decrease in the need for direct labor for those products and for the indirect labor that supports those workers. Often we see increased pressure put on sales staff in an attempt to maintain current levels of market share. For the information systems functions within these companies, IT workers will be expected to deliver the same levels of service at decreasing costs and will be used to build systems or implement systems that are needed to replace workers. These systems that replace workers will focus on workflow and knowledge retention.

While the data is sketchy, we have noticed an interesting aspect of this economic downturn. In the recession of 2000, IT workers were some of the very first to be laid off in large organizations, and IT hiring all but stopped. This time, however, we have indications that companies, while scaling back their hiring, have not targeted IT workers for layoffs. There are perhaps several reasons for this. During the recession of 2000, many senior managers felt that their organizations had overinvested in Y2K and dot-com projects. When the pressure came to cut costs, those managers targeted the IT area. Today, however, organizations have leaner IT operations, which have not fallen under the budget knife as quickly. Instead, managers today begrudge the money spent on compliance but are not as likely to make deep cuts in this area for fear of causing even bigger economic problems for the company if a compliance problem were to emerge. IT seems to be viewed as a partner in helping companies cut costs rather than as the target for cost-cutting as it has been in the past. Unfortunately, as the economic downturn continues, most areas of the organization eventually will experience budget reductions.

The industry that supports the IT function (hardware and software vendors) will begin to notice rapid declines in orders for its products and will experience pressure to make better deals in order to sell its products and services. We have already seen anecdotal evidence that IT managers are driving harder bargains during these times. Consulting companies, however, may find themselves answering the call of businesses to help provide short-term labor for projects that need to be completed quickly.

ALLOCATING LABOR DOLLARS IN THE COMING YEAR

The first part of my analysis of the data focuses on the labor within the IT organization, specifically issues associated with outsourcing and with staffing levels. We posed a general question to our respondents asking them to describe their current IT staffing situation. In 2008, the most common response from 46% of the respondents was that their company was currently hiring IT people. This year, however, only 25% of respondents indicate that the company is hiring (see Graph 1 in the Survey Data section). In 2008, 10% of respondents indicated that the company was currently downsizing. We compare that to this year's responses, which indicate that fully one-quarter of respondents say their company is downsizing. The good news is that this year half of the respondents indicate that the staffing situation is stable. We step back from this result to see the effect that the economic slowdown has already had in the last quarter of 2008 on projections for 2009. We have no reason to expect that this trend will improve substantially during the coming year. IT organizations will be forced to do the same or more work with fewer people.

We also asked how respondents would describe staffing plans for the next year. In 2008, 55% of respondents confidently said that their company would be hiring. For 2009, only 35% indicate they will be hiring (see Graph 2). Related to IT staffing is outsourcing. We would expect to see some of the labor needs satisfied by outsourcing work. We asked the following question: "Do you currently outsource or are you planning to outsource work?" In 2008, 55% of respondents indicated that they do or were planning to outsource. This year that number is up slightly to 59% (see Graph 3). For those that currently are outsourcing or planning to outsource this year, development at 70% is the highest-ranking area of work to be outsourced, as it was in 2008, though it came in at 78% then (see Graph 4). This makes sense because in an economic slowdown, we see less development and more attention to maintenance or other work on existing systems. We see little change from 2008 to 2009 in the level of outsourcing for help desk support, suggesting that most companies who planned to outsource the help desk have already done so.

If the company is planning to hire, it would be interesting during these times to gain an understanding of where it will spend the few new labor dollars it has. In answering the question for which IT skills will you be hiring, the most common answer given was application development. In 2008, 57% of respondents indicated that they would be hiring in application development. This year, however, that number is down to 40% (see Graph 5). The next most common place where labor dollars will be spent is in the enterprise architecture area. This year 35% of respondents indicate that they will hire in enterprise architecture, which is down from 47% last year. This result makes sense because rationalizing the IT architecture is a money-saving activity if pursued correctly. It also is a mechanism for consolidation and is the primary tool today for virtualization, readying systems for either software as a service (SaaS) or some other service-oriented architecture (SOA). Finally, last year 47% of respondents indicated that they would be hiring in project management, while this year only 25% indicate they will be doing this. There is perhaps no clearer indication of what is happening within IT than this particular result.

So what does this mean? IT managers are restructuring their budgets around projects and initiatives that save their organizations money. This includes reducing the costs of delivering IT services and service levels at least equal to those of the last budget cycle. The result will be fewer, smaller projects requiring fewer project managers and application programmers. The push to continue virtualization, a cost reducer, is seen in the attention paid toward hiring architects. The wise manager will use this information to allocate shrinking resources in an attempt to free up resources to be used for other initiatives. For example, rather than hire an experienced application programmer who will be more satisfied with new application development, a manager might consider hiring a less experienced programmer to initially work on the maintenance of existing applications, perhaps increasing their functionality, while learning about the software environment. This same manager might hire an architect and attempt to recover a portion of that person's salary through server and license consolidation. In other words, in addition to helping the organization save money, the wise manager will begin to find ways to save money in his or her own IT organization.

INNOVATION UNCOVERED

In many companies, innovation is hampered during a recession. When our respondents were asked how they would characterize business innovation in their organization, the most common answer this year -- at 55% -- is that innovation receives focus when a particular need calls for it. Last year that number was 46% (see Graph 6). We would expect in the coming year that innovative ideas would have a difficult time being heard. Even ideas that will help save money in the short term might succumb to the status quo. This makes sense because a large portion of cost-cutting activities includes some sort of headcount reduction. Employees are hesitant to put forward ideas that might cause a fellow worker to lose his or her job. Consequently, those organizations that have well-defined approaches to creating and fostering innovation will have a competitive advantage compared to those that do not. Only 19% of our 2009 respondents indicate that innovation is well supported through a defined approach or process.

We might ask about the IT organization's role in innovation. The most common answer in 2008 -- at 38% -- was that IT was reacting to business innovation initiatives. This year, however, the most common answer -- at 33% -- is that IT is a key enabler of business innovation (see Graph 7). We fully anticipate that in the coming months IT will be a very key component of perhaps the actual survival of some companies. How that support is created by IT is important. When asked to what extent software tools support innovation, the most commonly provided answer in 2009 -- at 60% -- is the tools that support group communication. Last year, supporting group communication came in second to supporting the person-to-person communication (see Graph 8). We would anticipate that during stressful times, group communication may be more important to innovation.

Innovation, however, has not come to an end. We see from our survey that Enterprise 2.0 initiatives and Web 2.0 activities are moving forward. Last year, 34% of respondents indicated that they were in the phase of information gathering for Enterprise 2.0 initiatives (31% for Web 2.0 customer-interaction initiatives). This year, our respondents indicate that they have passed information gathering, and 26% are in the early experimentation phase of Enterprise 2.0 initiatives. In addition, 30% indicate that they are working on initiatives such as social networking tools like blogs and wikis (see Graph 9).

We can see that innovation continues, although in very specific areas. We see that innovation in some areas, however, hasn't changed very much. Web services, for example, has remained relatively stable from 2008 to 2009. When asked what was impeding the adoption or expansion of SOA this year, our respondents indicated that lack of business buy-in is significant. Last year, 23% indicated buy-in was a problem while this year that number is 29%. At 24%, lack of funding is also a problem in 2009 (see Graph 10).

In general, the problem with SOA is one of focus. As he mentions in the next article, Jeroen van Tyn states that the "trend of CIOs being the top-level SOA sponsor continues dramatically upward, now approaching half of all SOA programs.... Insufficient sponsorship is now the leading obstacle to the success of SOA programs." He goes on to say that "the number of companies experiencing significant impediments to instituting SOA has gone way up, from just over half of companies in 2007 to nearly two-thirds today."

Many managers attempt to implement SOA without the proper project management experience or funding. The result will be an SOA implementation that does not achieve its goals and that causes substantial disruption within the organization. We would anticipate that SOA implementations slow down or even get cancelled during these tough times. This does not mean, however, that the goals of SOA are not worth pursuing but that the payoff is too distant to make it a good investment right now.

Interest in enterprise architecture (EA) is also growing, with 69% of respondents indicating they have EA programs compared to only 61% last year (see Graph 11). There is no clear reason this year that drives EA requirements. Last year, 51% indicated that the most common reason for EA investments was to reduce IT costs. This year that number is down to 47% (see Graph 12). More important this year is the formal development of enterprise business requirements, at 55%. And 29% of respondents indicate that the primary focus this year is the implementation of standards, compared to only 22% last year (see Graph 13). Further, 26% indicate that having a common application architecture is important, compared to 24% last year. We see that innovation in the delivery of IT services in pursuit of organizational goals is critical and is continuing to be funded, although with more scrutiny.

RISKS AND REWARDS

We asked two new questions this year to help gain a better understanding of the role of IT in the respondents' organizations. The first question asked, "When the economic performance of your industry is good, does your organization tend to choose riskier IT projects than it would otherwise?" About 59% say this is true. In other words, almost 60% of those surveyed indicate that their company adjusts its IT portfolio based upon the economic conditions in which the company finds itself. Conversely, during times of economic slowdown, we would expect the IT portfolio to have more projects that are less risky in it. If we recall our introductory finance classes, we will remember that the reward of risk is greater as the riskiness of a project increases. Analyzing the portfolio of new IT projects could give us an understanding of the risk profile of IT managers and the companies for which they work.

The second new question we put forward in this year's survey asked how often IT initiatives are mentioned in the organization's annual report. The annual report of many organizations is sometimes used as a public relations document aimed at current and new investors or stakeholders. About 33% of respondents indicate that IT initiatives are frequently mentioned in the annual report; 31% indicate that they are sometimes mentioned; while 24% indicate that they are seldom or never mentioned. With approximately two-thirds of our respondents indicating that IT initiatives at least sometimes appear in the annual report, we would anticipate that these initiatives are meant to either make substantial reductions in the cost of doing business or make significant improvements in revenues or sales. In future surveys, we will very closely monitor these two questions to see if the makeup of the IT portfolio is a leading or lagging indicator of economic performance for the firm and the industry.

COMPLIANCE AND BUDGET

Some critics blame much of the economic malaise in which we find ourselves on lack of regulatory oversight. We would anticipate that in the future increased regulation would occur to keep situations such as the mortgage fallout and other activities from happening. Regulatory compliance, while initially a labor-intensive activity, is often automated as the need to reduce costs increases. This year, we asked if respondents believe that the information systems budget will grow to meet the needs of regulatory compliance. Last year, slightly more than 30% of respondents did not believe that the budget would grow to meet compliance needs, while this year more than one-third believes that there will be budget problems associated with compliance.

Compliance systems are one of the four basic kinds of information systems that are built by organizations. Those four systems are: those that make money, those that save money, compliance systems, and infrastructure systems. This year, we asked a question related to the development activity budget for organizations. Respondents were asked to allocate their development budget based upon the four types of development projects and whether they accounted for 0%, 1%-25%, 26%-50%, 51%-75%, 76%-99%, or 100% of the budget. According to 53% of participants, compliance systems would make up between 1% and 25% of development activity budgets. This was the largest pool of investments reported by our respondents. The second most commonly identified area was in infrastructure systems at 46% for between 1% and 25% of the budget. This is followed by systems that save money coming in at 40% for between 1% and 25% of the budget. These three items were the most commonly identified uses of the IT budget. We can see that the allocation of the IT portfolio is indeed very conservative and that most of the systems being developed are investments in compliance or a cost savings.

Organization Size Drives Types of IT Investment

We conducted some rudimentary analysis on the data associated with company size and the allocation of the IT project budget. One would expect that smaller organizations that have IT budgets that are correspondingly smaller would have to pay more attention to certain kinds of systems, while other companies with larger budgets might have the latitude to select other types of systems to develop. We would expect, for example, that smaller organizations might focus on cost control more than systems that make money, or that systems focused on compliance would make up a bigger component of their budgets. Our analysis, however, does not show a relationship between the size of the organization and the percentage of the development activity budget allocated. We continued our analysis by looking at only those responses from large organizations and found that as the size of the organization grew, the smaller was the portion of the investment in systems that make money. We also found that large organizations invest in compliance systems more heavily as they grow larger. Smaller organizations, however, tend to invest more in infrastructure than any other system. We don't find these results to be unusual in these times but would expect as the economy rebounds to see more investment at all levels in systems that make money.

ROI IN IT

As we begin pinching pennies, we find that there is an increased scrutiny in how we allocate our dollars. Last year, when asked if the respondents believed that their organizations calculated the ROI for all information systems projects, 36% agreed or strongly agreed. This year, 40% agree or strongly agree. What is often the holy grail for IT managers -- business-IT alignment -- is still viewed as being extremely important by our respondents. More than 70% of our respondents indicate that IT alignment with business strategy is crucial for the coming year. Unfortunately, 48% of all respondents feel that the information systems function in their organization is treated more like a utility than a strategic tool. This is up considerably from 37% last year, which may indicate that the pressure to cut costs and to improve workflow may feel more like a utility function as opposed to a strategy. We may see this attitude reflected later in coming surveys as a problem for business-IT alignment when IT is viewed as a cost-focused tool rather than as a business partner.

In an effort to improve business performance while not increasing the cost of doing business, many companies are beginning to look at using data and tools that they already have to improve decision making. One of the tools gaining increased attention is business intelligence (BI) software. Last year, 33% of respondents indicated that they were not currently using BI software, but this year, only 28% indicate they are not using it (see Graph 14). The most common use last year (43%) was in the analysis of sales and customer data. This year, sales and customer data analysis represents 48% of respondents' use of BI software. Also this year, 54% of respondents indicate that the software is being used to analyze financial data, up from 42% last year; analyzing the business risk is up to 25%, compared to 22% last year. We are beginning to see the use of BI software as a cost-control tool. To some this may be an innovative use of a tool once thought to be a mechanism for expanding markets and customer bases. However, as we have seen with other decision-making tools, BI systems can "earn their keep" by helping companies restructure costs and find the low-hanging fruit that might be in their data.

During the last 12 months, we've seen the price of a barrel of oil skyrocket to US $140 and fall to less than $40. We've seen the focus on green computing initiatives range from nonexistent to critical to in-between.

We asked respondents to share how critical being "green" is in the purchase or design of information systems. This is the first time we've asked this question. About 19% report that being green is significantly important, 46% say somewhat important, and 35% say that it isn't important. Some managers have used green initiatives to push forward virtualization initiatives or to provide other aspects of lights-on operations in their data centers. We've also seen examples of managers using these initiatives to push forward telecommuting, telework, or Web conferencing tools for workers. There can be little doubt, however, that many of the green initiatives that were begun in companies had their roots in the increases seen in the costs of energy rather than in a sense of environmental stewardship. As the recession deepens, we notice that the price of a barrel of oil has fallen dramatically as has the amount of gasoline consumed per worker. We've also seen that the prices of other energy products are beginning to fall, and prices may stay at these levels for the coming year. This may negatively impact organizational interest in green initiatives particularly in those cases where an investment is required to be green. There is much yet to be learned about green computing, and we'll watch this trend as it unfolds.

Each year during the trends survey, we are interested in respondents' attitudes about open source systems and other methods of acquiring software. When answering the question, "If it were safe to do so, I would move my server environment to a non-Microsoft platform," more than 37% of respondents indicate they would do so. This is roughly the same percentage as in 2008. However, when the same question is asked about desktop software, last year approximately 29% of respondents indicated that they would like an alternative to a Microsoft environment. This year, that number jumped to 35%. We believe this reflects some of the cost-cutting that organizations wish to do and perhaps some of the dissatisfaction with Windows Vista.

Perhaps reflecting a change in our respondents, or some other change in price or availability of packaged software, we've seen a shift from last year to this year in those indicating that they have deployed open source applications. Last year, 65% of respondents indicated that they had deployed open source applications, while this year that number is 49% (see Graph 15). The number one reason for lack of deployment of open source applications this year is the lack of a business sponsor (according to 46% of respondents). Last year, the top reason (38%) for lack of deployment was no business need (see Graph 16). We believe that the wide-ranging responses to this question are rooted in the fact that open source software applications have not taken root as a safe alternative to proprietary, packaged solutions.

Much has been written about SaaS and about cloud computing. Both of these trends are expected to greatly impact the way we deliver systems for employees and interact with our customers. When combining SaaS and cloud computing with Enterprise 2.0 initiatives, we see the emergence of a network-centric computing approach to information systems design in ways we have not anticipated. Network-based systems are fundamentally different from those that are server- or application-focused. Designing an architecture to enable decision making without regard to where the data and application is stored or functions, or where the decision maker is, is a substantially different way of building systems. SaaS is key to this new design of information systems.

A key component of SaaS is the metering ability of the software provider to be paid by use rather than by the seat. It is also a mechanism for regulating the cost of computing by the user to only pay for those services that you need when you need them. We would expect SaaS to significantly impact the way we pay for computing and the way we develop systems. In this year's survey, 26% of our respondents are in the information-gathering phase of SaaS, while 23% are in the early experimentation phase (see Graph 17). We fully expect that more than half of our respondents in the future will be implementing SaaS, and we intend to follow this trend. We might ask ourselves what other parts of our systems we will need to keep inhouse. The combination of cloud computing, SaaS, Enterprise 2.0, and increasing bandwidth and computing power all align themselves to present us with a different model of computing subject to the constraints of security in regulation. We would expect these initiatives to significantly drive IT investments in information systems design in the future.

DIRECTIONS FOR THE WISE MANAGER

The implications for managers that we see in the trends data focus around helping our organizations manage the costs of doing business in an attempt to survive the economic climate in which they operate. We anticipate that in the next 12 to 18 months companies will come under significant pressure to cut costs, to reduce the need for long-term capital, and to maintain certain levels of customer loyalty to prepare for the recovery that inevitably will come. Managers must focus on those aspects of the business that can quickly cut costs and improve profitability. The IT organization will be called upon to provide a series of control reports focusing on cost variances and upon sales analysis that will spot trends in purchase behavior from our customers. We will see an increasing need for changes in the database architecture to aid in the construction of these reports and perhaps the creation of dashboard tools to allow managers to quickly make decisions that affect the health of the organization.

Cost cutting will hit the IT budget as well. IT managers will be required to reduce their headcount, will be required to reduce their budgets, and will be asked to do more with less. The low-hanging fruit in the IT budget can rove all around the renegotiation of maintenance contracts and the delay of upgrades. While it is clear that delaying upgrades of hardware and software can imperil the operations of the organization, the wise manager has begun deciding which upgrades need to be postponed and which need to happen right away.

A word of caution, however, is needed. The wise IT manager will not undertake any actions that increase the risk the company already has. Just as the ill patient in a hospital is at increased risk for additional illnesses, so too is the organization at greater risk during an economic downturn. The IT manager must be vigilant in caring for his or her IT resources.

The economic downturn, however, will not last forever. The wise manager will plan for good times while in bad times. When IT budgets again begin growing, demand for IT workers will skyrocket and some key employees may be tempted to go elsewhere. It is essential that key personnel be taken care of during the downturn and be enticed to stay when things get better. The wise manager pays more attention to the welfare of his or her key employees during a recession. It is also suggested that plans for server consolidation and other virtualization activities be pushed forward. These cost-savings activities may be essential in helping the company survive in the next few months.

The longer the recession lasts and the fear of deflation continues, the more likely it is that organizations will need to decrease headcount. Headcount reduction within direct labor in a manufacturing organization is relatively straightforward, albeit painful. As product output and product demand fall so does the need for direct labor. The indirect labor that is employed to support direct labor is also a target. However, other overhead labor costs, such as those in accounting, finance, and human resources, are more difficult to attach to the costs of goods sold. Many of those workplace activities are part of workflow, and some analysis is needed to identify where the workflow slack exists and where software and other process redesign can make an impact. The wise manager will focus key business analysts on those elements of business process workflow that will significantly reduce headcount without noticeable service degradation or on key business processes that are vital to the ongoing health of the organization. In other words, the manager must make a decision about where to best use his or her resources, including his or her people.

The wise manager will also pay attention to innovation. While many good ideas will not get a fair hearing during these coming months, it is important that we keep track of and even encourage the ideas that will ultimately increase productivity and organizational performance during the recovery. Studies have shown that it takes almost three years for good ideas to bubble up to the surface after two companies merge. That means that for almost three years little innovation actually occurs. During a recession the same thing happens. Because there is little money or other resources to fund good ideas, good ideas stop coming. The wise manager will keep track of all the good ideas and even encourage their discussion.

During the 1980s when the oil industry fell upon hard times, many oil companies stopped all of their recruiting activities at universities, which traditionally provided them with labor. As a result, relationships, which had been built up over many years, began to dwindle. One company that chose not to do this was Texaco. Les Hodges, the former general manager of Texaco's IT department, was a visionary leader. He understood that the energy business would someday turnaround and the relationships with organizations that provided labor and other services would be a key competitive advantage for his organization. So he pushed his people to stay in touch with universities and with other key labor providers. While the company had no jobs to offer, it did have other things that would keep Texaco in the minds of students and other workers. When oil bounced back, Texaco was the first to begin hiring back good people, while other energy companies spent time rebuilding relationships.

The wise manager will also help his or her organization understand the value, both long and short term, that will be generated from the use of various items in the software portfolio. Many times the IT manager has a view of the role of information systems and the organization that project sponsors do not. While many of these projects may have been given the green light during good times, during an economic slowdown they may not generate acceptable returns or be a good investment of scarce resources. More than most, the wise IT manager understands the value of terminating a project before it gets implemented if there is a good chance that that project will ultimately fail or not deliver the expected results. Understanding that, the wise manager will also look at the value generated by new technologies and anticipate unexpected returns. BI software and SaaS are examples of such systems.

CONCLUSION

To be sure, these are trying times for all businesses. We can expect the recovery to last many months, and some analysts expect additional cuts will be necessary. Our trends data tells us that investment in systems and processes that help organizations cut costs and manage expenditures will be the most successful in the coming year. We would anticipate that shrinking IT budgets will push development, infrastructure investment, and innovation into subsequent years. Vendors will be cutting costs as well and good deals will be found, but care should be taken to look at the long-term health of our business partners. Those organizations that invest in strategic nimbleness will reap the rewards and those that do not will adjust their investments in the future.

ABOUT THE AUTHOR

Dennis A. Adams is an Associate Professor in the Department of Decision and Information Sciences in the C.T. Bauer College of Business at the University of Houston (USA). He has published articles in journals such as Interfaces, Information Systems Research, The DATA BASE for Advances in Information Systems, MIS Quarterly, and Information & Management. His research interests include leadership and the effects of and techniques associated with valuing the bottom-line contribution IT makes to organizations. He can be reached at adams@uh.edu.