One of the many diamonds of wisdom that come from working with people running companies is that a corporate strategy needs a constraint or two.

While the strategy sets the ambition and context for business decisions, constraints drive us to make them. Two things, however, are vital: a constraint must be genuine, not imagined or contrived, and people must know how to use it in ways that execute the strategy rather than undermine it.

With much talk of global economic challenges in the air, it’s a good time to reflect upon what we’ve learned about the value of IT spending constraints to the success of the CIO’s strategy. Some battening-down of the hatches seems inevitable, so let’s make sure we turn this to our advantage. Even if the current economic concerns turn out to be misplaced, we can make sure the strategy wins either way.

What do we need everyone to remember about constraining IT costs? I’ve chosen two main themes.

First, that a CIO’s departmental budget is rarely the same as the company’s total IT spending. Constraining that budget is no guarantee that we are constraining the company’s overall costs of IT because there are almost always IT expenditures in business unit budgets. So let’s not focus on the IT department budget until we’ve understood the wider IT spending picture.

Second, that constraining IT costs in isolation from the business decisions that create them breaks the first principle of IT investment (which is that technology, on its own, delivers no value). IT budget constraints potentially impact all the people using IT to create business value, and all the business decisions that cause IT costs to exist. This is not like, for example, setting the marketing and sales budgets, where the consequences are mainly limited to marketing and sales. So let’s also understand, and utilize, the business causes of IT costs and the business impacts of constraining them in order to define how much to spend on IT.

Defining the IT Budget

Rachael is the CIO of major transportation company, with 400 staff. Her departmental budget for this year is $245 million, 17 percent more than last year. When times are tough, that seems wrong. Most departmental budgets are likely to be frozen or cut. However, her executive colleagues know what is causing the increase; that Rachael’s departmental budget is a variable proportion of the company’s total IT spending; and that she consistently reduces her like-for-like budget (i.e., excluding the incremental impacts of new projects and of business volume growth).