Many CIOs have submitted their first 2004 budgets recently, politicking for key stakeholder support while waiting to hear back from management. Early responses indicate small incremental growth in 2004 IT budgets, with 1%-3% a typical planned increase.
We expect IT budget requests to go through fewer rounds (one to three) for FY04, much than last year (upwards of four to five), mainly because spending has already been cut so drastically. With tight spending restrictions in place for the past one to two years, IT budgets are already close to the bone.
As part of the dot-com buildup and increased adoption of IT throughout business, the IT budget has become a much larger part of an enterprise's SG&A expenses. This has led senior management to place the cost-cutting spotlight on IT, since it perceives the role of information to be supportive and not operative. But if spending is cut or restricted in a draconian way (e.g., 15% cut across the board, spending freeze across all categories) without regard to essential needs and urgent priorities, shadow spending occurs and is problematic to control. In addition, non-discretionary processes could be unknowingly stinted - causing significant risk and loss potential in business agility.
To avoid these problems, companies must treat information technology spending as they do business technology spending (e.g., investment portfolio) and categorize investments (e.g., core, non-discretionary enhancements, discretionary enhancements, investment, and venture spending, or a similar categorization scheme). Only then can the business rationalize the right investment choice/mix (and commensurate spending cuts).
In 2003, the focus has been to severely cut "discretionary" projects and, where possible, avoid or delay non-discretionary enhancements. Growth and venture investments from 2001/02 had already been tabled: These are no longer issues in annual IT budget requests. However, many non-discretionary enhancements have not been executed in 2003 (e.g., server, storage area network, database maintenance), leaving an increasingly brittle IT services infrastructure that, when called on to perform, will not be adequately provisioned or prepared. Moreover, failure to stay current with technology will force many IT organizations into risky, time-consuming competency jumps (e.g., proprietary Unix to Wintel/Lintel) when the business - not the IT organization - determines it is time to switch technology platforms for cost reasons.
For 2004, leading CIOs plan to closely examine the quality of their IT infrastructure and operations; cut service levels (e.g., help desk) the business can justify; selectively source components that an outside provider can manage with consistent, acceptable quality and lower cost; and refurbish enough such that risk of infrastructure and operational compromise is measurably diminished.
"People have forgotten core operational and non-discretionary expenses must be paid for, like the infrastructure maintenance bill that includes servers, storage, middleware, database, and network components," says META Group analyst Doug Lynn. "If an organization doesn't pay to maintain those assets, when they do break, the vendor many not have the experience or skill (or enough of it) to help out. What does an organization do then?" If maintenance is not kept up, the risk of significant outage as consumption organically grows cannot be left unknown and unaddressed - it is career-altering should something happen to mission-critical systems. Furthermore, the groundwork for an adaptive infrastructure and operational processes will be severely jeopardized. CIOs will find themselves in the position of pressing on the gas pedal and watching their car stand still.
"Companies have gotten into a highly compromised position - dictating to IT management that it first accomplish the more results with the same, and eventually less funds," Lynn adds. "Regretfully, it will take a significant experience (e.g., failure of mission critical systems, failure to make compliance deadlines) for management to realize that non-discretionary spending is not optional or something to cut corners on. The recent power outage in the northeast US exposed the fact that many organizations are inadequately prepared (e.g., backup power, lighting, ventilation) and must devise manual processes to cope with such events."
"Another CIO concern centers on hidden or shadow spending," says META Group analyst Jed Rubin. "It was a quite popular activity in the late 1990s and early 2000s to 'feed the market,' increasing IT spending up to 50%. In 2000/01, it crashed to and is now hovering around 10%-20% of total IT spending. The pitfall of shadow spending is the lack of future control over the technology environment by the CIO and IT organization. Business and IT process architectures and environments become disjointed and lethargic in performance. From a financial point of view, the CFO cannot gain a holistic view of IT spending. Redundant spending occurs (e.g., multiple projects deploying similar solutions without being aware of each others' activities). The potential of increasing technology and process reuse that contributes to organizational adaptiveness swiftly vaporizes. It is ironic that the same budget-cutting pressure intended to eliminate shadow IT spending, when taken to an extreme, promotes further shadow spending because there is clear lack of spending governance (e.g., policy).
"A large percentage of organizations do not yet have this holistic view of IT spending," says META Group analyst Louis Boyle. "Structured as silos, business units do not work together, and thus are prevented from fully leveraging their investments. In contrast, leading organizations do have a unified technology portfolio investment strategy that is driven top-down from senior management.
User Action: While continuing to demonstrate effectiveness at cost cutting and control, CIOs must counteract excessive attention on cost cutting with a categorized spending strategy, clearly emphasizing vulnerabilities and risks to business performance.
"The most popular method to accomplish this task includes the use of risk management as a discipline to portray various levels of risk and cost to resolve/address the risk," says Boyle. "An impact discussion with the business is necessary to have rational discussions on what should be spent and where. This discussion will help users develop a deeper appreciation for the value of IT."
"To ensure their funding, IT executives should explain the role of end-user recognized core operations and non-discretionary enhancement components of their budgets," says Lynn. "Furthermore, from a control perspective, IT executives must create a compelling business reason (e.g., economies of scale, risk management, agility) for central IT budgeting and operations management.
CIOs cannot sell their IT budget. Well-structured, fully disclosed budgets do that automatically. Organizations should be sure to clearly communicate those items that must be funded, should be funded, and would be nice to fund. In addition, stakeholder sponsorship of specific requests, (e.g., application and/or service maintenance) should be enlisted.
META Group originally published this article on 3 October 2003.