The weakening economy is beginning to effect the earnings of companies outside the industries that have been hit hardest by the mortgage crisis (financial services, real estate, and construction). Yesterday, UPS attributed a nearly 10 percent drop in its earnings per share to the " sharp decline in U.S. economic activity." Starbucks' newly reinstated CEO Howard Schultz revised downward his earnings outlook for 2008, citing weak economic conditions and a decline in consumer spending.

To minimize the effects of a recession on corporate profits, benchmarking firm The Hackett Group recommends in research it released earlier this week that companies make targeted cuts to their general and administrative (G&A) spending (IT, finance, HR and procurement) that quickly impact the bottom line without compromising the quality and service the company provides or its ability to grow when the economy picks up again. The study is available on Hackett's Web site (registration required).

According to The Hackett Group's research, a typical Global 1000 company can remove between 15 percent and 41 percent of its total G&A costs by focusing on certain processes, such as IT infrastructure management, purchase order processing and accounting, where the largest opportunities to improve efficiencies exist. These savings can offset a decline in pre-tax profit during a recession by between 21 percent and 45 percent. Hackett defines a typical Global 1000 as a company with $23.4 billion in revenue, 56,000 employees and $862 million in G&A spending.

The potential cost savings for IT are also noteworthy. According to Hackett, a Global 1000 firm that spends $444 million on IT can remove between eight percent ($34 million) and 39 percent ($171 million) of its baseline spending by making application maintenance, application development and implementation, end user support, and infrastructure management processes more efficient.

Five Specific Recommendations for IT Leaders*

1. Focus on big ticket items like telecom spending .

2. If outsourcing contracts are coming up for renewal, renegotiate them at a lower cost.

3. Consolidate and standardize datacenters, help desks, and applications.

4. Improve efficiency of application development and implementation processes.

5. Halt the development of certain projects temporarily or permanently. If any of these projects are outsourced and your paying the outsourcer for time and materials, stopping the project, even for just a few months, can immediately save you money.

*Source: Erik Dorr and David Ackerman, The Hackett Group
Efficiency Gains Through Budget Cuts Varies By Company

The total cost savings a company can achieve in IT specifically or G&A in general depends on a variety of factors, according to Hackett, including the level of efficiency at which the company is already operating; the extent to which it adopts best practices for managing G&A processes, eliminates redundancies (whether they be processes or systems) and standardizes technologies and processes; and the company's ability to undertake change.

Nevertheless, Hackett executives say, most companies are surprised by how much they can actually save when they examine their cost structures and compare them to best-in-class companies.

"I've seen companies take out 50 percent of their IT operating costs over a few years," says Erik Dorr, Hackett's senior IT research director and co-author of the report on G&A spending. "Going into that, people said, 'You've got to be kidding. That's going to shut us down.'"

IT leaders have this idea that their operations are already running efficiently because they dug so deep during the economic downturn of 2002, but Dorr notes, when the economy started growing again in 2004, some companies and IT operations lost their fiscal discipline.