Recession revisited: Will this time be different for IT?

As the US economy turns downward, CIOs are preparing in dramatically different ways than the last time

When CompuCredit began feeling the sting of the subprime mortgage mess and resulting credit crunch toward the end of last year, CIO Guido Sacchi's IT organization was forced to absorb a 20 per cent year-over-year hit to its annual IT budget.

But for Sacchi, that's where the similarities between handling the current economic slump and the one earlier this decade end.

Last time, IT budget-cutting was a one-time exercise. Now, Sacchi and his IT finance team are making weekly adjustments to the company's IT budget. They're using scenario planning to analyze changes in consumer spending and credit-market conditions, in order to roll with the business and fine-tune its IT spending plans on an ongoing basis.

"I think today as CIOs, we have more tools to respond to those [financial] challenges," he says.

The situation at CompuCredit illustrates that the current economic deceleration is different for IT than the recession that followed the dot-com bust.

For starters, many IT organizations have risen to the status of business partners, and IT's visible contributions to corporate revenue growth and efficiency gains have made senior management more selective about cutting IT investments. Indeed, unlike the previous economic downturn, where across-the-board IT cost-cutting was de rigueur, investments in certain technologies such as virtualization should continue to rise, thanks to the efficiency gains they generate.

Moreover, the shift to the use of IT contractors, from India to Singapore, has enabled IT leaders to scale back their contract labor without resorting to layoffs.

And finally, any slowdown in IT spending caused by a slumping US economy may be offset, in part, by strong international growth among many multinationals.

To be sure, the industries most directly and adversely affected by the housing bust and subprime mortgage madness have tightened their 2008 IT spending plans. In mid-February, Forrester Research lowered its predictions for US IT spending for the second time in two months, from a 4.6 per cent growth estimate it issued in December to 2.8 per cent.

But even within those businesses, "it's almost impossible to generalize IT spending changes by sector," says Howard Rubin, professor emeritus of computer science at Hunter College. There are "microclimates" of economic impact and corresponding IT budget reactions that are occurring on a company-by-company basis, he explains.

Priorities

There are stark differences in spending priorities now compared with the period following the dot-com bust.

In the late 1990s, companies of all stripes invested heavily in new systems during their Y2k preparations. At the same, many businesses were making "speculative investments" to determine which Internet models might work for their organizations, notes Mark Settle, former CIO at Corporate Express and Arrow Electronics who is currently between positions.

Once the economy began to soften in mid-2000, many CIOs were ordered to cut back on new application development and stretch other systems investments. And many couldn't push back effectively because they had lost credibility among executives who perceived that the Y2K threat had been oversold.

In the current downturn, which many economists expect to extend through 2009, different circumstances and philosophies are affecting IT investment decisions.

CEOs and other executives have become much more cognizant of the business value that IT investments can deliver, even during a period of economic retrenchment. So they're generally more reluctant to cut back on strategic projects aimed at increasing revenues or improving operational efficiency, says Hunter Muller, president and CEO of HMG Strategy, a CIO consulting and advisory firm.

That's particularly evident within companies where CIOs have delivered solid results, have achieved a level of trust with senior management and are continuing to execute on three-to-eight-year IT-business strategies, he adds.

A case in point is FirstHealth of the Carolinas, an integrated health-care network.

Even if the economy worsens, "there's very little I could stop doing" from a project execution standpoint, says CIO David Dillehunt. That's because the company's clinical systems investments are aimed at "getting patients out the door faster" and reducing operating costs, he says.

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