In these uncertain times,IT departments need to prepare for the eventual tightening of the belt. A recent survey on TechRepublic showed that as a result of the slowing economy and the terrorism attacks on Sept. 11, most IT pros believe that budget cuts will hit their IT departments (see Figure A). Only a third of the survey respondents believed their IT department would avoid budget cuts.

Figure A
Respondents to a TechRepublic survey believe IT budget cuts are on the horizon.

When budget cuts are made, internal support departments are often hit hard by them. No one makes good decisions when they are facing a deadline. That’s why I recommend mapping out a strategy for cost savings in your department before you are forced to do so. If your organization’s senior management announces that budget cuts are needed, you’ll be prepared to suggestyour options—instead of becoming a victim to their ideas. Here are some suggestions to begin positioning your department to survive the long-term budget crunch.

Manage executive expectations
IT managers need to realize that cutting costs is a business decision. Because it is unlikely that IT will be immune to budget cuts, the goal is to minimize the impact on your group. Begin with a candid conversation with the CFO and/or CIO. Ask these questions:

  • What are the company’s long-term plans? How will the company position itself to be successful and profitable?
  • What are the preliminary plans for cost cutting? Determine where the IT department is placed in the cost-cutting timeline. Is IT facing cuts in the first round, the second round, or the 10th round of cost-cutting exercises? This placement will give you an idea of how the organization’s leadership views technology. If leadership believes IT is a key to future success, it is likely that proposed budget cuts will come in the later rounds.

Once you have completed this discovery phase, arrange for another conversation with the CFO. The goal is to manage executive expectations of the IT group once the cuts are made. Avoid long presentations and get to the point. Here are some ways to stay on top of looming budget cuts:

  • Before this second meeting, figure out how you can effectively educate senior management on the importance of the IT department’s role in the organization.
  • Create a discrete priority list of the IT functions that are truly business-essential and those functions that can be eliminated.
  • Jot down a list of IT services that would be negatively affected if cuts were made to IT. Present the opportunity costs to such a cost-cutting decision and identify all its subsequent consequences, such as lower productivity. (An opportunity cost is what your organization would lose if a cost-cutting decision were made. For example, if you laid off a developer, the opportunity cost would be the ability to quickly change your e-commerce site.)

The opportunity-cost document is usually a real eye-opener to most CFO’s when they see how dependent they are on IT services for the business success and competitiveness of the company. The eventual question will be: What services can be cut with a minimal impact to productivity? Here is where your prioritized list comes in handy because you have already determined what can be “sacrificed.”

An example of how I might set priorities to reduce costs

I’ve considered how priorities might have an impact on my department if I ever face budget cuts. For example, since most of our employees are in-house, the first expense that I might cut is support for telecommuters. Next on my list is support for peripheral workstation devices—like Palm or similar PDA devices.

Return to core competencies
Return to the basics. During the flourish of the technology market, IT was considered to be “all things to all people.” IT groups later went beyond the early support services model and began looking at revenue-generating applications or cost-cutting services to further their organization’s goals. With this shift in focus, ROI (return on investment) became the big “in” acronym, as IT managers needed to present returns for technology spending, either in faster productivity or revenue generation. With tough economic times head, begin slowly pulling in the scope of the IT department’s reach. It is a conservative move, but it may save you dollars in the long term.

Start by determining the core competencies of your group. Our organization’s IT group flourished as an in-house data-hosting center but struggled as a data processing center. Your department may be different in focus, and you should pinpoint that focus. Determine that core competency and then build on it. Evaluate IT projects by lining them up with the company’s core business and determining if the projects are also in line with your group’s core skill. If not, think about terminating the project, spreading out the development/implementation cycle, or outsourcing it.

When cuts are made, the IT group may be called upon to maintain its current service offerings. You should ensure that your group will be able to handle the volume of services by holding back new services until funds are available. If leadership demands you support the new application with your limited resources, use the opportunity-cost perspective in your negotiations for any new, in-house IT services. Here is where your priority list comes in handy again.

Investigate outsourcing options
One of the main reasons for avoiding outsourcing is the control issues that revolve around the application and data. Now is the time to seriously consider outsourcing IT services to save on costs, especially in labor. Though many ASP vendors have struggled or failed, there are still strong market leaders. Do the homework and investigate ASP vendors that might pick up some of the services you are now providing. Typical services that are outsourced include e-mail and level one help desk support. There will likely be initial inconveniences, but if you find a reliable vendor, it’s likely that the comfort level will improve with your diligent management.

Make sure to negotiate solid service level agreements (SLAs) and make certain that your in-house staff can support the OS platform and hardware used by the vendor. This strategy also keeps open the option of bringing the services back in-house if funds become available.

Review your current contracts and renegotiate aggressively when those contracts expire. Vendors are bundling in more services with their offerings today. Use this fact to add additional services to supplement current IT services. Take advantage of the weak technology market and allow vendors to compete for your business. One caution: Remember that cost shouldn’t be the only factor in these decisions. Your organization’s senior management may favor the cheapest vendor, but you are looking for overall value.

Maintain staff morale
As you are pulling back on IT service offerings, don’t pull back on staff development and training. If you find that projects have been cancelled and there’s a lull in activity, this might be the perfect opportunity to increase training offerings. An initial reaction may be to cut the training budget first, but I believe this really should be among the last areas to be axed.

Begin the cross training that you’ve always planned, and send staff to formal training classes. Cutting training is devastating to morale because it cuts off growth opportunities, and people may begin to look elsewhere for employment. The cost of replacing staff is always higher than retaining current staff. Training your crew is essential for your group’s future success. As they become more knowledgeable, the company will get more for the dollar and you get a more efficient team.

Finally, as you are preparing for the worst, prepare your staff mentally for the changes to come. Let them know you are taking precautions today to reduce drastic changes tomorrow. By doing so, you raise the level of awareness so others can pinpoint ways to reduce costs that you may have overlooked.

What’s the first item that you would cut?

If you’ve been forced to reduce your budget, tell us about the least painful way that you accomplished this. What do you recommend to managers who are forced to make choices when staff reductions are required? Post a comment or send us an e-mail.