Study: While Demand Increases, IT Budgets Stay Flat

Due to the global economic downturn, IT budgets and staffing levels are expected to remain nearly flat over the next two years, according to a new study published by the Miami-based consulting firm The Hackett Group Inc. But demand for IT services will in

According to Hackett, companies forecast that IT budgets and staffing levels each will grow by only about 1% annually over the next two years, down from the annual growth rates of 5.3% for budgets and 4.3% for staff over the past three years.

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

"Demand for IT services has always exceeded supply capacity,? Hackett IT Advisory Practice Leader David Ackerman said. "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."

Hackett's research found that the drivers of IT demand are 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, according to Hackett.

How to Close the Gap

Hackett's research, which looks at results from more than 80 global companies, details best practices in three areas that companies can use to close the gap between flat budgets and rising demand: IT cost-control strategies, demand management and discretionary cuts.

  1. IT cost control is a well-understood and mature approach that has the greatest potential to reduce IT costs, according to Hackett. Cost-control tactics include: 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 they affect the largest share of the overall IT budget. However, the study also found that an across-the-board goal of 10% cost reductions in this area is realistic and achievable.
  2. The study found that many companies are neglecting demand management. IT traditionally has 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 chargebacks, service catalogs or IT portfolio management to reduce costs, despite the fact that these techniques can drive real savings.

    The research reinforces findings from a previous Hackett study on IT business value management that identified top-performing IT organizations' ability to directly link their discretionary budget to the highest-priority business objectives of the enterprise -- in and of itself the most effective form of demand management, according to Hackett.
  3. Many company make discretionary cuts, which generally involve mandated budget and staff reductions without underlying process improvement or rationalization. Hackett considers discretionary cuts to be the riskiest of the three approaches. Unless process improvements are an integrated part of any discretionary cuts, Hackett warns that they are likely to result in degraded service levels and reduced overall effectiveness. It also can be challenging to sustain discretionary cuts on an ongoing basis, the research concludes, as many companies quickly find that they have very little fat left to trim.

"What we see here is that there's significant untapped potential for companies to cut costs and manage demand," Hackett Senior IT Research Director Erik Dorr said. "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."


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