IT cost cutting heads for dangerous edge

Obsessed with savings some of Australia's largest companies are putting great strain on ageing IT systems without realising most organisations have hit the wall on cost reduction.

Meta Group is warning Australian business that most companies have already cut into discretionary spending and can afford o more cuts without putting their day-to-day operations at significant risk.

The research firm's executive vice president, Dr Howard Rubin, said IT organisations need to assess the risk versus the 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," he said.

A former IT manager at Worsley Aluminia, who has now become finance manager Ed Stuart, said the 'slash and burn' mentality prevalent today is detrimental in the long term.

Stuart said there is a real danger in this climate for companies that do not differentiate between reduction and slashing costs.

If cost reduction isn't undertaken effectively, Stuart said companies can pay through the nose to fix mistakes because the network cannot catch up.

In general terms, he said the enterprise has to determine how dependent it is on IT.

"My company is completely business driven and there is great scrutiny, but that doesn't mean it takes a slash-and-burn approach to IT; if you have to cut IT to the point where it's affecting business operations that sort of extremism is short sighted," he said.

However, Stuart admits the first areas to be cut in a tough climate are training and IT if there is a requirement to meet shareholder demands.

Meta's Rubin said companies have already made drastic cuts including staffing reductions, server consolidations and contract renegotiations.

While other reports have predicted a rise in IT spending by early 2003, Meta claims it will remain flat and any spending increase will be an "artificial bump" because IT spending is only increasing 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 becomes a larger percentage of total revenue without increasing the dollar amount."

Harlequin Enterprise IT manager Paul Singh agrees with the Meta report, claiming outsourcing is the preferred option to cut costs.

"We are looking to upgrade some systems hardware to get cheaper maintenance costs; upgrading will help us save on maintenance and vendors are really keen to sell at the moment," he said.

Singh said the company will be upgrading from January 2003 onwards including two PC servers and the AS/400 a project that will involve a bit of "shopping around".

"Rather than make drastic cuts that affect the business we are spending more carefully by using consultants to streamline processes and doing in-house changes to existing systems," he said.

-- with Lauren Thomsen-Moore

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