Right on the money
How can CIOs better manage their finances this year?
The current economic uncertainty may not necessarily spell bad news for chief information officers (CIOs) seeking to revamp their departments and secure their positions. While cutting costs may form an integral part of an information technology (IT) head’s agenda, certain tips can assist them in making sound financial decisions in managing their teams.
According to a survey of Australian CIOs and senior IT executives from 98 organisations, cost control remains the number one priority for IT heads. The study, which was jointly conducted by Fairfax Business Media and technology management and consulting firm Accenture in March, surveyed the attitudes of CIOs in shaping their IT in response to the current downturn. Respondents indicated having targets of between 10 to 20 per cent savings for the following six months.
Survey results showed 65 per cent of respondents were focused on reviewing their IT procurement spending and rationalising IT contractors, while 57 per cent indicated they were in the midst of renegotiating their IT contracts. Forty-five per cent showed they intended to rationalise their IT suppliers.
“When times are good, clients buy SLAs [service-level agreements] that they don’t really need,” says Scott Halstead, IT strategy and transformation partner, Accenture. “But when you come back and look at them, there’s actually significant savings in potentially reducing SLAs.”
How then, should CIOs proceed with reviewing their IT spending? Is there more to cost-cutting than meets the eye? What should IT heads take into consideration, while negotiating their contracts? We speak to two analysts to find out their take on this.
Get creative
Patrick Chan, chief technology advisor, emerging technologies, IDC Asia Pacific, feels leasing bundles provided by major technology players could provide CIOs provide financially viable options for cash-strapped companies. “Vendors are getting creative in proposing IT leasing and financing structures to Asia Pacific organisations. Bigger players such as HP and IBM are in a good position to weather the financial storm and are actively throwing in leasing bundles that help companies to lease IT infrastructure.”
According to Chan, leasing IT infrastructure holds benefits such as equipment replacement and cost savings. “Vendors should note that end-users are interested to shift cost between capital and expense budget and are also pro-protection against IT infrastructure obsolescence,” says Chan.
This view is shared by Richard Ni, research director, IT procurement and asset management, Gartner. “Hardware leasing is becoming more popular because it is more traditional and less risky for both the vendor and customer,” says Ni. “With the current economic environment, vendors have been known to offer zero percentage leasing promotions in order to attract customers.”
Chan, however, advises CIOs to take the disadvantages of equipment leasing into account, before making a decision. “De-installations will not be as quick as installations; and the process and methodologies of removal and assets from existing end-user environments need further improvement.”
Ni similarly advocates evaluating all aspects of a contract, in order to see if it suits the company’s needs. “Each financing model has its own risks. To avoid potential repercussions involved in the leasing and financing deals, we advise our clients to cover areas such as contract terms and conditions, price negotiation based on total cost of ownership and asset life cycle,” says Ni.
Chan further recommends that CIOs consider options such as outsourcing, managed services, capacity on demand and cloud computing to reduce costs. “Note that IT leasing and financing is an operational as much as a financial decision and requires holistic attention and planning towards asset lifecycle replacement strategies,” says Chan. “CIOs are required to work closely with CFOs in IT leasing projects.”
Chan also addresses market interest, referring to what he terms “blended” products, such as Sun Microsystems’ Thumper storage device and Cisco’s recent announcement of new server products which combine server and data management with networking equipment. “These new product types represent a challenge. It is logical to want to classify equipment in the same categories as we have in the past. However, a detailed review of each product that includes a technology life cycle and useful cycle is necessary, in mitigating risk in new investments.”
Service first
The economic crunch has also brought with it lower prices, and that could prove to be positive news for IT heads seeking the best bang for buck. Ni states lower prices do not necessarily mean a corresponding compromise in service levels. “When prices go down, there exists the perception that service levels will also go down. However, this need not necessarily be so. There are many factors driving prices downward, including over-capacity in the market place, lower profit margins, decrease in customer consumption and lower cost base for vendors,” says Ni. “CIOs must exercise caution when exchanging service levels for lower price, especially where it concerns external customer facing functions and mission-critical activities.”
CIOs should focus on a vendor’s ‘vulnerability’ or ‘viability’, says Ni. “More companies will likely fail given the recession, and when a critical IT vendor fails, the impact on its customer can be devastating,” says Ni.
“Vendors should understand the priority of the CIOs. Be flexible in negotiations. The game for now is to retain and grow their account, but not necessarily their revenue and profit. When the economy turns around, these same vendors will be rewarded because of the stronger customer relationships they have built during these turbulent times,” says Ni.
Contact: Melissa Chua & Jack Loo
