Surgery vs injury

If you’re a CIO and aren’t tightening your organizational belt right about now, and I had to bet whether you work in (1) a growing, profitable company; or (2) a different solar system, I’d put my money on (2).

IT can’t tighten its belt in isolation. The enterprise needs an integrated plan. As CIO you participate in its creation, both because you should as part of the executive team, and because without IT representation the plan’s practicality will be limited.

In typical cost-cutting situations, a single company finds itself insufficiently profitable. The proper response is finding and fixing root causes, and the places to look are internal: Uncompetitive products, bad marketing, ineffective selling, too-costly manufacturing, a flabby supply chain, or any of a variety of other sins of ineffectiveness.

That, however, isn’t this. The root cause today is the entire economy.

Faced with any new, externally driven trend, I know of only four possible strategic responses: Ignore, exploit, ally, or defend.

Ignoring the financial crisis isn’t an option. I trust no further argument is required.

A few happy companies can exploit this mess, either by aggressively grabbing weaker competitors’ customers or aggressively buying the weaker competitors themselves. If that’s your situation, as CIO gear up to support due diligence work, and for integrating acquisitions.

Alliances might be a useful part of your overall game plan, but choose your opportunities carefully. Alliances entangle your company’s future with potentially unreliable partners, after all.

Strategic outsourcing is a long-term play. It rarely reduces cost in any significant way and certainly won’t in the short term. Meanwhile, it does create immediate reductions in effectiveness as everyone learns how to operate with the outsourcing partner.

And, it adds risk, because you dismantle your internal capabilities. If the outsource doesn’t work out you’ll have to rebuild them — an expensive proposition.

Tactical outsourcing, in contrast, might make sense — particularly for “commodity” business functions that are highly portable. For IT, managed hosting or co-location facilities are the most likely opportunities.

Most companies will choose defense as the most prudent response. Defense means becoming less dependent on debt, increasing cash reserves, and most of all downscaling capacity in response to ongoing industry-wide declines in demand. If that’s your game, here’s the enterprise-level program:

First, as mentioned last week, terminate negatively productive employees. Put this at the top of every manager’s to-do list, in every department in the company. It’s a pain-free cost-cutting step, and you don’t have many of these.

Second, identify “charity case” employees. Every company has them — perfectly nice people who everyone likes but whose contributions are limited. They are a luxury, and this, sadly, isn’t the time for luxuries.

Third — speaking of luxuries, don’t make the “AIG mistake.” The bash AIG threw for its top salespeople was a rounding error given its size. The tone choices like this set, though, rationalize a thousand more decisions to be lavish.

Lavish means: Four-star hotels instead of clean, three-star alternatives; apartment-sized offices instead of using space more productively; travel when a conference call will do … in a word, self-indulgence.

Dial everything back a notch. And be creative. For example, convert vendor-provided perks — junkets for the privileged few, for example — to productive business uses such as vendor-funded broad-based training.

Every luxury the company eliminates is pain it can avoid.

What’s left will hurt. Your choice is whether it’s the pain of surgery or injury. The difference lies in how well every part of the enterprise understands what drives costs.

Cost-centers fall into three major categories: Direct revenue generators, production, and shared services.

Direct revenue generators include Sales, Marketing/Advertising, and Customer Service (yes, Customer Service, which retains current customers, reducing the need to acquire replacements). The target for these areas is reducing the cost of sales.

Production departments (in manufacturing, Supply Chain, Manufacturing, and Distribution) deliver what the revenue-generating departments promise. Their target is, in the short-term, to shed capacity, and in the middle term to reconfigure, shifting overhead cost to unit cost so they can respond flexibly to uncertain, fluctuating demand.

Shared services departments … IT, HR, Accounting, Purchasing and so on … can’t effectively plan until the revenue-generating and production departments know what they have to do. That doesn’t mean IT gets to sit back and wait. It means IT has to do what it’s been doing all along:

Collaborate. Be part of every solution. And make sure assumptions about what IT can deliver are realistic.