Firms to trim IT expenditure, take refuge in open source

Anticipating a tough year ahead, major Indian companies are planning to trim their IT expenditure or stop additional investments. This is against the conventional wisdom of increasing IT budgets even at times of crisis (due to long-term benefits), with companies now increasing exposure to open source technologies and low-cost infrastructure.

For example, Reliance Industries Ltd (RIL), which had invested around Rs 400 crore on IT last year, is one company that is looking at cutting down its expenses on IT..

“Yes, there will be a drop in IT spending, but the extent is yet to be decided. The reduction will be part of our overall cost-cutting strategy,” RIL Senior Vice-President (IT) Alok Kumar told Business Standard.

While companies do not provide separate IT expenditure figures — which are normally clubbed under miscellaneous expense or other expenses — analysts estimate that a company normally spends around 3-5 per cent of its total revenue on IT.

Similar is the case with certain Tata group companies, including Tata Steel and Tata Motors. According to sources in the Tata group, there would be a rationalisation of expenditure, including that earmarked for IT.

Under the “weathering the storm” programme, Tata Steel subsidiary Corus cut £600 million (around Rs 4,370 crore) in the first half this fiscal to deal with the financial crisis. This included IT expenditure, said sources. The Tata group posted total revenues of over Rs 2.5 lakh crore as on March 31, 2008.

However, automotive major Mahindra & Mahindra (M&M) is not slashing its IT expenditure, even though the group has no plan to hike it from the present level. The group’s total revenues for the previous financial year stood at around Rs 31,000 crore.

“We are not cutting our IT spends, even though we wouldn’t be increasing it from the present levels. M&M makes a lot of investments in IT R&D (through its arm Tech Mahindra) and a lot in communication, which will continue,” said Anand Mahindra, vice-chairman and managing director, M&M, on the sidelines of Ficci-Frames seminar.

Reliance Communications (RCom) intends to follow a similar strategy. The company might not increase its IT spend. There would be no reduction either. RCom had recorded total revenues of Rs 18,000 crore last year. The Aditya Birla group communicated its intention of not cutting any expenditure, neither IT nor capex, during the year.

IT budgets of companies in India for 2009 will fall sharply to 5.52 per cent from 13 per cent reported in 2008, according to a study by global research firm Gartner.

“In the current economy, enterprise cost optimisation has become the most critical factor for chief information officers,” said Partha Iyengar, head of research, Gartner India.

“The majority of the IT budget — up to 60 per cent — will be used to run day-to-day operations, while 23 per cent will be utilised to grow the business and 19 per cent to transform the business,” he added.

Industry analysts estimated that Indian firms’ total domestic IT spend (including hardware and BPO services) was around $16 billion for the year ended March 2008. Global and Indian companies including IBM, Acer, Hewlitt-Packard, Zenith, HCL and Infosys Technologies, among others, were the beneficiaries.

But what is the alternative? According to Alok Kumar, companies like RIL would look at increasing exposure to open source technologies that would help contain costs and improve operational efficiencies.

Another option is to look at low-cost network and infrastructure, at least till the time the slowdown lasts.