What can the CIO do now to prepare for a recession? The short answer is: A lot.
The past 30 months have been trying on many levels. I wrote about the Three Hurdles for 2020 and Beyond shortly after the start of the pandemic to address a few of these issues.
Fast forward to today, let us look at the timeline. 2022 is proving to be a troublesome year with the markets see-sawing up and down. At the time of this writing, the markets hit their lowest point in all of 2022. If a recession were to hit, it will likely take hold in earnest, in early 2023. The problem is the economic indicators are mixed.
Inflation is up which makes everything more expensive. Interest rates are up which makes capital more expensive. Yet employment and spending numbers are strong…at least for the moment. Confusing. Usually, one would expect spending to drop which then sends employment and other economic indicators down. Yet, that is not what is happening. Meaning, we should continue to expect mixed messages and a sort of ‘forced recession’. More on a forced recession later.
The CIO Playbook for Recession
In order for the CIO to prepare, there needs to be a hard look at the existing strategy, budget, technology and organization. Each have opportunities to prepare for in an economic downturn and/or recession.
Strategies should always align with business priorities and outcomes. In a downturn, strategies need to refocus and align with the most critical business objectives very closely. Side projects and initiatives with limited alignment or limited impact will likely disappear. Organization, projects, technology and spending all need to support a newer, tighter strategy.
Organizations are currently imbalanced on multiple levels. The pandemic created a hybrid workforce that is creating more challenges for organizations and leaders to navigate. At the same time, strong demand for people has shifted the pricing balance significantly in favor of the employee. This is good in moderation. Today, however, it translates to a highly competitive environment that is pricing out many enterprises due to very high compensation packages. This pricing imbalance is somewhat out of control and needs a correction to bring things back into balance. The problem is it will likely not correct itself until a significant event happens (like a recession) that forces all companies to rethink organizational value. Conversely, a significant event will also cause employees to rethink their strategies as well. In sum, a recession will significantly slow down the churn that IT organizations are currently experiencing and brings things back into balance.
In the interim, imbalance means rethinking the role the organization plays. Also think about when and how you manage through churn. For some, this may mean delaying a rehire for six months to bank a little funding for other needs. In other cases, it may mean moving the headcount to a more critical business function that creates greater value. It also may mean shifting headcount funding to 3rd party organizations to provide an easier path to cut spending should that move be needed.
Beyond people, automation plays a significant role in strategies. Economic downturns can accelerate movement away from labor to automation wherever possible. These downturns also have a funny way of immediately removing hurdles that CIOs regularly fight against. Hurdles that may have prevented progress immediately disappear out of necessity. CIOs need to prepare and capitalize on these opportunities.
Budget and Spending
Looking at the budget, a more critical look is needed. Spending needs scrutiny and needs to tie directly to business outcomes. Otherwise, the question should be: Why are we spending money on this?
In addition, the cost of capital is getting more expensive which shifts focus to emphasize OpEx spending over CapEx spending.
Across the board, contracts need a close look. Consider renegotiating contracts or changing terms to favor changing business demands. It is easier to do this ahead of time rather than when push comes to shove.
The same goes for technology. There is a ton of technical debt and legacy technology sitting within enterprises. Some of it resides in the corporate data center or colocation facility. While some of it resides in SaaS-based applications. Now is a good time for portfolio pruning to deprecate technology, systems and services that are no longer in use or not providing positive value to the business. To be clear, positive value is defined as business impact that is greater than the cost to operate. You would be surprised how much excess is currently running within enterprises.
Winners and Losers
In an economic downturn or recession, there will be winners and losers. Here are a few indicators to watch for and plan accordingly when considering an updated strategy.
Winners: Incumbents with a strong base of customers and providing core business value. Look for solutions that have low risk and high value. Solutions that tie to customer engagement and experience or business operations and efficiency are good choices. Examples include AI, automation, data insights and cloud.
Losers: Niche solutions that provide limited business value. Items not closely tied to strong business outcomes. Solutions that only do one thing or require quite a bit of upkeep are likely for this category. High risk and low value solutions are ones to avoid. Examples include legacy solutions and experiments with a low probability of success.
Things to Watch Out For
The impact to the enterprise will vary depending on a number of factors. Understanding the levers to pull…and when… is key. Too many leaders do not do the homework and planning ahead of time. Trying to figure this out in the moment is fraught with risk and potentially poor decision making that could have negative short and long term implications.
Understand that the cost of capital is already going up and likely to continue in a recession. That, plus the need for flexibility will drive enterprises to consider more nimble approaches and architectures. Just as the potential need to scale down exists during a recession, the need to quickly scale up coming out of it is also needed.
Look for opportunities in innovation and automation. That is not to say that automation is the solution for everything. You must be smart about where and how it is leveraged.
Find opportunities to de-risk the IT function. From cybersecurity to technical debt to organizational dynamics, everything should be on the table.
Based on the current indicators and if we are headed to a ‘forced recession’, we will likely find that the recession is incredibly short in tenure. The amount of talk about it is creating a sort of prophecy. Check the box and start the quick recovery.
There is uncertainty on the horizon and CIOs need to be well-prepared to flex as needed. Following this playbook is not intended to be a complete look at everything facing a CIO. But it is a good preparatory set of steps.