The extreme cash-flow challenges of COVID-19 are emerging, and CIOs need to act quickly to help protect their organization from financial catastrophe. At a time when it’s not business as usual, there are eight things that CIOs must do right now.
Essential COVID-19 quarantine measures will slow down all economies and nearly all industries. Many are already entering some stage of recession.
Survival, not growth, will be the priority for executives in 2020. Survival will depend on maintaining cash flows and income while continuing to be innovative with technology.
There will be unexpected and unplanned spending implications from COVID-19, driven by the new ways of working without new revenue streams to pay for them.
Many organizations are already looking to reduce spend and identify actions to ensure their survival.
As CIOs seeking to mitigate cash-flow challenges through IT cost and risk management, you should:
Quarantine your cash flow by assessing risk, cost and value in your decision making. Cash is king and must be protected at all costs.
Define your new spend levels by identifying what you need and how much you can afford to pay for it in this new harsh economic reality.
Reduce strains on current cash flow by proactively canceling projects, eliminating services and reducing service levels. In addition, release unnecessary personnel and renegotiate all business demand.
Anticipate spend increases in essential areas for business continuity while removing or at least freezing all nonessential spending.
As the global spread of COVID-19 continues, the financial business implications are being felt in all industries and geographies. As the economic impact grows, it is inevitable that financial pressures will increase. Enterprises that fail to act may not survive this disruption or will have their subsequent recovery delayed. This is not a cost or value optimization discussion. This is a matter of survival through careful management of commercial risk considerations in your decision making.
A fundamental contributor to enterprise survival is ensuring the ongoing cash flow of the organization. With that in mind, take the following actions in order to protect or quarantine your cash flow (see Figure 1).
Immediately establish what aspects of your current spend can be deferred, eliminated or altered (e.g., payment terms). Review all external spend for third parties/vendors and address your spend across all of the categories and types. Focus your attention on spend that is not yet incurred or committed, or is nonessential/discretionary and variable in nature.
Identify key vendor payments that are approaching. In the first instance, ensure that payments are not being made before they are due. Next, approach vendors and seek changes and delays in payment, either in terms of reduced rates, plans for repayment or deferral until a later date (see ).
In protecting your cash flow, consider:
Start with a blank sheet of paper and work with the business to reprioritize requirements and set spending levels that they can afford. Classify the spend and actions in the following groupings.
Can/Must: Identify the vendors/suppliers and payments that can, and therefore must, be ceased, deferred or delayed but be wary of buy now, pay later deals you will not be able to afford in the future.
Could/Should: Identify the vendors/suppliers and payments that could be ceased, deferred or delayed. For these, identify the specific spend reduction actions and the associated risk mitigation steps that will be required to execute these.
Can’t/Don’t: Identify the payments and vendors that should not be addressed because they are critical to the business. Actively monitor the performance and financial viability of these organizations and consider contingency plans for at-risk vendors.
Across all of these groupings, include vendor impact considerations in this assessment — what happens if the vendor fails to perform or terminates services? Can they survive from constraints on their cash flow? This will be particularly relevant for smaller and more heavily geared vendors.
Immediately review all projects that are already in flight. Break these down into two categories:
Category 2 projects should be further assessed to determine what aspects can be immediately reduced. Identify and adopt the following, where possible:
Reduce current project scope. Maintain the “must have” capabilities and address the “nice to have” ones at a later date.
Review all projects for scope creep, and reduce back to the original scope and business case.
Migrate fewer users to new software products, or do it over a longer period. Reduce or defer costs.
Deliver less features in software development projects.
Renegotiate payments away from time and materials to milestones or a success basis.
Defer or cancel all uncommenced spending on projects, staffing, assets or upgrades. Release any retained third-party resources, service or infrastructure expenses related to these. Defer any and all future or planned expenditure.
Beyond tackling the largely discretionary project portfolio, it is also important to address the current service portfolio. Here the need is to identify opportunities to:
Provide a lower service level — for example, help/service desk or end-user support
Reduce hours of service to core business hours
Reduce the number of software applications available to users
Inspect your current consumption and spend levels on all variable operating expenses — for example, IaaS, PaaS, SaaS, and voice and data communications. On a service-by-service basis, either completely eliminate or take control actions to reduce enterprisewide consumption levels by restricting or managing supply and renegotiating contract terms as necessary.
Identify the saving/reductions needed from personnel or headcount reductions. As described in it is critical here to ensure that this is done carefully and only once, if possible. Ensure that reductions are appropriate for the need and, as far as possible, do not need to be done again. Approach this in two categories.
CIOs should work with their CFOs to investigate what government or industry financial assistance is available at the federal, state and local level. Different types and levels of assistance are being provided and offered in most geographies and changes rapidly.
Work with business leaders to decide on key changes to operations.Negotiate with the business to terminate services or applications and encourage business users to use less or work in a different way — a way that reduces the variable operating costs, and potentially even the fixed costs, of the business.
As part of this action, it is key to make certain that core business revenue and outcomes are protected as far as possible, ensuring that actions do not damage ongoing revenue and cash flow.
As working arrangements change and remote working increases, it is critical that CIOs anticipate and plan for the spend shifts and increases that will take place (see Figure 2).
Many organizations and industries that are largely office-based use desktops and fixed office networks and infrastructures. The widespread shift to remote, largely home-based working is and will have impacts on all organizations. This includes:
How do you obtain and fund laptops, monitors, mobile devices and other equipment? What will the impact of this be on operating expenditures (opex) and capital expenditures (capex)?
What are the increased software, VPN and hardware costs?
What will happen to variable or consumption-based communications costs — both voice and data?
What impacts will there be on security — both in terms of elevated or actual risks, and the costs of prevention?
CIOs must anticipate and plan for the increased costs, which in many organizations will be felt in the IT budget. CIOs need to communicate this with business leaders and their CFO to ensure that the costs can be met and that they do not appear irresponsible in managing their budget during these times.
CIOs and their teams must proactively identify what can and should be reduced and how. If offices or work locations are partially or completed vacated, can enterprise-/office-based utilities, communications/access, infrastructure and services be suspended or deferred? CIOs should carefully consider their cost base and cost categories to anticipate both what increases, and what can decrease, with some action.
The impulse to make rash decisions in the face of a crisis must be tempered with consideration of reprioritization, divestment and even investment. Even though decisions must be made quickly, a pragmatic assessment of organizational dependencies (risks) like technology, workforce and service providers can create valuable insight to support success in the middle of the crisis and beyond.
While leadership will be forced to choose winners (preserve/invest) and losers (cut/divest) across every aspect of organizational operations, processes, and even goals, they should take care to make informed decisions that do not needlessly mortgage the future.
In this environment, the priority for CIOs is to identify the risks that are inherent in the decisions they have taken. They can then actively work on mitigating those risks, while also doing all they can to achieve their primary goal of cash-flow protection.
The Gartner risk, value and cost (RVC) optimization model creates credibility and defensibility that an organization is doing the right things, whether achieving success or experiencing failure (see Figure 3). Risk-optimized decisions support credibility and defensibility under both conditions (see ).
Gartner Recommended Reading