How To Trim IT Expense

Almost every organization is trying to trim expenses in this downturn. One obvious line item is IT spending. Following the Y2K and internet bubble, many organizations were caught in the IT rat race, thus exploding their spending on IT projects, of which many failed or did not deliver on promise.

Today, CEO’s are asking CFO’s and CIO’s to trim down IT costs after realizing that IT is usually not a core competency but an enabling capability. This realization is generating questions such as “How do we cut IT costs?”, “Where do we start?” and “Should we look at outsourcing?” While answers might seem obvious, culture and psychology are major roadblocks. Organizations find it hard to prioritize IT projects and they are sometimes emotionally invested that they cannot treat some initiatives as sunk costs and just move on.

The solution is simple: Do not over-design, just ensure the capability is available. To get to work, you do not need an Enzo Ferrarri, you just need a good reliable car. First of all, make sure that business is making these decisions with help from IT leaders, and not the other way around. Then, look at each project and prioritize them under the following categories: “Must-have short-term”, “Must-have long-term”, “wanted” and “nice-to-have”. Use this order to fund projects with the budget you have on hand.

It sounds simple but you will need to handle the political bickering. That’s when good cost-benefit analytics come in place. Again, business leader and not IT leaders will have to manage the analysis. Finally, hiring outside independent advisory to lead this undertaking is usually best to break cultural and political fights.

Irrational Panic Backed By Immoderate Governance

Can be used to describe the current economic environment. Here are some definitions:

• Irrational: Totally based on emotions and non-founded believes; not endowed with reason or understanding; lacking usual or normal mental clarity or coherence; not governed by or according to reason. Usage: “Bubbles are fueled by irrational exuberance”, “Many businesses are still run by irrational gut feel”.
• Panic: a sudden overpowering widespread fright with acute extreme anxiety concerning financial affairs that results in a depression of values caused by extreme measures for protection of property. Usage: “A house flipper panicked when house prices dropped”, “Companies panic during a downturn”.
• Backed By: Supported; guaranteed; secured. Usage: “Mortgage Backed Securities”, “Asset Backed Securities”.
• Immoderate: Exceeding what is usual, proper, necessary, or normal. Synonyms: Excessive, inordinate, extravagant, exorbitant, extreme. Usage: “The government used immoderate measures for bailout plans”, “Companies are being overly defensive and in immoderate downsizing mode”.
• Governance: Direction or control of a continuous exercise of authority over and the performance of functions. Usage: “Total governance choked the economy”, “Companies loosened governance only to be surprised by fraud”.

Strategic Planning Exercise

Many companies are finally getting back to their strategic planning effort. The steady growth that used to be common-place is replaced by projections of dramatic decline. But how realistic are these scenarios? Could your company be setting itself up for failure? You can always avoid the overly-defensiveness trap by following these 5 tips:

• Listen to the field and get more feedback from your managers. Nothing is better than getting direct information
• Be real with you assumptions by avoiding the overly optimistic ones your company had been using every year as well as staying away from perfect-storm scenarios that could cripple your growth
• Measure closely and rely much more on facts and metrics. Adjusting along the way will be crucial to a successful implementation of the strategic plan
• Be opportunistic and look for quick hits and low-hanging fruits instead of going for the big-bang projects that have long-term returns that could change quickly with market variations
• Keep updating and use a highly iterative approach to readjust your assumptions and keep in mind that a strategic plan is a living and breathing platform that needs to be adjusted frequently

Forget The Bear, Watch For The Car

Last Thursday morning, on a trail in Colorado Springs, a pregnant woman was chased by a brown bear that was 2-feet away at some point, according to the woman’s account. In her panic, she forgot basic safety rules and was hit by car when jumping on the street. Fortunately, she was not injured and her baby is safe.


While this might seem an unlucky or even funny event, it is a great lesson for business managers. Given the economic downturn, most companies are in panic mode. So the major risk for businesses is to get blinded and be hard-hit by an event that could have otherwise been preventable. In their rush to run from the economic bear, companies are downsizing under panic and with no strategic objectives. Chances are that these companies might hurt their business models and do more damage to themselves than any powerful downturn. In the woman’s case, detectives believe that the bear was not really chasing her but was used to people and was probably looking for food in her backpack.

So always remember, when in a group, you do not need to be faster than the bear, you just need to be faster than other people in that group.

Success In A Downturn

Business history teaches us that a downturn is not necessarily detrimental to your business. A good business model will always find ways to survive and thrive. In some cases, it is the best opportunity your business would ever have. Here are examples of companies that made it during downturns:

• 1837: Procter and Gamble is born to provide household supplies. It scores lucrative contracts with the Union Army during the Civil War. P&G uses a similar technique during the Great Depression and instead of cutting back on marketing, it starts spending heavily, especially on radio and TV (hence the term Soap Opera).


• 1875: Heinz Co. is forced to temporarily close down following a banking crisis. Within three months, the company convinced employees to come back and delay wages. Heinz also renegotiated contracts and dropped lease payments. Then by leveraging ketchup, the company got back on its feet.


• Banker’s Panic of 1907: GM is born and revolutionizes the card manufacturing industry. It succeeded by opportunistically acquiring companies during the panic.


• Great Depression: Born during the 1875 depression, IBM started spending, hiring and innovating. When President Roosevelt signs the Social Security Act, there is suddenly a heavy need for IBM machines to help process data (punch cards).


• Oil crisis, 1973: Important documents needed to reach their destination within 2 business days. When oil prices dropped in 1975, FedEx was still standing and experienced tremendous quick growth.

Ethical Capitalism

The question should not be whether capitalism works or not, it all boils down to ethics, trust and confidence. Many people are asking for more regulations and rules to rein in the financial industry. Extremes are pushing to bringing our system to a communist one. People are also starting to wonder whether capitalism is failing. The reality is that capitalism did not fail, ethics (or the lack of) failed.

Ethics: Our economy is based on the assumption that everybody is ethical in the way they do business. The right regulations were already in place. They were not enforced, and people went for the quick-buck instead of playing a long-term ethical game. Ethics are not luxuries, they are essential for capitalism to work the way it was intended to.

Trust: Where I grew up in Lebanon, you never trusted the other party in a transaction and always assumed that the purpose of a transaction was based on one party trying to take as much money from the other party. You always had to watch your back and negotiate, negotiate, negotiate. Both parties always felt as if they lost which hindered economic growth.

Confidence: The word “conman” originated from “confidence man”. Just like Madoff, he became a person of confidence and was able to take people’s money. Once consumers lose confidence in the economy, a downward vicious cycle takes hold of businesses. To break the cycle, you need ethics, which drive trust, which in turn drives confidence.

Note: The term "Ethical Capitalism" is borrowed from Brother Louis DeThomasis who wrote about the subject in his book "Doing Right in a Shrinking World".

IT Landscape Trends

In today’s economic stress, IT budgets are being scrutinized and business is requiring ROI analysis and prioritization to approve current and proposed projects. Technology became an integral part of business but is still perceived as a supporting or enabling capability and not as a core competency (unless you are in the IT business). So what should you expect in the next 2009?

• Organizational shakeup: Whether it is mergers, acquisitions, offshoring or inshoring, expect major transformation requiring IT systems to adapt quickly and efficiently.
• Better valuations: CIO’s need to get better at valuing projects and estimating costs. Rough estimates and sandbagging will get you in serious trouble.
• Financing options: Businesses are becoming more creative to finance large IT items. Think long-term leasing and vendor financing. This minimizes the upfront cost.
• Scarcity of resources: Cuts in budgets is requiring businesses to get more done with the same amount of resources.
• Legal and security: With the Satyam fraud situation, businesses realized how vulnerable their data and security was. Expect more involvement from your legal department and less flexibility to handling data.

Strategy Quandary

In the current economic environment, most businesses are struggling to make strategic decisions: Acquire and invest in projects now or hunker down and wait for the promised recovery?

Options for growth abound: less competition from Wall Street buyers, more companies willing to sell and cheap talent to ensure post-acquisition success. As usual, the main question is timing: Should a company wait or invest in growth now? Did the market hit bottom? Watching the volatile market is frustrating, but waiting too long could be fatal for businesses. The situation is similar to timing a bubble burst. In hindsight, most investors wish they never waited for the Internet bubble or the real estate bubble to peak before cashing in. So how is the current situation any different? No one can time the bottom, but everybody agrees that there is more chance the market will get better in the next 12 to 36 months.

Companies need to make an educated decision based on facts and analytics instead of following the herd and play the wait-and-see game. One way to look at it would be to evaluate scenarios of a dollar invested today and the possible outcomes 3 years from now (these scenarios are for illustrative purposes only and could change depending on the industry and on the business model):
- Market dips by another 25% (the real bottom) but then recovers 3 years later
- Market remains volatile but stays at 0% growth (stuck at the bottom)
- Market increases at a steady 5% rate indicating that we already hit the bottom

In all these scenarios, investing now in new projects makes sense. Your business could be recklessly cautious and miss on great opportunities to invest and acquire. Anybody looking for short-term gains is bound to lose big sooner or later, but a long-term decision based on facts has a high likelihood of paying big.

To Regulate Or Not To Regulate

A friend of mine just had her first speeding ticket and decided to contest it. The process seemed simple enough that all you had to do was to set a court date, show up hoping the cop would not be there and argue your case in case he was present. The problem is that she underestimated the inefficiency of the government process. Her first 2-hour wait led her to assign a hearing date. A month later, she showed up to her 9:30AM hearing appointment only to have to wait two hours and a half to assign a court date through the help of what looked like a physically and probably mentality slow lady (over time, the slow process must have caused a slow brain). My friend was appalled by the government inefficiencies and bad customer service. On top of that, her taxes are being wasted in that process.

Well, everybody agrees that government is usually less efficient and customer friendly than private organizations. Imagine having to go through something like that to get a loan modification (which is happening by the way, check this article from CNN). Even worse, imagine if the same process was applied to healthcare. Well no need to imagine too much, just go to countries suggested by Michael Moore (i.e., Canada, France) to experience first-hand how inefficient government is.

I am not advocating that there should be no government involvement and no regulations but we must figure out an optimal point for regulations and rules? While pro-government activists keep pushing for more regulations, we should stop and ask ourselves what is the tipping point when too many regulations will start choking the economy?

Thank Richie Rich Day

It is Tax day and most people are already waiting for their refunds! But what about the ones who are not getting a refund and are still paying high taxes? The reality is that the media and our culture tend to vilify the rich. But here are some facts for a change:

Recent data available from the Congressional Budget Office indicate that the top fifth of households made 56% of pre-tax income in 2006 but paid 86% of all individual income tax revenue collected. In comparison, the bottom fifth still made 5% of pre-tax income but paid less than 1% of the total bill. Imagine if a group of five people went for a nice dinner and all ate roughly the same thing, but the wealthiest guy paid the bill, the other guys covered the tip and the poorest guy ate for free. Sure, one could say that the rich should help the poor, but shouldn’t the rich guy at least get a simple “Thank you” instead of getting the usual “You should have paid more”?

A Tax Foundation survey found that households making between $35,000 and $50,000 believe that they pay high taxes when in reality their “Effective rate” (when various tax breaks to which they're entitled are counted) is very low and is usually less than 10% of their income. According to the Tax Policy Center in 2005, just under one in 10 filers owed more than 15% of their income in federal income tax, virtually all of them had incomes over $100,000.

So to all households making over $100K, I would suggest that we thank them for a change. They are the ones supporting our system.

Potpourri Of Good News

• Federal Reserve Chairman Ben Bernanke is optimistic and said today that he is seeing "tentative signs" that the economy's dramatic decline is easing, but that full recovery won't come until the financial system is stabilized.


• Goldman reports $1.8 billion profit, and plans to sell $5 billion in stock, paving the way for it to repay its TARP loans.


• Investors betting on more good banking news pushed up CitiGroup 25 percent and Bank of America 15 percent.


• The DOW, Nasdaq and S&P500 are back to where we started the year and oil is still trading below $50 a barrel.


• The Dollar is gaining in strength against the Euro and the Japanese Yen.


• Mortgage rates are still at historic low levels (some rates hadn't been seen in more than 50 years). The benchmark 30-year fixed-rate mortgage remains in the low 5 percent.

Rescue Mission

Wow! What an amazing end to a hostage situation! As the story of the capture and freeing of Captain Richard Phillips unraveled over the weekend, I couldn’t stop thinking about how well coordinated and planned the entire operation had to be. The other side was also very experienced. According to a former US negotiator, Somali pirates have strong “business” negotiation skills. CNN states that pirates in Somalia identified the slain men confirming that two of them were among the "most experienced men" in a group that has hijacked seagoing vessels for money. So this was no easy task for the SEALs.

Historically, most of today’s business strategies have been inherited from the Military. Business tactic and execution in the past emulated training and experiences received by military commanders. Today, businesses are facing a different kind of piracy, where they need to have on their side the best negotiators, best strategists and best marksmen (figuratively speaking. I am not suggesting the killing of anybody here). The point is that when you are in a tight spot, the last thing you want to do is to capitulate by paying the money or by ignoring the situation. This is the time when you need experts on your side and your business cannot afford not to afford them. Strategy is becoming a bastardized word but true strategists should be sought after and negotiators are crucial. The trap that most businesses fall into is to believe that they have those skills in-house and for cheaper.

Good Friday

My post today will be very short. Learning from a great message on Good Friday, things could get really bad, we could be hurting economically in an unjustified way, but we have to believe that we will rise above this turmoil. That’s what makes our nation a great one: Faith in the future. Have a blessed Good Friday.

5 Things To Do In A Downturn

1. Focus on retrenching and reinventing thyself: This is not the time to panic and react on bad news. Sure “change” is becoming a buzz word, but it is more than that. Businesses cannot afford to resist and delay change in a downturn.


2. Reduce the academic advice and increase hands-on strategy implementation: This is the time to put to test everything you have been strategizing about. Businesses need to move from strategy formulation to strategy execution. A downturn separates men from kids.



3. Strive to implement strategies quickly: Time is of essence. Go for 80% solutions and beware of perfectionism. That being said, quality should never be sacrificed. Also ensure benefits are being measured and results are optimized.


4. Leverage facts and data: Analytics combined with a hands-on approach is crucial to enable fast quantifiable results. The time of gut-feel and shooting from the hip is long gone. Arm yourself with enough data and facts to allow you to make the right decisions.


5. Stop listening to the doom-and-gloomers: The sky is not falling and things might return to normal faster than you think. Make sure you are using this time to out-think your competitors.

Claim Ignorance

Yesterday, a 47-year old Wisconsin man decided to clean up his apartment with gasoline. Apparently, he did not know what he was thinking when he tossed a lit cigarette into a pile of gas-soaked cushions and clothes. Later, in telling his case to the Police, he added that he knew gasoline is flammable but did not expect the dramatic results. He continued that it was a mistake to throw the cigarette and he was sorry for what had happened. Eleven other apartments were also damaged.

When you think people cannot be stupid, they always find ways to surprise you. That is what happened during the latest housing bubble. Granted that some homeowners were taken for a ride, but I bet most of them knew and understood the gamble they were undertaking. Put aside the fast-and-smooth talking mortgage brokers, most homeowners had basic understanding of the fact that they are signing up for mortgages that they could refinance later because house prices never fall down. But what if they did? And they did. So now it is easy to claim ignorance and ask for forgiveness, especially after ruining other people’s lives along the way (including their own families and neighborhood).

Back to our story about the apartment in flames, imagine if tenants of the eleven other apartments decided to fix the arsonist’s apartment because he could not do it himself and because they could not have a charred apartment in their building. That’s exactly what is happening in the market: Somebody acted stupid, claimed ignorance, said they were sorry and we got to pick up the tab.

What Great Depression?

I am really overwhelmed listening to analysts comparing the current economic downturn to the Great Depression. We became so spoiled as to think that a knee scratch is similar to an amputated leg. To put things in perspective, here are some facts:

• Unemployment: While we are currently at 8.3% and might be heading to 10%, this is way better than the 25% to 40% recorded during the Great Depression. Keep in mind that many European countries have been functioning for years under double-digit unemployment.
• Adjusted GDP: dropped by less than 2% compared to over 25% during the GD (Great Depression).
• Failed Banks: less than 1% compared to 50% during the GD.
• Prices: Dropped 25% during GD version no-change today.

So call it recession, downturn or slowdown, but please stop comparing it to the Great Depression!!!

Malaysian Downpour

Anyone who follows Formula One racing did not enjoy last weekend’s race when it was cut short due to torrential rains. What happened in that race is very similar to what is happening now or in any bubble situation in general. Everybody knows that in Malaysia, the weather changes quickly and one always should expect rain after a sunny morning or vice-versa. So since it was sunny, everybody expected rain. But as dark clouds moved in, rain did not come. Then there was lightning and thunder and still rain did not come. Ferrari took the gamble and got the wet tires on, but still no rain. Until suddenly, torrential rain came flooding the entire circuit with typhoonesque amounts of water. Needless to say the race had to be cancelled.


That is usually the case when things takes longer that expected to happen. In an economic bubble, the adjustment is a burst. In an extreme downturn, the same thing will happen and we will experience a quick comeback. The DOW is close to 8,000 points proving again how volatile the market is and that “recovery” or what I prefer to call “snap back to reality” might be coming faster than we expect. If you believe that the market is a leading indicator to the health of the overall economy, then we should be expecting an early return to normalcy, which is a DOW between 9,000 and 12,000.

Mortgage Rates Down

Mortgage rates are at their lowest levels in recent memory! The benchmark 30-year, fixed-rate mortgage fell 6 basis points, to 5.13 percent, according to the Bankrate.com's national survey of large lenders. In the meantime, 80% of new applications are related to refinancing and the application level is back to extremely healthy levels. Banks with solid platforms such as Wells Fargo, US Bank and many Credit Unions have been inundated with volume. The hope is that these indicators are early signs of recovery.

Note: F1 Strategy compiles data from the US Treasury, Freedie Mac, Fannie Mae and the Mortgage Bankers Association.

The System Knows

Yesterday, a woman in Wisconsin religiously relying on her GPS ended up driving on a snowmobile trail. Several miles down the frozen path, she got herself stuck in two feet of snow. It took the Police a while to figure out where she was in the first place, and then to bring heavy equipment and free her vehicle.

You might be saying to yourself how dumb does a person need to be to do what this woman did? In reality, while not many people would do that (except for Michael and Dwight in one of the Office’s episodes), many businesses are acting exactly like this woman. I see it everyday where business leaders stop looking at the big picture and start relying on “the system”. I worked with this head of sales who kept repeating “the system” should do this and “the system” should do that to the point where he deeply believed that “the system” could actually manage the entire sale process for him.

Well, every system is another tool in your toolbox, it definitely helps decision-making but it will not build things for you by itself. At the beginning of every project, I always make sure the stakeholders understand that the business is driving decision-making and not IT. Any IT solution that we recommend is the outcome of a business need and not the other way around.

Tojan Horse

A friend narrated to me how he dropped five business cards at a car show for sales guys to contact him with a quote. He genuinely wants to purchase a car. It has been a week and one would expect sales people to be hounding him and following him everywhere he went. So how many phone calls did he receive? None. The only explanation is that sales people are so numb and believe that nobody is buying cars to the point that they are missing on the real opportunities. How can you not blame the media? “Ashton Kutcher squeals as chest is waxed”, “American Idol judges distracted by Iraheta's funky outfit” and “Ohio man charged with drunken driving on bar stool”; these were news headlines on the front page this morning. These are the “bright spots” that the news media is squeezing in between doom and gloom stories. Really!!! That’s all you can do? How about telling bright stories about the 92% who are employed? Or the people who are still purchasing cars?

We are becoming our own worst enemies. What have we learned from history? Apparently nothing. We are like a fortress surrounded by barbarians (the economic downturn). Usually, to win in such a situation, people get ready for harsher days but ensure that they are not sacrificing resources crucial to their survival during and after the siege. What are we doing instead? We are being fed and feeding on the bad news. Can you imaging people inside a surrounded fortress going on spreading rumors and stories about how strong the enemy is compared to how ill-equipped the surrounded guys are? Or can you imagine them wasting time and energy on non-value added activities (such as Ashton getting his chest waxed)?

History of surrounded cities teaches us three major lessons:
- Do not let fear take over: When surrounded people can almost perform miracles, as long as fear does not reach their hearts. Your own fear becomes your worst enemy.
- Prepare for bad times and set yourself up for better times: This is what war is about. Once you are desperate and start reacting, you lose. During bad times, strategy and planning are not luxuries but necessities. They ensure that whatever you are doing now is in line with your recovery.
- Watch out for Trojan Horses: Businesses are fooled into believing that simple and easy patches today will resolve the problem. Do not accept any gift you are handed for a discounted rate. Make sure your decisions are based on facts and are supported by a long-term strategy plan.