Special Feature
Part of a ZDNet Special Feature: IT Budgeting 2015: Planning the Next Stage

The battle for the IT budget: Operation versus experimentation

IT budgets often favor operating expenses over enabling new technologies. Here's why that might not be the case for much longer.

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The eternal struggle in IT budgeting has been balancing the money needed to keep the lights on with the capital required to experiment with, or enable, new technologies. Traditionally, the former takes precedence over the latter.

For many CIOs and CTOs this can be frustrating, as many of these executives come from a technical background and value the increases in performance and efficiency that can come with new technologies.

One of the big questions on the table is whether IT departments are getting to the point where the money in the yearly budget allocated for new deployments and A/B testing outweighs that set aside to keep day-to-day operations running smoothly.

While 2015 will not be the year that new technology investments usurp operating expenses in the majority of IT budgets, there are signs that enterprises are heading in that direction.

Growth versus maintenance

The challenge in moving forward with experimentation is a question of both resources and support. The reason that the operations portion of IT budgets often overshadows the allocation for new technology is because the former has to be paid first; what's left over can then be dedicated to experimentation. You have to keep the ship afloat before you can direct its course.

Martin Schneider, the CIO of VF Corporation — the parent company of brands such as The North Face, Vans, Wrangler, Lee, Nautica, and Timberland — said that VF's budget is managed broadly in terms of operating and enabling.

"Our operating budget is the portion primarily driven by infrastructure/desktop support and telecom," Schneider said. "We have an active program focused on simplifying our technology stack. This will allow us to invest more in enabling technologies by reducing our operating expense."

According to Schneider, having greater operating expenses than those that enable technologies is an industry benchmark. It makes sense, as operating expenses often center around a company's most important asset — its people.

Max Dufour is a technology and strategy partner at Harmeda, working as an interim CIO for mid-sized businesses and some Fortune 500 companies. He said that IT payroll is typically the majority share of most budgets, while infrastructure maintenance and enhancements usually come in second. Still, many of those companies are putting money towards technology to grow the business.  

"Companies are investing in technology to support growth opportunities and efficiencies, but at the same time they are cautious about growing internal tech teams by adding full-time employees unless they are able to secure some specific wins for the firm," Dufour said.

Although they aren't moving full-speed ahead, corporations are taking steps toward an equalized IT budget, and new software and infrastructure tools are enabling that move.

New tools and investments

The value of investing in new technology, besides the obvious increase in power, speed and so on, is the potential to lower operational expenses through the management and revenue models of modern software tools such as cloud computing and software-as-a-service (SaaS). Additionally, managed services and outsourcing offer another level to maintain, or further lower, operating costs.  

Donald Lemma, the CIO and Associate Dean of Technology for Columbia Business School said that the school has made quite a few investments in infrastructure items that, he said, are paying dividends for their operations budget going forward.

Still, the school's 2014 budget saw roughly a five per cent increase from what it was last year. The reason, says Lemma, is because they have "normal inflationary pressure of salary increases, benefit increases, and maintenance increases from the vendors with which you have key technologies." So, the budget increased less than it normally would have, as it was offset by savings generated by the new investments.

"We had already used many SaaS applications, but we are moving over more and more of our key systems to SaaS providers and, generally speaking, even a function that we could do in house, a SaaS provider or a IaaS provider has the resources to do it better, faster, and cheaper," Lemma said.

Lemma noted that the Columbia University Business School is operating the same number of servers as before, but hasn't had to increase its data center footprint even though it's taking on more responsibility. He said the school is using the web and the cloud to enable the growth without the cost.

"The win rate for on-premise has decreased a lot...and most companies have a solid aversion against buying hardware, paying for implementations and waiting for tangible results."
— Max Dufour, technology & strategy partner at Harmeda

The pricing model for SaaS and cloud services stands tall against the licensing model of legacy programs, adding fuel to the fire in the argument against traditional hardware and software deployments.   

"Justifying the ROI for maintaining old solutions or building expensive new ones has become very challenging," Dufour said. "The win rate for on-premise has decreased a lot — below 20 percent for some products — and most companies have a solid aversion against buying hardware, paying for implementations and waiting for tangible results."

Outsourcing is another way that many companies are saving money on operating expenses. Traditional outsourcing is still a popular way to save costs on helpdesk, but using platform-as-a-service (PaaS) and infrastructure-as-a-service (IaaS) tools are, in a way, a form of outsourcing support as well.

Another, seemingly more radical option, is the deployment of cloud-based hardware, such as Chromebooks, which eliminate the need for imaging and software installs. Although, that only works if it's compatible with your company's stack. Even then, devices like Chromebooks won't work for most design or finance departments. For most companies, freeing up resources is a game of shifting weight within the budget.  

"We've recently completed a major SAP implementation for Asia that is allowing us to shift investments to other areas," Schneider said. "Additionally, we have reduced portions of our infrastructure operating spend by consolidating contracts, leveraging VF's size."

Not all investments in new technologies will lower operating costs. Schneider said that VF's total investment in technology initiatives has increased steadily over the last three years. Of course, an uptick in omni-channel retailing tools has led the charge, but VF has also seen more resources allocated to ERP software and analytic capabilities to tackle big data.

Big data is an extreme case, but it's an example of a technological innovation that requires an investment in new software and infrastructure tools, as well as the hiring of specialized employees to make it a useful investment.

"It is important to estimate ROI ranges and potential cost savings as part of the process in order to set governance guidelines for the upcoming year, in terms of what is feasible/acceptable/opportunistic," Dufour said. "As new technology solutions become available, it is important to build in some flexibility, but within a framework to deliver against the company's needs while taking advantage of beneficial innovations on the marketplace."

Conclusion

As businesses and organizations move toward an IT budget model that favors experimentation and enabling new technology over maintaining operating expenses, in terms of resource allocation, there is another question to ask: Once these investments in new technology begin to lower operating expenses, how do CIOs and CTOs practically go about reallocating the newly-available resources?

The first option is for IT leaders to give the remaining resources back to the organization, showing that they are able to come in under budget, and proving the success of enabling new technologies. The second option is to reinvest the remaining capital in even more new, or appropriate, technologies in order to save even more time and money going forward.  

Lemma's opinion is that they should do both, adding that the goal of a strong CIO should be to balance that with transparency and tact. When asked when he believes we will see the era of reversed roles between operational expenses and technological innovation, he said it's happening now.

"The opportunities have existed for a while, they still exist, and they still will exist," Lemma said.

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