Expensive IT systems a drag on resources in recession

Copyright: David Lawson

Property Week April 2009

Landlords and occupiers are weighed down with far too much space as the recession deepens but bricks and mortar were not the only over indulgence during the boom. Millions were spent buying IT systems now seen as an expensive drag on resources.

  It seemed like a good idea to gear up for the information age but spending was based on assumptions that profits would cover pay-off periods of several years. Cuts will not be easy, as complex new systems require support, and contracts with suppliers are difficult to modify, say James Kaplan and Johnson Sikes, two experts at business consultant McKinsey. Squabbling between different departments over priorities add to the difficulties.

  But huge savings are possible by increasing efficiency, says property industry adviser Remit Consulting. A survey of clients found the best IT teams had a substantial cost advantage. ‘An average firm could save more than £1m a year if it became as efficient as the best,’ says Remit partner Andrew Waller.

  Methods suggested by Kaplan and Sikes to reduce costs include:

• trim demand for new applications.
• find partners to share servers and storage.
• cap application maintenance spending.
• renegotiate contracts to reflect changing market conditions
• move operations offshore.
• sale-leaseback of data centres

  But cost cutting should not be an automatic priority, warns Remit director Bob Thompson. Firms need to look at the way they are managed and get these processes right first.

   Kaplan and Sikes concur, suggesting the slump as an opportunity to help ‘peel away unnecessary management layers’. They emphasise that better use of IT can also have a wider impact on management, enhancing logistics and inventory control, sharpening insight into customers’ needs, pinpointing opportunities to change prices and focussing sales. This can produce up to 10 times the savings of simple IT cost cuts.

  Smaller firms may dismiss such high hopes, as they have no data centres and offshore operations to manipulate. But they can investigate options including outsourcing email, internet phones and data storage rather than paying for the hardware. IT management itself could be outsourced, says Remit.

   Availability of ‘software as a service’ will increase, says partner Mark Jones. This involves buying use of applications as and when required, often directly over the Internet from a service provider, without having to take on the cost of an up front licence or powerful hardware. ‘Even small and medium sized businesses can take advantage of services or applications generally only available to large businesses with high IT budgets,’ he says.

  As IT teams are pushed to deliver as much as possible from existing systems, software suppliers will begin to feel the pressure. Those which have developed additional capabilities are likely to fare best, particularly where they help organisations manage their way through the slump, says Remit.  Several have added new modelling, budgeting and forecasting functions as well as widening the scope of the traditional property management systems to cater for fund and financial performance management.

  ‘We are in the middle of an information crisis as much as a finance crisis,’ says Waller. ‘There are huge pressures on software to analyse assets much better.’

    Software suppliers will rely on upgrading systems to cope with new demands such as rent arrear management and handling more frequent cycles, where tenants such as retailers convince landlords to bill monthly. Programs which work across different countries are also becoming increasingly important as international businesses attempt to spread system costs as widely as possible.

  Remit is predicting further rationalisation of suppliers, such as Yardi’s acquisition of Argus’ CTI property system and Insight Reporting, along with cuts among firms which have already merged.

  American suppliers will continue to vie for market share, particularly where businesses are looking for international coverage. Remit has also questioned the likely level of commitment to property systems by suppliers with interests in other industries. These may focus on the most profitable sectors and property systems might suffer.

  Green issues remain important and IT teams will be looking hard at energy saving. This does not just involve areas such as building management but business systems and office applications that can run in ‘lean’ technical environments.

 Several property system suppliers now have versions that support this model, says Thompson. Business systems will become increasingly pressured by demands of corporate social responsibility policies but the jury is still out on whether – and how swiftly – businesses are ready to switch from personal PCs to networked terminals running applications held on central servers.[END OPT CUT]

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IT plays a central role in property and corporate real estate managers must understand and take control of functions that have been palmed off to IT departments, according to a new guide published by the RICS. ‘IT can help managers reduce property costs and help operations teams deliver increased profitability,’ says the study. ‘It is essential for managers to understand how to outbid other teams for the IT resources they require and do so at minimal risk.’

 The report forms part of a suite of corporate real estate research called Property in the Economy. It has been produced for the RICS by Andrew Waller and Bob Thompson of Remit Consulting.

Further information from Rosemary Elder, relder@rics.org, 0207 695 1597 or http://www.rics.org/propertyintheeconomy