Everyone is talking about how this economy is different from past recessions and even comparable to the Great Depression. Between the credit, housing and consumer markets, there is so much information flying around that it can be difficult to get your head around the fundamentals. However, the pundits, economists and CEOs keep bringing up two words: volatility and uncertainty.
In this economy, volatility describes the range of changes going on in the economy. Consider the changes in the prices of energy, food, commodities or the range of movement in stock market prices and interest rates as indicators of volatility. Uncertainty refers to the limited ability to predict and plan for the future. For example, not being able to plan revenues reliably, market direction, the success of an initiative are all examples.
Indeed, these two words provide insight into how executives are thinking about their future, the motivations behind their actions and the risks they foresee. Yes, these are unprecedented times because both factors are present in the economy at the same time and to a high degree. The figure below illustrates the options executives have in responding to the challenges of these different environments.
The executive mind-set and outlook is different in each of these quadrants, as follows:
- Living in the lower left quadrant-Executives and corporate planners make and tune plans based on assumptions for the future. They like an environment with manageable levels of volatility and uncertainty. By “manageable,” think of a level of volatility you can plan for, and a level of uncertainty that can be accounted for by a contingency plan or alternative strategy. In a manageable environment, the enterprise can concentrate on its strategy and operational execution to achieve results, as it is less likely to be overwhelmed by uncontrolled swings in markets.
- Fearing the upper left quadrant-This is where high volatility increases the frequency and range of changes in economic conditions. You see this today in stock, oil prices and political policies, where there are radical swings in direction and scale. In an environment of radical change, volatility raises the premium on preserving what you have. Leadership focuses on cash and capital preservation. As economic forces overwhelm the best-laid plans, volatility compromises your strategy and operations. Executives feel the risk and seek to lighten the load in order to float on top of changing markets.
- Sweating assets in the lower right quadrant-This is where uncertainty reduces the ability of executives to determine the probability that a decision will be necessary, and to judge the results of decisions that are made. Uncertainty shortens executives’ planning horizons, reducing their willingness to invest in long-term results. In an uncertain environment, executives stick to what they know and seek to reduce resource requirements through actions such as budget holdbacks and workforce reductions. Being lean in this situation supports your survival while leaving open the possibility of getting fat when markets return to predictability or you come across a great opportunity.
- The challenges of the upper right quadrant-When volatility and uncertainty combine, they erode executive confidence, reduce the potency of strategies and render the current organization ineffective, along with its processes and practices. This is where many enterprises find themselves as their confidence in revenue sinks and they see increasing risk in their costs, market position etc. While being lean makes sense in the short term, any extension of economic conditions will further weaken a lean enterprise and its market position. Market leaders such as Intel and Deutsche Bank are restructuring IT and the enterprise as a whole in response to these challenges.
A move from relative stability to either volatility or uncertainty changes CIO plans, budgets and strategies. The start of 2008, for example, was a time of low volatility but great uncertainty for CIOs, resulting in an overall conservative stance in terms of IT budgets, business priorities and strategies. We saw holdbacks in IT budgets and a narrowing of focus. In contrast, when the last recession hit in 2002/2003, we saw volatility as the economy responded to over-investment in tech. There was a commensurate response in IT budget growth, which went from a 10% increase to flat. Yet in both situations, enterprise and CIO responses have been similar: hold the line on costs while narrowing the scope and focus.
A number of leading CIOs, however, are taking another approach to conditions in 2009. Recognizing the unprecedented combination of volatility and uncertainty, they are restructuring IT rather than reducing IT spend. It’s a case of “doing things differently” rather than “doing more with less.”
Why are they taking this approach? Because in an environment of both volatility and uncertainty, the only sure thing is that there will be change. In addition, change requires a degree of flexibility and openness that is difficult to gain with a regimen that concentrates exclusively on controlling costs.
What goals do leading CIOs set for restructuring? They work smarter rather than harder, striving for one or more of the following:
- Investment effectiveness-Concentrating on the few initiatives and investments required to achieve enterprise goals. This entails effective IT governance, clear priorities, and goals that bring immediate results, as opposed to implementing a diversified portfolio of investment projects that enable change later.
- Focused priorities-Delivering fewer solutions faster by concentrating resources and attention on the small number of things that matter: those that drive enterprise effectiveness. This is a departure from the past, when IT budgets and initiatives tended to be spread across the enterprise like peanut butter-an approach that no longer works because volatility and uncertainty will render most peanut butter projects irrelevant. Enterprises need a new capability now, which requires focus on restructuring IT governance, the PMO and the IT portfolio.
- Organizational flexibility-Having the ability to move resources across initiatives within IT and throughout the enterprise, and to place a critical mass of resources on the highest-priority projects in order to accelerate them.
- Resource productivity-Creating more results with the same resources, or the same results with fewer resources, requires changing the way you work. This involves new IT processes, techniques and approaches, as well as delayering IT to raise the ratio of workers to managers.
- Technical capacity-Meeting the need for more computing and communications power at lower cost and cost structure, which often involves data center consolidation.
CIOs who reduce the IT budget by cutting IT spending and personnel are applying a short-term solution to a structural problem. A better approach is to restructure and reposition IT in the enterprise, with a clear focus on driving enterprise effectiveness. Taking such action reflects, and addresses, the prevailing context of volatility and uncertainty.