New Initiatives Spending Versus Keeping the Lights On
In periods of economic growth, businesses focus less on restraining costs and more on making investments to capture new business. But, when things slow down, its all about saving money.
The expectation for IT spending growth for next year has been greatly diminished, said Frank Scavo, president of Computer Economics. Were not saying theres expectation for budget cuts, but organizations are not giving as much expansion to budgets as they had expected to earlier in 2007.
The median expectation for budget growth overall is 2.5%. This is the lowest number theyve seen since 2005. And this is even less at larger firms at just two percent. What this means is in real terms is IT managers need to be ready to defend the efficiency of their ongoing operations against pressure to make cutbacks all the while sustaining investment in high-priority strategic initiatives.
This often means keeping a good handle on just how much it costs (or should cost) the IT group to "keep the lights on" verses new initiatives spending, said Scavo. Tracking the ratio of ongoing IT support costs to new-initiative spending can be critical for maintaining a proper level of investment in IT infrastructure and keeping your job.
Both of those numbers are important for different reasons, said Scavo. Focusing on the piece thats going towards new initiatives shows how much the organization is investing in capabilities. So, thats an important number to measure. And measuring the cost of ongoing support allows you make an apples-to-apples comparison, year-over-year for how your IT spending has been most effective in efficiency and productivity of the IT organization.
At least that is the consensus of IT executives who participated in CEs new report IT Spending For New Initiatives: Key Measure of Efficiency, Competitiveness.
How it helps you keep your job is pretty straight forward. If the higher ups are looking for cost savings in IT and you dont know where the money is going you are not going to be able to make good decisions about where to find those savings. And that could be bad for your career in the long-run.
Having these numbers handy would certainly help you in a cutback environment, said Scavo, because you have a hard number you can point to and say, This is the number that we need to simply continue doing what were doing today to do the types things youre doing today and to continue to support the business without a reduction in service levels you need to spend this amount of money.
Negotiations can then turn to new initiative you are not going to complete, for example. So, you always start saving money by cutting what hasnt happened yet as opposed to cutting what you already provide.
The Benchmark for Spending on New Initiatives
Over the last few years, business and governmental organizations of all sizes have been giving priority to spending for new initiatives. The CE survey indicates that new-initiative spending remained strong throughout 2007. Respondents in the survey reported spending, on average, 27% of their IT budgets on new initiatives.
Surprisingly, the survey showed very little difference in average spending on new initiatives as a percentage of total IT budget among small, midsize, and large organizations. In other words, the 27% average ratio appears to be fairly consistent, regardless of organization size.Interviews with CIOs who participated in the study suggest that more and more companies are moving toward tracking this ratio, so CE expects the percentage of companies doing so to rise in future surveys. There are a number of strong reasons for tracking new-initiative spending versus ongoing-support spending:
It improves efficiency. There is a tendency to forget about what you have been paying for year after year. Last year, CIO Doug Bond of Century Insurance Group put systems in place to track spending on ongoing support and found that it focused attention on reducing expenses. "On an ongoing basis we're continuing to monitor it to make sure that the ratio is dropping," he said in the report.
It demonstrates the value of IT. Identifying spending on new initiatives demonstrates to the CEO and other top managers what IT is bringing to the table as it requests new funding. "It sells IT as a value-add," said Michael Crowley, former CIO of C&D Technologies, now principal of Michael Crowley Consulting LLC, in the report.
It helps set budget priorities. A new-initiatives budget enables top executives to set priorities for spending from among competing investments being advanced by various business units. "It's easier to get the right priorities," said Bob Dulski, director of information services for the Chicago Zoological Society, in the report.
It promotes infrastructure investment. IT managers can more easily demonstrate gains in efficiency and sell budget approvals for critical infrastructure investments by demonstrating ROI. Being able to show how IT spending has risen as a result of business growth or last year's new initiatives also helps decision-makers focus on spending that is discretionary.
The ultimate goal of tracking this key ratio is to improve the spending mix and free up more money for innovation and infrastructure reinvestment. In today's climate, IT managers need to be prepared to constantly glean efficiencies from their "keep-the-lights-on" budgets in order to fund innovation.
The conundrum is that a company that fails to reinvest in its infrastructure will become less efficient, and an inefficient operation will not be able to sustain investment in innovation. It is a downward spiral that has the long-term consequence of becoming increasingly uncompetitive.
Its a relatively simply measurement system to put in place, although the devils in the details, but it can benefit the CIO tremendously when it comes to defending his IT spending and demonstrating the business value of IT, said Scavo.
If you dont track any other numbers at least you should be able break out your IT spending on these two components.
The study is based on interviews with IT executives and a survey conducted in October and November 2007 on IT budgeting. The study analyzes responses from 112 IT executives representing companies with annual sales between $30 million and $100 billion.
Forty-five percent of our respondents are from large companies with more than $750 million in revenue, 25% represent midsize companies with $250 million-$750 million, and 30% work in small companies with less than $250 million in revenue.