Managing IT Through Tough Times

Lessons learned in times of stress can apply even when times are good.  Successfully managing the IT function is a challenge even in the best of circumstances. But when your company has fallen on hard times and revenue and profits are falling, how should the IT function be managed then?

We interviewed a number of CIOs from companies in the auto industry that are either currently going through difficult times or have emerged from such times, and found a relatively consistent set of actions that these IT leaders have taken to help their companies weather tough times. The four key lessons learned are:
 

1. Manage ongoing IT operations with a continuous cost-reduction mentality.
2. Focus discretionary IT spending relentlessly on bottom-line value within a long-term IT road map.
3. Find the right balance between IT organizational centralization and decentralization.
4. Be creative in managing attrition.

These key principles have served all of these CIOs well during times of stress, and, perhaps most interestingly, each of them reports they are employing these very same principles as their companies return to prosperity. Our ongoing work with both healthy and troubled companies confirms these principles as being the keys to success for IT organizations in either situation.

CONTINUOUS COST-REDUCTION MENTALITY REGARDING ONGOING OPERATIONS
If you are waiting for tough times to force you to cut your company’s ongoing IT operations costs, then you are missing out on a great opportunity to better position IT to contribute to the company’s bottom line on an ongoing basis. Rather than wait until times are tough and cost reductions are mandated from the top, the best companies are focusing on reducing ongoing IT operational costs every year. Contract renegotiations as well as outsourcing of networks, data centers, call centers, and application maintenance are tactics that are being used to achieve targets such as a 5 percent year-over-year cost reduction.

Ralph Szygenda took over as CIO of General Motors a decade ago. In each of those years, he has reduced total IT costs as a percent of corporate revenue, regardless of whether GM was going through ups or downs. “My approach was to focus on aggressively reducing ongoing IT operations costs and at the same time shift more IT spending to discretionary new development projects,” he said.

IT infrastructure (e.g., operating and maintaining communications networks, data centers, and legacy applications), while necessary, is not visible to business users unless something goes wrong. Therefore, the key is to constantly look for ways to reduce infrastructure costs while minimizing the risk of business disruption.

Sam Valanju, the CIO of Johnson Controls Inc., has a target of reducing infrastructure cost by 5 percent each year, in good times and bad. He does this through standardization of hardware and software, reducing the number of IT vendors, and building a 3 to 5 percent annual cost-reduction clause into every outsourcing contract. He is also moving more of his legacy-application maintenance to off-shore/near-shore locations, aiming for a 50/50 split in head count between those locations and on-shore locations. Further, Valanju said, “You can explore relaxing service levels in bad times as another lever to help reduce costs.”

The CIO of Lear Corporation, John Crary, agreed. “There is more tolerance from the business users about relaxed service levels during difficult economic times; more of a sense that ‘we are all in this together’,” he said.

Another CIO, whose name could not be used for this story because she was in between jobs, spent 60 percent off shore. For example, her previous company had a data center in St. Louis, but people were running it from Brazil. She also had 70 percent of the company’s legacy applications maintenance in India. In addition, the CIO had a no-nonsense approach to investments in ongoing IT operations.

“Any investments in ongoing operations had to be self-funding,” she said. “If we could spend a million to save over a million, we would do it. However, we were focused on the timing of the spending. We tried to time the cash outflow for IT infrastructure projects to occur when the business had good cash inflow, and tried to ensure that projects were kicked off early in the year and executed quickly to realize the savings during the budget cycle.”

The consensus of these CIOs regarding the topic of outsourcing ongoing operations (i.e., infrastructure and legacy-applications maintenance) is that outsourcing shifts fixed costs to variable and “builds in” ongoing cost reductions. However, the CIO must make sure that the outsourcing contracts are built around “unit pricing,” so that if the company hits hard times, contractual IT costs are automatically reduced as the volume of IT work decreases. Also, outsourcing should not be reserved for just tough times. As Valanju says, “The outsourcing process can take a full year and is clearly a strategic decision. It is more of a continuum strategy than an event-based strategy, so you need to establish your outsourcing strategy and then execute it, knowing the company’s financial position could change.”

RELENTLESS FOCUS ON BOTTOM-LINE VALUE OF DISCRETIONARY SPENDING
In many if not most companies, there is a tendency to scramble to cut IT projects when times are bad and then try to find projects to do when times get better. But in companies that develop and maintain robust multi-year IT plans, company executives are more likely to understand and “buy into” that plan, regardless of the financial condition of the company. In bad times, they may slow the execution of the plan, but the sequence of the projects remains roughly the same. A strict ranking of discretionary IT projects based on ROI and strategic value is needed to help a company going through tough times decide exactly where it makes sense to invest any discretionary IT dollars.

At GM, Szygenda has the IT organization work with its business counterparts to develop a business case for each discretionary IT business-application project. He then prioritizes the entire portfolio of discretionary IT projects and works with business management to determine the spending pool for a given year.

“The amount of discretionary money available can vary considerably from year to year and is typically less when times are tough. But our process remains the same,” Szygenda said.

Johnson Control’s Valanju agreed. “Each business unit ranks all of its capital projects, including discretionary IT projects, and decisions regarding which projects to invest in are made based on the ROI,” he said. “When times are tough, there is more focus on projects that have a shorter payback period and are more cost-reduction focused. When times are good, you see more projects that are customer-focused and more with subjective benefits.”

All IT organizations should establish this discretionary project ranking process rigor in good times, so if times turn tough the process doesn’t need to change—the cut-off line for discretionary projects only needs to be adjusted.

FINDING THE RIGHT ORGANIZATIONAL BALANCE
Most of the companies we spoke with were multi-national, multi-business-unit organizations. They all faced issues in achieving the scale efficiencies of centralization while “staying close to the business.” We found that the design of the IT organization reflected the culture and organizational design of the entire corporation. In general, if a company has an attitude of “give the business units autonomy to run their own show,” then the IT organization will be under pressure to decentralize, with each business unit able to manage its IT function as it sees fit. However, decentralized IT organizations are inherently more expensive to operate than centralized IT organizations. Therefore, when a company is under stress, there is a tendency to consolidate to cut costs.

BorgWarner traditionally has had a strong culture of independence, and its business units (BU) had the control and authority to run their operations as they saw fit. Jamal Farhat, BorgWarner’s CIO, responded to this cultural imperative by giving each BU an IT executive who reports jointly to the BU president and to the CIO. The BUs have responsibility for determining their application development budgets and doing the analysis and development of their BU-specific systems.

However, Farhat said that “to help achieve the cost-effectiveness that is expected, we centralized control over infrastructure management and established corporate competency centers for key applications such as SAP and PLM. The key is to drive global standardization for those areas that are BU-independent, while giving the BUs the autonomy they need to develop those applications that are unique to their business.”

Lear’s Crary has implemented a similar structure, where each division has its own CIO, as well as its own analysts and systems developers. Divisions “pay” the central IT group, which has been consolidated to get the necessary economies of scale, to operate their systems. Crary said that “each division evaluates its own discretionary IT projects and determines if it wants to invest in specific applications that will help improve divisional operations, but this is done within the overall corporate application architectural guidelines.”

Many large organizations are finding that a hybrid organizational structure such as Lear’s or BorgWarner’s can provide the responsiveness of decentralization as well as the cost-reduction benefits of a centralized organization. Addressing this issue when times are good will help the IT organization position itself to be in a position to react appropriately and help the company if times turn bad.

CREATIVELY MANAGING ATTRITION
When a company is having financial problems, it puts a strain on retaining good people in all areas, and IT is no exception. Strong IT skills are typically in high demand, and when a company is under-performing, it can affect the morale and the compensation of the IT function, leading to higher than normal attrition. Since IT personnel can move to another company with relative ease, CIOs need to be creative in taking non-monetary actions to retain their best people when they are not able to give raises or pay bonuses.

The aforementioned CIO who was switching jobs said she made it a point to focus on several areas to help with retention. “We picked several specific accomplishments to focus on each year, so the team could gain a true sense of accomplishing very concrete goals,” she said. “We also focused more intently on job rotation to help people pick up different skills, so they felt like they were truly building their personal capital. If the money isn’t there to pay bonuses, you have to focus on other areas that people value.”

Steve Pickett, CIO of Penske Corporation, believes that education plays a large role in the retention and advancement of IT professionals. “Encouraging external ongoing education, whether through participation in organizations such as SIM, vendor-sponsored courses, or independent seminars, is invaluable in improving your organization,” Pickett said. “Building a culture of continuous self-improvement for your IT staff brings a number of benefits to your organization, including helping to keep your best people through tough times.”

At Hayes Lemmerz, CIO Bruce Leidal has gone through a similar effort to strengthen the culture of his organization.

“We’ve gone through a significant effort to transform the IT organization through our ‘Topgrading’ process,” Leidal said. “Topgrading is an interviewing and development process focused on identifying A-players and putting them in the right roles to be able to perform at an A level. Implementing this has resulted in a lower attrition rate than many of our peers, in spite of the fact that we are expanding our offshore resources to support the needs of our global organization.”

Encouraging words and motivational speeches are never sufficient to sustain an organization through tough times. However, putting in place specific, measurable, non-monetary staff-development activities will help attract and retain a strong IT organization to support the company through both good and bad times.

CONCLUSION
What we have learned in our work over several decades with troubled companies, and these CIOs confirm, is that managing according to these principles is critical in making sure the IT organization does its part in getting its company through tough times. As it turns out, these “best practices” are effective for managing IT during good times as well. In fact, if this discipline and operating model is established as standard operating procedure within an IT organization, it will be on firm footing to respond to difficult economic times.

Gary Baker and Tim Clayson are directors and Bruce Myers is a managing director with AlixPartners LLP, a global performance improvement, restructuring and financial advisory firm.