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Analyst group warns on risks of discretionary IT cuts

Recommends better IT demand management, more offshoring

By CBR Staff Writer

IT shops are not doing enough to close the gap between flat budgets and rising demand, an analyst group has warned.

Better use of IT demand management, more use of offshore and outsourced service providers and fewer discretionary cuts, is the course being recommended by The Hackett Group Inc after a study of more than 80 global companies.

It said that IT budgets and staffing levels will each grow by only about 1 % annually over the next two years but that IT demand 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.

Use of offshoring and outsourcing offers the largest opportunity for cost control, more than three times the savings of other strategies, primarily because it affects the largest share of the overall IT budget.

It was found that IT demand management is a highly underutilised technique and the analyst house recommends the use of charge backs, service catalogs or IT portfolio management as a means shaping demand.

Only about a third of all companies in the study use cost allocation or charge backs to bill internal users. Fewer than 30% have a service catalog in place that defines a set of discrete service offerings with an associated price per unit.

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The analyst group rates discretionary cuts as the riskiest of the three approaches.”Mandated budget and staff reductions without underlying process improvement or rationalisation, is widely used by most companies. They are likely to result in degraded service levels and reduced overall effectiveness.”

It can also be very challenging to sustain discretionary cuts on an ongoing basis Hackett has cautioned, as many companies quickly find that they have very little fat left to trim.

The study also found that an across the board goal of 10% cost reductions is both realistic and achievable with offshoring and outsourcing. It has suggested that on the basis of its study demand for IT services could increase by more than 17% through 2010.

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