Don’t Cut IT During a Downturn

Published By: Harvard Business
Written By: Howard Rubin and John Sviokla

When we learned to drive many years ago, back in the age of rear wheel drive, we were both taught to “turn into the skid” because our natural instincts to turn away only made things worse. In a recession, business management’s reflexes suffer the same problem — at the very time executives should be carefully aiming their information technology (IT) to make their organizations more productive, they often cut indiscriminately . And that usually creates more costs and problems later.

IT makes up 7% of the operating expenses in the average firm and up to 18% of the cost base in information-intensive industries such as financial services. Given its size, IT must be considered for reduction; but the temptation to blindly cut must be resisted. Research by MIT’s Center for Information Research, as well as work done by Rubin Systems and Diamond Management, our companies, shows that businesses with well-targeted IT investments outperform their peers by 2-5% of gross profit. At the very time when profit is most dear, firms must keep their wits about them.

So what do you do?

Build bottom-up investment models of where IT is driving key levers in your business. These include customer service and sales support. In a downturn, investment in demand creation is key.

Understand your “IT cost of goods.” Many organizations don’t know how much IT is embedded in their products or services or what impact it has. Before cutting, understand the whole picture.

Be aware of the health of the IT organization. IT expense should remain a steady percentage of revenue. As IT is used to automate other parts of the business and lower total cost, IT itself should be increasing as a larger piece of a smaller overall expense budget.

Use the downturn to find the very best IT talent. For example, Wall Street is currently awash in great technology talent, and the very best IT talent is hard to find. Now is the time to find the team to take your organization to the next level.

That team will help you through the hard times. Sometimes, of course, cutting is unavoidable. In that case, you must have an IT team that can recommend to management what can be cut and what can't be touched — in business terms, not just technology mumbo jumbo. You must be sure you are cutting the right things and investing in the right things.

What are you doing to make sure that the economic downturn doesn’t cripple your IT platform in ways that will limit your business's future growth?

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