NotesOn: IT Fundamentals – Cost Cutting IT Is Not The Answer

Introduction (V1.2):

It seems nearly every IT related website, IT related seminar and IT consultancy firm broadcasts, loudly and as often and as authoritatively as possible, that Cost Cutting is absolutely imperative to an IT group’s survival in these economic times.  However.  Nothing could be further from the truth.  This is incontrovertibly, as in 100%, the least right answer.  I absolutely guarantee that Cost Cutting as a sole or major strategic initiative is a 180 degree reverse vector response to current IT issues.  Don’t believe me?  Here is why.

Background:

In these current economic “difficulties” the most prevalent “answer” to the question “What do we do to survive?” is “Cut Costs!”  and then “Cut them more!”  Apparently this “solution” has become the de facto standard, virtually the single and only guide post and measuring stick for C-Level and Senior IT Executives (and the Boards they report to).

But stop.

For a minute (or two).

Take a deep breath.

And think about it.

It may be difficult to find the time, as you are either out of business and frenetically looking for a new position, or fighting with every extra erg of energy you have to stay in the business you are in.

But pause.  Please.

For at least a minute.

And let’s both think about, truly think about this particular “everybody knows” “answer”.

Trust me.

It won’t hurt.

And you won’t regret it.

…

(I’ll wait while you close the door, mute the phone, turn off the cell-phone, the Blackberry, the iPod, the TV, and the radio.)

…

Ready?

(And, no, I am not being cynical.  It is important that you slow down sufficiently so that you can turn this “solution” upside down, inside out, right-way-left, left-way-right, positive-to-negative, negative-to-positive, …)

Now, are you ready?

Good.

Two Facts About Cost Cutting:

The first fact is that Cost Cutting by itself is a meaningless, and dangerous, strategy.

The second fact is that Cost Cutting as a concept is anything but new under the sun.  For as long as there has been a subject called “business” (visualize cavemen trading mastodon and wooly mammoth skins and bones) the concept of cost cutting has been an integral part of it.  The less cost the more profit is possible … and … the more service and product can potentially be delivered.

Pretty straightforward.  Perhaps even a “Duh!”.  Yet.  In today’s climate neither fact would seem to be a fact anymore.

But why?  Why has the cost cutting pendulum gone so far over the edge of rationality that it seems to have become the singular, major, focal point of world-wide management?  Good question.

Over the last couple of years in particular, millions if not billions of executive and senior management and management hours have been spent chasing the holy “Cost Cutting” grail, as if it had never ever been put into practice by any other business entity in the world.  Perhaps, I am overstating this a bit, but not by much.  The frenzy with which “Cost Cutting” strategies, and “Cost Cutting” plans, and “Cost Cutting” edicts and executive orders have been issued, and the money that has been spent on “Cost Cutting” consultants and “Cost Cutting” solutions, and so forth, is absolutely astounding, astonishing and nearly unbelievable.

When the truth is that “Cost Cutting” as a solution is not only an imperfect solution it is no solution at all.  It is merely an easy way out.

…

If you believe that “Cost Cutting” is the singular answer to anything worthwhile raise your hand.

…

1, 2, 3, 4, 5, 6, 7, … hmmm … more hands than I can rapidly count.  Well, to all of you who have raised your hand, I hate to burst your bubble, but you are incorrect.  (Or, to be polite, not right enough?)

…

Whanna bet?  Care to place a small wager on it?

…

Okay, I’ll take that bet (figuratively speaking, of course).

Repetitive Cost Cutting – The Result:

To restate the challenge, my assertion is that cutting costs as a primary focus, as a primary strategy as a singular solution will absolutely, positively, 100% guaranteed, destroy your IT group and maybe your company.

As my first form of proof, immediately below is a graphical representation of what happens:

Click on image to enlarge

[Web-site note:  if the image is too small to read, click on it to see full sized .jpg version.]

Can you see how cutting costs automatically reduces IT’s ability to produce valuable products that provide the rest of the business the ability to generate True ROI?  It is a matter of balance.  No generator, no business unit, at or near optimum efficiency can produce more than it has the bandwidth to produce (not on a long term basis).  So, when you cut capability you are automatically cutting output potential.  Keep it up and the unit will self destruct.

Nor does it matter if your company does a “gradual” repetitive reduction or if it assumes a “slash and burn” attitude (ex: “Let’s get rid of all the deadwood while scaring the pants off of everyone else!  To start with.”) in hopes of suddenly and sharply spiking productivity and ROI generation.  Both have the same end result.

And.  Yes.  IT groups often may have some “deadwood”, team members that haven’t been kept motivated and have fallen off the “grace radar”, and, yes, IT may not be running at 100% efficiency; but, the cold hard truth is that if there is so much “debris” around  that the “higher up’s” believe a “slash and burn” approach will “fix” IT, then there are other, more serious, problems than any cost cutting band-aid plan will heal.

Cutting Costs is, and always should be, an on-going element of any strategic plan, but it is only an element.

Logic dictates that if you don’t have the budget to do “it” right, whatever it is, you shouldn’t.  Not until you do have the budget or until you do come up with a workable solution.  Correct?

Common sense tells you that you don’t want to spend more than necessary in order to provide a service or product.  Right?

But does that mean that it should the primary focus point?  Absolutely, positively, 100% guaranteed … not.  No one in their right mind would spend more than they need to get a “value adding” work product out the door.

And yet “slash and burn” “cut ‘em off at the ankles” cost cutting “strategies” seem to be “all the rage”.  Does this make sense?  … Being a rhetorical question, the answer is “No.”

I know, I know.  Talk is cheap.  So here is a fundamental reason why cost cutting is the dark horse leading everyone down an unlit path into a blind and hazardous alley at midnight on a moonless night.

It has been said, often, that, in the field of metrics:

“You get what you measure.“

As an example:

Any help/support desk that has a sole metric of “number of tickets closed” will deliver up, as a rule, “number of tickets closed”; with, more often than not, customer satisfaction being an afterthought.  I cannot tell you how many times I have heard over the years: “Yes, I did open the frick-a-frack-en ticket but those stupid, idiotic bleeping #@&!!#’s closed it … without calling me … and … without fixing the #*@! problem!”  Heard it yet again the other day from my wife re: the help desk at her work.

As another example:

If you set “servers backed up” as a metric for a datacenter you will quite possibly get all or most of your servers backed up … but … when it comes time to restore the tape or image? …  You may very well not get what you wish for.  And.  No.  I am not exaggerating.  Neither is this example one I pulled out of my imagination (none of them are).  It is seen in real life, everyday … or at least too often for anyone’s comfort when it comes time to do a restore.

For more on the subject of metrics see “NotesOn: Risk Management-Risk Analysis“, and other FTR articles.

The logic behind the above metrics datum applies, in full, to IT cost cutting efforts, if we paraphrase it as follows:

“You get what you focus on.“

Thus.  If you focus on cost cutting and push hard enough and long enough you will get:  cut costs.  Possibly until you reach the extremity of zero costs which equates to being out of business (there is no such thing as “free”).

For example:

Have you ever seen IT budgets cut without regard to the projects (and priorities) on them, let alone the consideration of any ROI?  And then cut again, at the next level?  And then cut again?  And then …

For example:

Based on publicly available reports and so forth, at the first hint of an economic down one company almost immediately focused on and sought ways to cut IT costs.  What is interesting is that IT was their first, foremost and most immediate “scorched earth” target, above any and all others (though eventually, as you will soon understand, not their only one).  They:

1.      Began out-sourcing as much of their IT organization and structure in as many ways as they could think of, and manage.   It is not necessary to list them, you can easily figure them out for yourself.  The probably unintended, but predictable, consequences were:

2.      Service levels plummeted, dramatically and then drastically.  Seriously plummeted as in off the charts.  Despite the out-sourcing companies’ initial sales claims and verbal promises.

a.      From minutes, hours and days, IT response and resolution time sank to weeks, months and in some cases years.

3.      The business units, users, and customers started howling.  The help desk, which was also out-sourced, went into overload and overwhelm.

a.      Making it worse, they were factually operating on the singular “tickets closed” metric.

4.      In parallel, the company, having out-sourced much of IT started laying off IT members.  In theory all they needed were “management stubs”.  Practice proved that theory very wrong.

5.      Soon the business units began to do end-runs around IT, i.e. hiring their own developers, buying their own servers, their own commercial off the shelf software (COTS), etc.

6.      Then.  Not too long after the “out-source” was “complete”.  The out-sourcer, having low-balled (one could say with some accuracy falsified) the bid to get the contract, began complaining that they were losing money.  Which they were.  By the eighteen-wheel semi-truck-and-trailer load.

7.      “Thinking” to resolve this, the out-sourcers quietly reassigned their best people to other “better” customers and brought in “second” and “third” string support personnel (i.e. people of lesser skill and experience) who knew nothing or next to nothing about the systems and hardware they were supposed to support.  Forcing the remaining IT personnel to manage them, too.

8.      When that didn’t work (and of course it wouldn’t), to further “resolve” the problem the out-sourcers proceeded to off-shore the functions they had promised they would take care of “as if the systems were their own”.

9.      This cost cutting strategy spiraled downward out of control, rapidly, with the end result being:

a.      No cost savings, at all.  (I have it on good authority that many IT related expenses were slipped into “non-IT” GL accounts so the actual, true, costs of “out-sourcing” would not show up on the books, or Financial Reports, as IT related expenses.)

b.      No, as in zero, ROI.  (There is no way, with the bills that were and continue to be run up, that there would be an ROI for at least 15-20 years.)

c.      Few if any happy customers / users.  (Not even years after the fact.)

d.      Very grim, bleak, mostly dysfunctional remnants of a once near world class IT organization

e.      The remaining IT members operating 12-18 hours a day, 6 and 7 days a week in a funeral-like atmosphere, wondering when their heads were going to get chopped.

f.        Years of unnecessary recovery and rehabilitation ahead – if and when the company finally realizes they shot themselves in both feet and both knees by dismembering a once highly efficient, highly productive IT organization … in the name of “cutting costs”.

So:

Instead of focusing on “cost cutting” and “cost savings” and so forth (which is a negative not a positive result when dealt with as a singularity), perhaps it is time to get back to basics by focusing on:

“Return On Investment (ROI)”

Why?

Because:

Cost cutting/cost savings/cost consciousness is already an aspect of developing a “True ROI”:

“True ROI, defined:  an actual verifiable Return On Investment for the company and the customer.“

You can’t have an ROI without costs being less than profits.

Because (to put it another way):

Cost cutting, or more accurately cost saving, is already an aspect, but only an aspect, of sound business practices.

If you as a business ever find yourself in the position of focusing primarily on cost cutting then you have other, more serious, issues and problems (such as not having previously applied sound business practices).

If you as an IT organization ever find yourself in the position of focusing on other than the delivery of high quality services and products to your customers, ones that provided a True ROI, then you have other, more serious violations of business basics and IT fundamentals.

The Fundamental Being Violated:

The most fundamental underlying reason why Cost Cutting as a singular strategy does not work is as follows:

“Negatives, over an extended period of time, are not sustainable.  To manage a negative, which is sometimes required, you need to, you must, offset it with a greater more productive positive.“

This, by the way, is also the underlying reason why socialism (in its many failed forms) does not work in the long run.  That “ism” is far more negative than positive.  Thus, far more destructive than constructive.

This concept of negative vs. positive (which I’ll write more about in terms of “the laws of flows” one of these days) is also the primary reason why a business cannot long survive … if they’re giving away their services and products for nothing or next to nothing over an extended period of time.  They will close their doors.

[Editorial Comment:  Local, National and International economic policies live or die based on the application of this same fundamental:  governments are not immune.  Any (apparent) dimwit light bulb who tells you otherwise has ulterior motives, i.e. motives good for them not for you.]

More to the point:  the cold hard reality is that when you focus on cutting costs to the bone, all you are left with in the end is, at best, a rather sparsely fleshed skeleton.  Grizzly.  But true.   And.  Need I point out that skeletons,  by virtue of having no muscles or nerve centers or circulation systems, are not terribly productive?

Lest you think this is but one persons opinion, mine is not the only voice in “the wilderness of panic and dismay” trying to hammer home this point.  You can, if you dig hard enough find references to similar points of view but they are hard to come by and are the exception rather than the rule (of common sense).

When The Light Bulb Went On:

When the world economy “hit the brick wall” [editorial note:  you would think after two centuries of failed socialist experiments we would have learned that there is no such thing as "an extended free lunch", but I guess not], when everything economic went hay-wire, purportedly, supposedly, of a sudden, I too had no real clue as to how we all were going to dig ourselves out (though I had faith that we would).

Even though I did not have a ready answer myself, the fact that everyone jumped on the band wagon of “cost cutting” with great ferocity made no sense to me.  At all.  It didn’t feel right.  At all.  Even though I couldn’t put my finger on exactly and precisely what wasn’t right about it.

I had, and have, no issue with economizing, cutting back on nice-to-do-but-not-necessary projects and nice-to-have-but-not-critical expenditures.  That.  Made sense.

What didn’t make sense, what didn’t compute, at all, was the “slash and burn” technique often being used.

As I look back on it, in actual fact I knew the answer (as did many others I believe) but, being caught up in the economic cement-mixer along with everyone else I didn’t KNOW the answer sufficiently well to clearly isolate and succinctly verbalize it.  So, I too watched as these strategies, these solutions evolved into even bigger problems.  And I, too, kept looking and considering various reasons for and against.

Then, several months ago I received an invitation to an evening seminar during which a panel of IT executives would be discussing cost cutting strategies as we ate.

At first, I said to myself:  “That sounds interesting.  … The members on the panel certainly appear to have the knowledge and expertise to discuss the topic intelligently, and thus the knowledge gained should prove to be a definite ROI against my time expended (plus the cost of the meal).”

And.  Then.  In saying that, to myself.  It hit me.  A light bulb, the light bulb I’d been searching for, finally, went on, finally.

As soon as I said “ROI” to myself, I turned around the topic of the seminar by exactly 180 degrees and looked at it another way.  Instead of discussing cost cutting strategies, what if the topic were:

“Do You NEED To Cut Costs?”

Or:

“Why On EARTH Do You Think You Need To Cut Costs?”

Other possible subject titles soon followed, such as:

“Alternatives to Cutting IT Costs.  Yes, There Are Some.  Really And Truly.”

Or:

“ROI vs. Cost Cutting – Which Is The Better Short And Long Term Strategy?”

Part of my realization included this fact:  the current state of the economy is a semi-legitimate excuse for businesses also trimming IT costs but not for doing a “slash and burn” on IT costs.  [Well, except for governmental IT agencies which are sometimes subject to political whims that are hard to out-maneuver.]

This “strategy”, I decided, is one bandwagon that doesn’t need to be, and shouldn’t be jumped on, save for the most dire circumstances.  Of course, with very rare exceptions, dire circumstances actually equate to missing fundamentals, the real source of the problem.

Remember, when one cuts IT costs one also cuts IT functions and thus IT delivered services and IT delivered products that are, at the very least, consumed by your business if not your customers.  And.  One way or another.  These days.  99.5% of your business runs through IT (not run by IT but definitely through IT).

I think I heard a dull thud somewhere, and possibly a few choice words, of the four letter variety, having much to do with my being out of my flippin’ mind.

Okay.  Then, let’s try looking at it in a different way.

Have you as an IT exec, ever asked yourself, this question:

“If my team is delivering on-time on-budget quality results that provide a true ROI to the company and to our customers then [assuming a marketing plan that's worth a darn] why do I have to, why would you want to cut IT costs? … What happened to ‘If it ain’t broke, don’t fix it!’?”

The topic of discussion at the seminar when looked at from this new perspective of mine was a horse of a completely different color, as the old cliché goes.  Because, by asking that question in that way, I began to focus my attention on what I already knew, almost instinctively, but hadn’t brought to a point of clarity, regarding what was and is most important, what can and should be done by IT to prevent the slash and burn cutting of IT costs.

Still doubtful?  Try looking at it from yet another angle:

How many companies do you know, let’s limit this to your immediate environment (city, county and maybe State), how many companies do you know that are succeeding in spite of the economic “down turn”.  ?

After all.  Not everyone is failing.  There are at least some successes.  Right?  Someone(s) is making money.  Someone’s IT group is helping its company to make money.  Right?

So then, why, if that IT group is making that company money (etc.), why on earth would any sane executive cut that IT group’s costs to the bone? … Hmmm.  Maybe, they didn’t. … There’s a thought.

And yet, too often, despite IT running all of the business’s business through their systems, too often, despite the quality of the work and the fact there often is genuine ROI from IT services and products, IT has been and continues to be the first and primary cost cutting target.

Does that make sense?  Wouldn’t it be (more) logical to support that IT group instead of tearing it down?

Correct Response To Down Turns:

In case you were curious, there is a response and solution to the maze of wrong decisions, incorrect orders and ineffective (yet well meant) strategies revolving around “onerous” IT cost cutting.  In summary form, remember …

1. … Don’t Panic!  Don’t grab for your HR list of IT employees and contractors as the first step, followed swiftly by finding out-sourcing and off-shoring consultant phone numbers.  When economic down turns occur (and they will again), look to your business and IT fundamentals … first.  Analyze the situation, the entire situation.  List out what factors, products, services and players are directly involved in, and necessary to, the continued generation of, and improvement on, True ROI.  With more than 95% of business going through IT, IT should be high on that list (if not, keep reading anyway).
   1. Then politely beat your Board of Directors and/or owner and/or senior management over the head with the verified facts; in an effort to avoid across-the-board IT “slash and burn” tactics.
   2. This will be easier if you’ve already done your best to make sure everyone knows and understands the true value of IT to them, see “PPT:  From Idea To Execution – Working With IT“
2. … An “economic down turn” is, to one degree or another, merely bringing to light a prior lack of IT Fundamentals, sound Controls and rational Policies and Procedures that were already in need of repair.  So “Fix it already”.  Hammer home your IT Fundamentals and you will get (back to) True ROI.
3. … If you absolutely positively have to cut, know exactly what you are cutting.  Arbitrary “across the board” cuts are very dangerous to both IT and the business, as high and medium priority mission critical projects typically get either degraded or wiped out entirely right along with low priority “nice to do” ones.   Surgical scalpel versus sledge hammer.When you do cut:  no retaining “pet projects” or offering political favors or favoritism, rely on a proper ROI focused prioritization process that noticeably, publicly, aligns IT with Strategic Planning.
4. … IT must never, ever, be caught hiding out in its own technical bubble. If you’re having a hard time defending IT, look first to see if IT is an active business partner with every element of the business.Again, up to 99.5% of the company’s business goes through, flows through IT.  Cutting IT off at the knees cuts into every single other aspect of the business.  However.  The rest of the business does not care about “technical”.  Except insofar as it helps them get their job done better, whatever their job is.If you’ve been hammering the IT Alignment drum all along you are less likely to be at Cost Cutting ground zero, but still, IT Alignment is your first and most routine major checkpoint.[Note:  some blogs and consulting sites insist "IT Alignment" is extraordinarily difficult.  It is not.  Hardly more difficult than going out of your way to help a friend.  Remember the "Simplify" step from "NotesOn:  A Quick-Fix IT Repair Plan"?  Keep it simple is a definite watch-word to live by in IT.]
5. … Enforce discipline in IT (adherence to its fundamentals), insist on and reinforce mentoring of junior IT members by seniors, and always always always push for excellence in whatever is being done.
6. … Educate, re-educate everyone you can talk to, gab with, drop hints to, stop in the hall to give a brief reminder to … that ROI and Cost Cutting are polar opposites.  The former focus is beneficial, the latter is not.  The former is positive, the latter is not.  The former can be part of a long range strategy and achieve tactical success, the latter cannot and will not.
7. … “Cheaper” often isn’t.  ROI is not about getting the cheapest deal.  It is about investing smart dollars that buy back more than the initial investment, for the business and the customers.  For IT, that takes homework and a full understanding of the “Four Fundamental Life Cycles Of IT“.
8. … Outside sales personnel have, as their first and foremost, priority the survival of their business, their company.   Not yours.  Your company is, to be frank, of secondary priority at best (they have other customers besides you).  So be a bit cynical about what vendors, consultants, business process out-sourcers and off-shorers, etc. try to sell you.I am not “against sales men and women”.  They have a very real value to the world of business.  But.  Even the best, most honest sales people have at the forefronts of their thoughts the survival of their company.  Thus, they will (try to) sell you anything they believe is right for you, using any buzzwords, pushing any go-buttons, they deem appropriate to get you to sign on the dotted line.Your job, IT’s job, on the other side of that equation, is to not believe every single word but to verify, verify, validate and verify that there positively and truly is a True ROI in that contract or purchase agreement, no matter the dollar amount of it.  [BILLions and BILLions and BILLions have been wasted on "if I had only known then what I know now" purchases.]

Full Disclosure:  this is true even for me.  When I, as a consultant, am offering my experience and skills as a service to a business to help solve a problem(s), always in my mind is, “Is there a ROI for me in this deal?”  But.  I also append:  ” … and for the client and their customers?”  I too must always keep in mind the Fundamentals of IT, the first of which is that we are here to help them do something better.

Summary:

If , as an executive and/or Board member, you discover your company’s IT group is …

(a)   producing reasonably on-time and on-budget quality results that are in continued demand (though preferably high demand), while

(b)   driving their own cost efficiencies as part of determining True ROI, while

(c)   helping you drive increases in your company’s gross and net income and profit

… then wouldn’t it make sense to support and reinforce that IT department?  Instead of tearing it down for, at best, a very short term “gain”?

My answer, the answer, clearly is:  ”Yes.”

“But”, you retort, “what if my company’s IT department isn’t meeting the criteria sufficiently, or at all.  Then what?”

If it isn’t, or isn’t on-fire in all three zones, then wouldn’t it make sense to attempt to fix and/or reinforce those zones, first?  Before cutting costs or cutting headcount, or both?

The truth is that investing in IT’s fundamentals, ensuring they are known and applied, ensuring that IT is strategically aligned with your business, so it too is investing in the business, is far more cost effective than any other solution.   Any other solution.

When you cut costs, you cut functions and services to your business and customers.  So do so only with a very good reason.  When you out-source and/or off-shore you are giving up control … and power.  So do so only with the very best, verified reasons.  When buying off-the-shelf software (remember “Build vs. Buy”?) you are giving up, to some degree, control (over how you do business) … and power (over setting future directions).  So, here too, do so only with a very good reason and sufficient homework.

Economic down turns can present knotty problems; it is a tough topic, no argument.  Even harder if you’re a governmental group and your budgets are subject to “slash and burn” activities no matter how well you do.

Presumably your IT group must be doing something right or it wouldn’t still be here.  But.  If one or more functions within your group is not operating optimally.  Then fix that function.  Don’t burn down the entire organization to the ground.

Or, in tune with the theme of The Home Of IT Fundamentals^TM (www.fromtheranks.com):

If your IT group is not functioning at 100% efficiency (keeping in mind that no IT group does 100%, 100% of the time) then, quite simply, to one degree or another one or more IT Fundamentals are not being followed or are not truly understood or are not known.

The answer to IT is always:  constantly driving home the Fundamentals Of IT.

Don’t make managing and working in IT any harder than it is.

Again.  One should always be cost conscious, looking for improved efficiencies, lowering the costs of providing same or better service levels, never ever buying something that has more cost than benefit, etc. … but cutting costs at the expense of quality, productivity, delivery and True ROI?  That is neither sensible nor sustainable.

To reverse this economic down turn (any economic down turn) in your arena you need to, you must, you have to focus on ROI not on Cost Cutting.  Call it what you will “value added”, etc., but ROI is the ticket out and up.

Hope this helps,

DP Harshman

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