28 Feb How IT manages three phases of a downturn: Reset, Reallocate, Renew
Editor’s Note— Jorge L. Lopez, VP & Distinguished Analyst at Gartner, will be a featured Keynote Speaker at the Fusion 2009 CE0 – CIO Symposium, March 4 – 5 at the Fluno Center in Madison. For more information and complete list of speakers see www.fusion2009.com. Registration is about to close and only a few seats remain.
Many heads of state have said in detail that no one saw it the current recession coming. That belies the many signals of recession ahead of time that would have served as triggers for action among those properly prepared. The question is, what to do now that we know we are in a recession to further reduce our risk? This is made difficult by the time lag between the actual onset of a recession or downturn and its official determination, at least in the US, by National Bureau of Economic Research (NBER). For example, the current recession was determined to have begun on December 2007, and it was announced November 28, 2008, one year later. While this provides substantial academic rigor, executives need to act long before this point. We need help in anticipating what will happen. The greatest dangers are when the business goes from one phase to another and does not prepare. Let’s examine the three phases:
The signs that triage is about to happen are led by declines in economic output numbers such as GDP and corporate earnings, as well as asset values. Another signal of this is CEO sentiment. In February of 2008, CEO surveys at the time noted the sharpest decline in CEO sentiment in five years. Many business models that had been operating profitably for years will now find that they are getting diminishing returns on their investments in marketing and new products as the markets start to slow down. You will also notice excessive denial from many sectors of business, government, and media in the face of factual movements. For Triage, CIO’s must Reset: IT executives will lower operating costs of IT by terminating projects, lowering headcount, consolidating data centers, and many other tactical actions. Not much strategy here until the panic subsides. Lack of confidence that conditions are stabilized drive further actions to reduce costs quickly. Be prepared to have the budget that was handed to you a month ago get torn up and then be expected to proceed forward with no annual budget but a series of monthly releases.
While the signals of triage are marked by denial, the signals for doldrums are marked by excessive fear and pessimism. Months after equity, lending, and other asset markets have started to slow their decline, the predominant sentiment remains that the downturn will last for many months more than ever before. There is, of course, the possibility that the negative sentiment is correct, but the actions taken during this period are different from the earlier triage phase- the goal is to manage the resources that remain in the best possible manner without being overwhelmed with additional tasks that are sure to come. For Doldrums, CIO’s must Reallocate: Step back, think strategically and act to manage costs in a manner that provides a long-term platform for business performance into the recovery- pursuing shared services, consolidations, standardizations all aimed at improving the productivity if the IT organization. Don’t forget- you also need to reserve some thought for the innovations that will lead to revenue or earnings growth in the years ahead. Finally, use the crisis as the driver to achieve change in IT on a level unthinkable two years ago. It is your ally in creating an outcome that is world class.
In this stage it starts to become clear that the tremendous size of financial writeoffs in one year provide easy comparisons in the next. Suddenly, the rate of earnings decline slows down and even starts to grow as the intense focus on cost management provides the breathing room to invest new profits into growth projects- some of which were maintained under duress in less certain times. In the recovery, CIO’s must Renew: Insure that the productivity improvement you worked so hard to win during the downturn continues to improve as you move to sustain the emerging growth of the business. Accelerate investments in the innovations that lead to growth by taking from the gains in productivity of less strategic areas.
Prepare for The Next Phase
There are factors in a downturn that are outside the control of the CIO and anyone in IT. That said, for those factors that can be controlled, it is crucial that while the business is in one phase that the plan for the next phase is ready or at least in preparation. The risk to a business that misses a crucial turning point during the down cycle is that it is not ready when the markets take off again and a more agile and attentive competitor is ready. In some ways, this is similar to auto racing where the speed of the pit crew in replacing worn tires and refueling a car can win or lose valuable seconds in the race. Think through the planning you will do this year and make sure you are ready for the next phase of the downturn.
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