4 Managerial Mandates (cont.)
Engage in Strategic Sourcing, Offshore and On
Midmarket CIOs and their small staffs spend most of the day -- 80% by some estimates -- dealing with infrastructure issues and putting out technology fires. But smart CIOs are turning to a plethora of sourcing options to cut costs, gain flexibility within their IT departments and, most important, free up time for business-related technology concerns.
"Strategic sourcing will indeed be a mandate in 2006 if it already isn't," says George Danforth of Tatum Partners in Greenville, S.C, a provider of temporary CIO-level services. "The thinking has evolved to be, outsource everything that is seen to be a commodity but keep in-house that which sets you apart in the marketplace."
There's a buffet of choices for CIOs feasting on sourcing options. Channel partners continue to court the midmarket with an ever-increasing portfolio of services. Services companies are also primed to offer midmarket firms outsourcing arrangements that meet budgetary and business needs.
"The traditional boundaries and general framework around outsourcing decisions have been redefined and are now relevant for even small-to-midsized companies," Danforth says. "It is no longer a strategic decision [only] for those employed at large companies."
Gartner Inc. has aggregated these techniques in a new operational model it calls multisourcing, by which "internally and externally delivered services are blended seamlessly, governed closely and evaluated continuously." Gartner researchers Linda Cohen and Allie Young describe the model in Multisourcing: Moving Beyond Outsourcing to Achieve Growth and Agility.
Two main roadblocks hinder adoption of a pervasive sourcing strategy among midmarket companies. Some CIOs are still anti-outsourcing. President John Sullivan of Majestic Insurance Co. in San Francisco, which handles $100 million in workers' compensation premiums annually, fired his top IT guy a couple of years ago, partly because "he didn't want to [outsource]. It was just his philosophy," Sullivan says.
And CIOs who have embraced outsourcing and other sourcing options often face a major challenge: managerial chaos. Thus, the need for a strategy to manage sourcing contracts and relationships becomes clear. Harold William, a vice president at Western Computer Services Inc. in Sandy, Utah, learned that the hard way. "I wanted a quick-strike approach," he says of his first outsourcing experience.
"But my organization fell into some of the basic gotchas."
In 2006, your budget will probably get a bump. But with some potentially new priorities -- more customer-facing applications, a renewed focus on disaster recovery, staff retention -- prudence is the name of the game. That's why spending wisely continues to be a managerial mandate.
IT spending at businesses with 500 to 5,000 employees is projected to grow by 6% in 2006, the same percentage increase as in 2005, according to Forrester Research Inc. But Forrester predicts new investments, including customer-facing applications, will grow 10% to 12%.
Yet budgets rarely tell the whole story, Forrester's Andrew Bartels says. Historically, projections have understated actual spending, he says. "CIOs offer conservative plans, but then they spend up to or above their budgets."
Nonetheless, 2006 won't be a free-for-all. "The U.S. economy's been surprisingly strong despite stresses like [Hurricane] Katrina and high energy prices," says Bartels, "but there's a lot of uncertainty that could affect overall business spending."
Disaster recovery efforts from this fall's hurricane season reordered IT priorities for many companies, in some cases with budget implications. "I was just pulling my proposed budget together when we got hit by Katrina and Rita," says Tom Fluker, vice president of information systems at $291-million Cornell Companies Inc., a Houston-based firm that provides correctional and treatment services in prisons and halfway houses. "They were a pretty plain reminder that we need to pay more attention to disaster recovery."
Though only a few years old, Cornell's existing disaster-recovery plan was based on assumptions that are no longer tenable. For example, a three- or four-day lack of e-mail had been deemed acceptable. "Obviously we need to rethink that," Fluker says. "And the solution is simple: money."
Overall, Cornell is looking at a flat 2006 IT budget of between $8.5 million and $9 million, with more money allocated to some areas (staffing and applications to take advantage of IP telephony) and less to others (hardware and network infrastructure), simply because the company "is in good shape" on the latter fronts, Fluker says.
Another school of thought is that level funding in a growth climate causes IT to lose ground. Gartner Inc. expects IT budgets to rise in dollars but decline as a percentage of revenue, representing a net loss. That makes conservatism not just a recommendation but a requirement.
Whichever direction your budget is headed in, next year you may want to formalize the way you track IT projects, especially in relation to their contribution to the business. Midmarket CIOs are embracing practices such as portfolio management in an effort to better understand and explain technology's effect on the bottom line. It's an approach that any cost-conscious executive team will appreciate.
This was first published in December 2005