For some time, financial pundits have been prognosticating a recession. According to 68% of CFOs surveyed by CNBC, a recession will occur during the first half of 2023. Given last week, many are even suggesting a hard landing could occur this year.
The question is, how will CIOs manage through a recession without impacting business competitiveness? As well, what should the impact be to technology spending? If my financial portfolio is any measure, market analysts are expecting a bit of crash and burn.
But is this correct? These were the questions that I asked CIOs, and those that influence them.
Planning for Recession, a Slowdown, or Business Acceleration?
The spread of answers was interesting. Industry analyst Dion Hinchcliffe shared that most CIOs he speaks to are preparing for economic turbulence and continued supply chain woes. “Uncertainty is the enemy of growth and most other business activity. We're in uncertain times for now, and so I see planning and strategy teams at work on these problems," Hinchcliffe says.
CIOs in manufacturing industries are fighting the impact of a potential slowdown at the same time as they deal with ongoing and worsening supply chain shortages. Together, these are causing chaos and consolidation.
For this reason, many of these CIOs say they are hedging their bets in both directions. While a recession is certainly looming, business acceleration is currently happening for them as well. For example, Mevotech CIO Martin Davis, says, “The automotive aftermarket parts industry often benefits from a recession as people keep their vehicles longer and have more repairs done. The supply chain issues for new vehicles also play into this as well.”
Meanwhile, FM Global (one of the world’s largest commercial property insurers) CTO Todd Mazza says: “We are planning for all the above. We're continuously trying to learn how we can accelerate our business in the best and worst circumstances. We focus on what we can control and how we can turn a risk into an opportunity. Absolutely, the uncertainty is driving better conversations and making us look at the strategy at hand more frequently. I have to say it's helped propel our business while we focus not only on what to do more of, but what to do less of, or eliminate.”
Education CTO Stephen diFilipo agrees with Mazza’s approach to planning. “We're continuously trying to learn how we can accelerate our business in the best and worst circumstances. We focus on what we can control and how we can turn risks into opportunities,” diFilipo said.
How Will IT budgets Be Affected in a Slowdown or Recession?
In terms of how a recession or slowdown will impact IT budgets, CIOs say it will largely depend on the business and industry. However, after COVID-19 and the business transformation that ensued from it, CIOs believe the impact will most likely could be a temporary flattening in spending.
Importantly, CIOs predict tech budgets in high digital maturity firms will not be much affected plus some will still grow. Davis says, “I think the real question comes down to the C-Level’s view of the strategic importance of investing in technology. Do they see technology as a means to grow the business or improve efficiency even in a recession?”
Mazza says that his management team really grokked the value of IT during COVID-19. “We've hired 200+ people in the past year and have significantly increased the investment," he says. "It's not reasonable to continue at the same growth rate in a true recession, but I don't anticipate a huge impact one way or the other.” CIOs suggest as well that with the pandemic, most IT organizations switched from CAPEX to OPEX. For this reason, CIOs don't believe the impact will be as severe as it would have been in the past. With this said, many CIOs will be asked to refine their spending by revisiting cloud choices and eliminating waste, or moving workloads to less expensive providers.
Hinchcliffe asserts, “It would be short-sighted to blanketly cut IT budgets. Where it occurs, it is often the result of a CIO reporting to the CFO. But IT is now the key to growth and resilience more than ever before. Clearly organizations that make such cuts and are already digital laggards will fall further behind. Hopefully business leaders look at things differently than before and understand what IT can do.”
Miami University CIO David Seidl adds, “Just because we were critical doesn't mean we shouldn't share in whatever is needed to preserve our businesses’ mission.”
Related Article: Clearing the Path for Future CIOs
What Things Will Be Cut First for CIOs?
While CIOs had some concrete suggestions, Seidl suggested, “It is best to have a collaborative approach instead of just assuming things what is obvious to cut. It helps to ask folks throughout the organization for their opinions. A common goal and shared understanding make the changes easier to digest. Reacting instead of thinking is bad.”
But where will cutting most likely happen? What types of projects are the safest or most at risk? Mazza says, “We're already doing a combination of growth and cost reduction projects. If we had to cut, we'd kick the can on some modernization efforts first and foremost. We'll continue to invest in growth and sunsetting legacy systems.” CTO diFilipo agrees that cost reduction and cost containment would be at the top of his list for reduction.
Meanwhile, Davis suggests, CIOs should avoid creating longer term problems, so a tighter focus on business value and future growth is the right filter. The goal should be to not leave the company at a disadvantage. Clearly, areas to look for reduction in recession should include:
- Inefficient license or cloud use.
- Lowest ROI/priority projects.
With this said, CIOs are candid that they want to avoid cuts to people, training or improving workplace experience. City of Asheville CIO Jonathan Feldman says that his plan for managing through a recession includes the following elements:
- Push to manage reduction in budget vs. people.
- Be transparent with staff but do not make promises that you can’t keep.
- Ask staff to find creative ways to increase revenue or cut cost.
- Beware: Any staff cut will worry top performers!
Former CIO Isaac Sacolick suggests that CIOs “don’t slow down, prioritize fewer things, focus on transformation impacts and always avoid burning people out.” However, University of Delaware CIO Sharon Pitt says personally, “this is a tough conversation to hold as we are just beginning to recover from 15% cuts directly associated with the pandemic. If cuts must happen, they need to be thoughtful and include broad engagement.”
What Should Be Protected and Even Accelerated?
CIOs are clear that the focus should be on things that impact top line revenue. Mazza says, “It feels like we're already in this mode. Our digital transformation initiative investment and our people will continue to get investment. We're 187 years old, and we take a long-term view on everything.”
A good focus includes:
- Market penetration efforts
- Projects that enable next generation solutions.
Manufacturing CIOs suggest that work on fixing the supply chain should be protected, but anything related to ERP or MES upgrade should be postponed. At the same time, Davis suggests taking a more agile approach that delivers value faster in smaller chunks. This includes avoiding mega projects, he says. Additionally, he would accelerate only projects that reduce costs or add value quickly.
In terms of what should be protect or accelerated, diFilipo says that these projects should have the following characteristics:
- Customer experience
- Digital transformation
For example, Seidl says, “As an institution I worked at making major investments during a recession, hiring amazing new folks to provide a lot of lift coming out of it. That's made me think that recessions are a time to invest if you can find a way to do so.”
Associating Spend With Business Priorities
CIOs say it is essential. Mazza claims, “If you're not spending money on helping your organization's North Star vision and driving differentiated business capabilities and priorities, then what are you doing?” CIOs believe that during recessions, it's even more critical to help their company see the value that IT generates and the slow time as an opportunity to invest, not retract.
Today, winning organizations have an IT organization that aligns spend especially with how value is created. Davis says, “If what we are doing does not align to business priorities then why are we doing it?” Capgemini’s CTO Steve Jones concludes by saying too often IT business cases are aligning spend and making up value. "A CEO I worked with said to his CIO, if I added up all the IT business cases this business would be 10 times bigger and cost nothing to run," he says.
With this recognition, CIOs and salespeople need to frame projects in terms of business goals to succeed during a recession or slowdown.
Parting Words: IT Transformation Should Continue
While a recession is seeming more and more likely as the Fed has to step on the brakes with inflation going through the roof, it is not clear that CIOs will have to claw back expenditures as much as in previous slowdowns or recessions. Without question, IT organizations have transformed themselves from a back office, efficiency to a front office, business revenue.
In this version of IT, projects tied strongly to business goals and business transformation will be flourish. This means for tech companies that will flourish have reps that “identify a major pain or a corporate initiative” (John McMahon, The Qualified Sales Leader) and where there is clear sense of urgency and business impact.”