15.01.2009

IT Investments in Volatile Times

By: Susan Sills, SAP AG

Market meltdowns, gyrating economies, bank failures, and plummeting stocks: no company or investment seems safe. But should companies react by cut back on their IT investments? Claudia Funke, a director in McKinsey & Company’s Munich office, takes a look at why this is not a good idea.

Smart investments in these times of downsizing and looming recession are those that address cost issues and that have a very small payback time. And CFOs should not refrain entirely from making investments.

“There is always a big risk in times of crisis for people to take a short-term perspective and just reduce investments,” Claudia Funke explains. But that does not solve the problem. In fact, by holding off investments for a longer period of time, “you risk that your processes will not work in a way you need them to work later on.”

Counterproductive to panic

What is called for, according to Funke, is a through cycle perspective. “Think carefully about which investments can be postponed without causing danger and which ones you really need to do,” she advises. “It is counterproductive to panic and say we need to cut down everything.”

On the contrary, it is essential for companies to ascertain the investments that help costs and save energy – short-, mid-, and long-term. And information technology can play a significant role in this process. “IT applications that address both, the energy crisis as well as the cost crisis, are very meaningful investments, also in times of crisis,” she says.

Proper investments in necessary IT

However, as companies are investing in IT during economic downturns, they must exercise discretion and foresight. It is not always a question of new technologies, new bells and whistles. “It’s more about the right applications and about the right focus on the right business processes,” Funke says. “That is the real opportunity, one that enables you to take a more through cycle prospective.” Proper investments in necessary IT, in other words, help companies achieve their long-term goals, even in periods of economic uncertainty and financial duress.

In Funke’s eyes, the IT provider and the customer can work together to reduce cost and create opportunity. Server consolidation, for example, saves money. And by offering their customers innovative financing models, IT providers make it easier for customers to invest where necessary to strengthen company growth and stability.

Continue on that path

A question that begs to be answered is what companies should do if they are currently in the middle of implementing new software architecture. According to Funke, it depends on the sector and how severely a company is hit by the financial crisis.

Companies in capital-intensive sectors and experiencing a lot of short-term debt would be well advised to carefully consider whether to continue with their software investment. But for companies in other sectors that have secure short-term financing and that believe the current crisis will not last longer than one or two years, “my advice would be to continue on that path but think carefully about where you can save money along that way.”

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