October 8, 2008

Managing IT in a Downturn: Beyond Cost Cutting

Excerpts from The Mckinsey Quarterly

Looking to slash your IT investments? Consider the possibility that targeted ones might generate savings and revenues exceeding what you could save through cost cutting.

Economies around the world are slowing down, and companies are looking for ways to trim spending and improve the bottom line. Although information technology often represents a small fraction of the corporate cost base, senior executives inevitably turn their attention to IT budgets for substantial contributions. Yet in some instances, IT investments deliver more value to a company’s top and bottom lines—by creating new efficiencies and increasing revenues—than any savings gained from traditional IT cost cutting.

IT has come a long way over the past decade. Budgets grew rapidly during the dot-com boom and the run-up to Y2K, then declined drastically when the bubble burst. Over the following years, CIOs, working with business unit leaders, improved the performance of IT departments by streamlining application portfolios, reducing infrastructure costs, improving governance, consolidating vendors, and outsourcing many activities.

Much has changed across the business landscape as well. Technology now meshes tightly with operations in ways that weren’t possible a decade ago; the apparel maker Li & Fung, for instance, uses IT to manage supply chains with a network of over 7,500 different suppliers. At the same time, e-business, once a buzzword, now forms a part of the corporate status quo. IT capabilities have fostered new sales channels, defined new customer segments, and even helped create new business models.

These factors make reductions in IT spending more complicated than ever. Simplistic cuts, applied across the board, may endanger critical business priorities from sales support to customer service. That potent message should resonate even among corporate officers anxious to find quick savings.

Still, except in the most dire circumstances, turning off technology investments during a downturn is counterproductive. When business picks up, you may lack critical capabilities. Besides, many technology investments can improve profitability in the short to medium term.

When business and IT executives jointly take an end-to-end look at business processes, the resulting investments can have up to ten times the impact of traditional IT cost reduction efforts (Exhibit 1). The trick is to scan for opportunities—such as improving the customer experience, reducing revenue leakage, and improving operating leverage.

Creating impact with technology

Such an effort begins with a survey of operations for areas likely to produce near-term revenue and efficiency gains. In our work across a variety of industries, we have identified a number ways technology investments can have a substantial impact (Exhibit 2).

  • Manage sales and pricing. Develop insights into customer segments and improve pricing discipline to increase revenues without increasing prices.
  • Optimize sourcing and production. Rethink supply chains and logistics to improve the scheduling of deliveries and inventory management.
  • Enhance support processes. Improve the management and use of field forces (such as installers and field technicians) and of customer support centers.
  • Optimize overhead and performance management. Sharpen awareness of risk exposure and improve decision-making and performance-management processes.

To extract value from these opportunities, our experience shows, companies must make managerial improvements in two areas.

Developing new insights

Few companies have successfully capitalized on the explosion of data in recent years. Often this information, residing in separate IT systems or spread across different business units, has never been mined for insights that could add value. Small teams of business and IT staffers can find opportunities by combining a detailed understanding of business processes with straightforward analyses of consolidated data sets. When such teams use the data to compare best practices across regions or to identify under- and overserved customers, for example, they can identify hotspots of revenue leakage.

Optimizing processes

As IT becomes tightly integrated with processes, breaks in workflows often get built into systems and diminish productivity. Shining a light on these areas with an integrated view of operations and technology may well surface problems, which often involve outdated processes, manual steps, redundancies, and bottlenecks. An 80/20 approach can highlight a modest number of activities that, when corrected, deliver a disproportionate amount of value. Companies can usually apply these fixes in short order. At times, new systems may be needed, but modest enhancements or targeted work-arounds often suffice: an additional error check in a credit application, for instance, can reduce the need to rework incorrectly entered data. Adjustments to workflow processes may also promote greater adherence to corporate sales-discounting and bidding policies.

Applying these methods

Applied in high-opportunity areas, these two levers can not only make a short-term contribution to earnings but also build a foundation for future performance. Two cases illustrate this approach.

Revenue and pricing discipline

Maximizing revenues is always important, but even more so during a downturn—particularly when revenues can be increased without raising prices. For many companies, especially those with complex pricing in business-to-business transactions, poor pricing discipline is endemic. Since most pricing regimes depend on IT systems for the process and the workflow, these systems can play a central role by capturing lost revenues.

Employee productivity

Another critical goal during a downturn is getting more “bang for the buck” from employees—for example, by increasing a company’s operating scale, making processes more efficient to reduce rework, and stepping up efforts to automate manual procedures. IT is essential to all of these efforts.

Downturns give companies a chance to buck conventional wisdom and increase their IT investments. From our experience, targeted investments in many areas can generate efficiencies and revenue growth that surpass the savings from straight cost reductions.