IT Demand to Increase by 17 Percent as Budgets Remain Flat

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Atlanta and London — May 12
IT budgets and staffing levels are expected to remain nearly flat during the next two years, in large part due to the global economic downturn. But demand for IT services will increase by more than 17 percent, creating a significant gap that companies will need to address with improved efficiency and productivity, according to a new study published by The Hackett Group Inc.

Hackett’s research, which looks at results from more than 80 global companies, details best practices in three key areas that companies can use to close this gap: IT cost control strategies, demand management and discretionary cuts.

Demand management is one particular area of potential efficiency improvement the research cites as neglected by many companies. Only about a third of all companies in the study use cost allocation or charge backs to bill internal users based on the volume of IT services consumed, or for IT work done on their behalf. In addition, less than 30 percent have a service catalog in place that defines a set of discrete service offerings with an associated price per unit.

“Demand for IT services has always exceeded supply capacity,” said Hackett IT Advisory Practice Leader David Ackerman. “But the global economic downturn has put more pressure than ever before on IT organizations to ‘do more with less.’ The growing gap between demand and budgets requires companies to broaden their mix of techniques. IT organizations that stick to traditional discretionary cuts are unlikely to truly solve the problem and also risk significantly damaging their ability to provide strategic value to their company.”

According to Hackett Senior IT Research Director Erik Dorr, “What we see here is that there’s significant untapped potential for companies to cut costs and manage demand. While most companies in our study have implemented basic IT cost control strategies, other areas, such as demand management, have been largely ignored. And even in traditional areas like discretionary cuts, which are fairly inevitable in the current environment, there’s room for an increased level of sophistication to reduce the stress on the IT organization and to ensure that the cuts are sustainable.”

According to Hackett’s research, companies forecast that IT budgets and staffing levels will each grow by only about 1 percent annually during the next two years, down from the annual growth rates of 5.3 percent (for budgets) and 4.3 percent (for staff) seen during the past three years.

This 75 percent decline in budget growth contrasts sharply with companies’ projections for IT demand, which will shrink by only 15 percent, to 8.6 percent annually for the next two years, resulting in an increase of more than 17 percent by the end of 2010.

Hackett’s research found that the drivers of IT demand are also shifting, with organic business growth dropping significantly as a priority while needs driven by process transformation and business reorganization increase. Two other IT demand drivers, regulatory compliance and M&A activity, are expected to remain fairly stable.

Hackett’s research outlines best practices in three key areas that companies can use to close the gap between flat budgets and rising demand. The first, IT cost control, is a well-understood and mature approach that has the greatest potential to reduce IT costs and includes key tactics such as offshoring and outsourcing, IT reorganization, technology rationalization, productivity and process improvements, and supplier and contract management.

In this area, Hackett found that offshoring and outsourcing offer the largest opportunity for cost control, more than three times the savings of other IT cost control strategies, primarily because it affects the largest share of the overall IT budget. But the study also found that an across the board goal of 10 percent cost reductions in this area is both realistic and achievable.

The study found that the second area, IT demand management, is a highly underutilized technique by most companies. IT has traditionally been more focused on how to meet ever-growing demand than on implementing processes to curb that demand and ensure that the highest value work gets done. As a result, demand management techniques are less mature than other cost-control techniques. The study found that few companies use tactics such as charge backs, service catalogs or IT portfolio management to reduce costs, despite the fact that these techniques can drive real savings.

This research also reinforces findings from a previous Hackett study on IT business value management that identified top performing IT organization’s ability to directly link its discretionary budget to the highest-priority business objectives of the enterprise — in and of itself, the most effective form of demand management.

The final strategy — discretionary cuts, which generally involve mandated budget and staff reductions without underlying process improvement or rationalization — is widely used by most companies. But it is also the riskiest of the three approaches. Unless process improvements are an integrated part of any discretionary cuts, Hackett warned they are likely to result in degraded service levels and reduced overall effectiveness. It can also be very challenging to sustain discretionary cuts on an ongoing basis, the research found, as many companies quickly find that they have very little fat left to trim.

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