A potentially dramatic reduction in revenues has prompted most CFOs to call for spending cuts across their organizations—and they need to happen quickly. In a recent survey, 50% of organizations have already reduced IT budgets, with the median reduction being 25%1. Cost optimization is the top priority in 20202. Cuts not managed carefully result in significant harm to the long-term prospects for the organization.
In part 2 of our series on responding to COVID-19, we look at a recent survey that describes how IT leaders are responding to COVID-19 and discuss how hiring decisions must meet cost-cutting mandates without negatively impacting services. With upwards of 40% of IT spend going to labor, hiring decisions have an outsized impact on how you survive economic disruption.
Meeting a cost-cutting mandate with a uniform % cut to labor spend satisfies corporate finance but raises operational risk. A flat cut across all IT cost centers implies that all IT spend is created equal, and its impact is distributed evenly. This is not the case. Back end vs. front end; customer-facing vs. internal-facing; sales vs. HR: the impact of any spend varies based on where you apply it, and overall corporate goals (e.g., driving revenue, upping customer NPS scores).
IT, with the most complicated cost model of shared services within any line of business, has the most to lose from across-the-board cuts.
In a recent Apptio-sponsored survey2, organizations are delaying hiring as one of the top three tactics to cut costs. But they meet the challenges of COVID-19 by avoiding the blunt instrument of across-the-board labor cuts.
Cutting contract roles as a response to plunging revenue is a quick way to cut labor costs. Contract staff assigned to canceled or postponed projects have no impact on other IT services and can be released without downstream impact. But this decision tree with only two variables is the best-case scenario. Most other contract hiring decisions have trade-offs.
Releasing full-time employees (FTEs) to cut costs impacts the very people most likely to get the organization through the economic crisis. Institutional knowledge and emotional investment, once lost, can’t be quickly brought back. According to Gartner, there are incremental steps before eliminating positions:
IT leadership may be on the back foot when it comes to a hiring slowdown—a corporate directive may override their hiring plans.
Before COVID-19, many organizations were already struggling to fill open positions. The economy was so strong that many FTE positions remained open for the “right” candidate, and contractors picked up the slack in the interim. As a result, many organizations already use contract labor as a response to a hiring slow down or open headcount.
Critically evaluate headcount associated with projects and services not aligned to the core of the business. For example, workloads moved to the cloud change the relationship between IT and its business partners. Corporate IT will still exist in a company with a cloud-first mandate (hybrid IT and a migration journey require on-premises expertise). Nevertheless, its core competency will be less about technical knowledge and more about vendor management. This changes the hiring profile for IT and identifies headcount that can be eliminated as business capabilities are sunset.
Not taking on new contractors is a good response to the economic crisis (see #1 above), but contract positions can cover for hiring freezes for new FTE employees. Ramping up contract spend may turn out to be the best hiring decision during economic uncertainty.
Demands on IT helpdesks have increased in the first half of 2020 as many employees learn that they’ve traded in their commute (good) in exchange for being their own IT support person (bad). IT departments, swamped with requests that were previously resolved by a quick desk drive-by, need to scale up their IT support, knowing they will scale it down again at the back end of the year (or in 2021). Contract labor is an appropriate solution for this short-term business need.
Conversely, organizations with well-established remote working practices may see no change to the demands on help desk services. In that scenario, reducing hours of service to core business hours, or lowering service levels, maybe a path to trim labor costs.
To help respond quickly and effectively to these challenges, Apptio has made available an offer for IT Financial Management Foundation to accelerate cost optimization and the process to update forecasted spend. This solution is designed to help an organization quickly identify optimal cost-saving opportunities across core areas such as labor, vendors, and projects and then package them in an updated aggregate forecast. Read more here.
1 Source: Bain & Company – COVID-19 Implications: Early Perspective from IT decision-makers in North America, March 2020
2 Apptio database, May 2020