The Conventional Wisdom on I.T. Spending in a Downturn
The conventional wisdom for a firm entering troubled times is to cut back on spending and to focus on making it through the down-turn, like a turtle withdrawing its head and limbs into its shell until the downturn has passed. When most businesses apply this principle to their IT systems, they usually decide to stop all spending on new software, or software upgrades, and to focus instead on spending the minimum necessary to keep existing systems going.
The justification of such a policy is simple; if it ain’t broke, why fix it? Most people reason that since they are turning a profit now, there is no need to spend any additional money on their systems. Unlike a delivery van which will break down if its engine isn’t routinely serviced, a computer program will work indefinitely.
The Cost of Shoddy I.T.
If builders built houses the way programmers built programs, the first woodpecker to come along would destroy civilization.
Gerald Weinberg
The phrase I would use to describe most I.T. systems is jury-rigged. Most businesses figure out some way to use their computers to support their business on their own, and generally the software packages they use, and the procedures they use to operate them are poorly thought out and inefficient. This is not surprising, if most businessmen designed and constructed their facilities from the ground up, bypassing those pesky, expensive architects, engineers and foremen, the result would be rickety buildings that tended to fall down alot. Because the collapse of a badly designed building is a great deal more devastating than the failures of a poorly designed software set up, most businessmen recognize the need to pay for the facilities work, while remaining oblivious to the money that their inefficient I.T. setup is costing them.
Hiring professionals to design and set up a business’ I.T. systems is not panacea either; most computer programmers are oblivious to the harm and inefficiencies as well. An engineer who designs an unreliable electrical system that occasionally catches fire risks the near certainty of being fired and on the street with an unemployable reputation. A computer programmer who produces a unreliable computer program which crashes frequently – on the other hand – often finds that to be the best guarantor of a regular pay-check. This phenomenon is widespread enough to provide fuel for one of the funnier I.T. related sites on the Internet, The Daily WTF.
The Benefits of Good I.T.
When done well, however, good I.T. can make a business far more agile than all its competitors. It can take a lackluster business model or process, and make it the subject of admiring reviews in business journals. The reason is quite straightforward: just as an atl-atl gave the stone age hunter the ability to fell wholly mammoth, a well designed I.T. set up can ensure that the people executing the busienss processes are extremely productive. A good I.T. system can ensure that a worker is earning $60.00 an hour, while his identical twin struggling with a poorly designed or integrated system stuggles to produce $45.00.
The Difficulties in Reliably Implementing Good I.T.
There is no sure-fire way to reliably develop a good I.T. system. A bewildering variety of methods and schemes, described in hundreds of bestselling books, claim to describe a sequence of steps, which if followed slavishly, will result in a cost-effective, usable and productive system for your business. These claims are to put it politely exagerated. Complex systems, of course, do benefit from a formal, rigorous approach to allow people to design the system without being overwhelmed by its complexity. For simple systems the benefits of the formal methodology are outweighed by its cost, making such efforts unjustifiable from a profit/loss perspective.
Rationally Examining Whether to Upgrade or Not
The decision to upgrade depends on two factors:
- How much money you can save, or extra money you can earn…
- The likelihood that the project will produce the desired savings or extra revenues
Calculating Savings and Costs
In a downturn, the firm which cuts its costs the most effectively will probably thrive. It will be the most capable of reducing its prices while maintaining a profit margin. Then as the downturn drives out the marginal suppliers, and prices start picking up again, it will be well positioned to expand and grab marketshare.
The question that the decision-maker should be cosnidering, therefore, is how can I quantify the costs and benefits of maintaining the status quo to improving your systems. Some measures to consider are:
- Costs
- Man hours consumed using the system.
- Lost business or production due to shortcomings of the system
- Implementation costs
- Lost business or production due to training
- Benefits
- Improved business or production.
- Savings due to better reliability
Using the numbers generated by such an exercise, you can then calculate an upper ceiling to how much a better system can improve your bottom line. If this number is sufficiently large, then one can consider the likelihood of success.
The Probability That the Project Will Meet Expectations
Typically software projects are oversold; it’s tempting for a developer to promise everything that he thinks it will be feasible for the software to accomplish. Almost inevitably, these promises prove to be too ambitious, and the buyer is left trying to use a lemon that they wish they had never purcahsed in the first place.
Just as there is no surefire process to produce good software, there is no surefire process to quantify this risk. For a company that is experienceing consistently high profits, taking on an unquantifiable risk is not necessarily a problem. For a company struggling to maintain profitability, the failure of a risky project can be the kiss of death.
However, we can roughly gauge the risk of engaging in a project by examining the following criteria:
- Is the project an incremental improvement or a radical “great leap forward”.
- How much of the project is dependent on custom programming and how much of it is dependent on use off-the-shelf components?
- How radically will the work-flow of users be altered?
Risk Matrix Graphic
Generally, any project should be structured to minimize its riskiness. Radical changes should be avoided in favor of incremental ones. Instead of writing a custom application from scratch, take an existing application, and if needed customize it. Rather than changing the work-flow dramatically, make improve the current workflow.
If I were to guess which of these risk factors is the most underappreciated one, it is the latter one, user worflows. Often an idea that seems wonderful to management and to the developers will turn out to be a real turkey, because it does not meet the needs of the people on the shop floor. If the users can’t use it, then the project has failed.
Analyzing the Worst Case Scenario
One helpful exercise when considering a proposal is to lay out the worst-case scenario. By qunatifying the losses the firm will suffer should the project turn out to be a failure and comparing them to the status-quo, a decision-maker can make a more informed decision concerning the risk involved. Moreover, the decision-maker can take steps to minimize the harm of the worst-case scenario.
For example, our customers’ worst case scenario typically consists solely of the loss of money paid for us to do the project. Typically we structure our contracts so that our customers pay no money until they judge a milestone to be completed fully to their satisfaction, with no payment required until a working protoype has been demonstrated. These terms transfer the costs of failure to us, the people performing the work.
Typically, vendors are quite willing to accept this sort of risk during a down-turn. After all, they are suffering from a slow-down too.
Making the Decision
A down-turn can be the a good time to make improvements. Vendors are competing for your custom. A succesful project can ensure that your firm will be one of the ones that best weather the storm. By realistically and critically examining the costs and possible benefits of a project using the criteria discussed here, you can identify opportunities to improve your firm’s bottom line, even in the worst of times.
Of course, you don’t have to make the decision yourself: being customer focused, we aren’t afraid to examine a project proposal and honestly to tell a prospective client that the project is not worth their time, even if it would be very lucrative for us.