Riding the economic rollercoaster

Riding the Economic Rollercoaster
reprinted with permission from HP

Stephen Minton, vice president, Worldwide IT Markets and Strategies, IDC, offers insight on how outsourcing can help you ride out the economic downturn—and maybe even gain a leg up on the competition along the way.

Rising gasoline prices. Falling consumer confidence. Subprime mortgages. Inflation. Budget cuts. Currency fluctuations. Floods, droughts and crop shortages. Each day’s news seems to add to the torrent of challenges heading our way. No business is immune—but outsourcing can offer a way to leverage technology to help stem the negative tide.

Here, IDC’s Stephen Minton shares his expert views and experience on the subject—and puts some useful perspective around when it does and does not make sense to consider outsourcing in today’s volatile economic climate.

Recession. Downturn. Call it what you will—what’s the impact on business decisions to outsource or buy IT services?

Historically, when faced with an economic downturn, companies do one of two things:

First, they look to reduce costs. Here outsourcing—with its potential to reduce overall costs—is one way you can reach that goal.

Secondly, as talk of a recession continues and nervousness about the economy increases, many companies start putting the breaks on discretionary or performance IT spending—the “new” projects in queue, if you will. Projects such as software development around new applications often fall victim here, as projects are put on hold or suspended all together.

Agreeing that outsourcing is a way to cut costs, how should companies approach the decision to outsource? And are there some areas better suited to it than others?

Done rapidly and rationally, outsourcing can certainly generate rapid cost benefits. But do not rush down the path to outsourcing.

You might consider outsourcing for an area that is more commoditized from a skills and tools point of view and has already gone through a certain amount of optimization. Also choose a project that you already have a good handle on internally, because the last thing you need is disruption at the technology level. The desktop space and end-user workplace are good examples here.

What areas make the least sense for outsourcing right now?

You should move slowly in any area where you don’t have much experience. Rushing too quickly to outsource newer strategic areas—such as software as a service—can be a risky proposition.

Security is another area that comes to mind. You really need to conduct a thorough analysis of all security implications before outsourcing anything that involves sensitive data.

As you’ve mentioned, cutting short-term IT spending is a natural reaction for most organizations in an economic downturn. But are there examples when taking a more strategic, long-term view can be beneficial?

Definitely. You can make the argument that outsourcing services can help you ride out the downturn while allowing you to retain focus on more strategic, cutting-edge technology or solutions that can ultimately be advantageous to your business.

Business intelligence initiatives provide an excellent example. BI is one place where companies may look to decrease spending or put projects on hold; in part because this is still a fairly new area—one that does not generate any immediate bottom-line revenue and one where delays in a project are generally not disruptive.

However, you can build a case for incorporating outsourcing into your overall BI strategy as a means of riding out the downturn without taking focus away from a strategic initiative that could help you move ahead of your competition.

Where does this leave larger projects designed to drive transformational changes at the technology and business level?

Today, line-of-business managers are going to take a more conservative approach to technology spending. That’s fair: when you are overloaded with budget anxiety, you are naturally going to be more adverse to risk and more cautious about committing to a new software application or technology.

On the technology side, IT managers also need to retrench for a while—and perhaps take a more incremental approach so that transformation does not grind to a halt. Consider making the case for reducing spending or extending timeframes in some planned areas—such as PC upgrade cycles—as a way to manipulate budgets and free up some spending so that you can continue to make at least a smaller investment in newer, more strategic areas.

The good news is that we do not see this downturn being as catastrophic for IT spending as it was 2001 and 2002. This should make it much easier for IT departments to protect important initiatives. The reality is you simply have to ride it out—and wait for the next economic upturn to come around again.