Moving Money Into Capital Investment is Key to Competitive Advantage

I spent time recently with Computer Associates CTO Mark Barrenechea at a tech conference in London. Barrenechea is a big believer in managing his IT staff efficiently. His reasoning is based on the fact that, as Forrester reports, on average, 76 percent of a company’s IT budget goes to operational expenses, with less than 25 percent allocated to capital investments in infrastructure, application development or network expansion. Therefore, says Barrenechea, companies will gain competitive advantage by becoming experts at moving current and future operational expenses into the capital investment portion of the ledger. Or, as Martin Warner, a partner at the consultancy Bearing Point said at the conference, CIOs “must shrink their operational expenses to grow their firm.”

These comments were in sync with recent CIO magazine research (www.cio.com/state) that reports that the top two barriers faced by CIOs are an “overwhelming application backlog,” followed by inadequate budgets.

Most research firms forecast that IT spending will increase 6 percent to 8 percent in the coming year. That’s better than in recent years but still not enough to make a significant dent in that growing application backlog. And while the tide of CIOs reporting to CFOs is ebbing, keeping costs under control remains a top priority for IT leaders as they shift their investment strategy to growing the top line.

So what’s a CIO to do?

Here’s a short exercise. Think of a company with a $100 million IT budget. Using the Forrester ratio, it will spend $76 million on operations and around $24 million on capital investments. Now throw in another $7 million for the 7 percent increase. If that company could move even 1 percent of its operational expenses into its capital expenses and allocate the $7 million for the same purpose, it will have $32 million to work with for new IT development.

Many CIOs now are focused on their 2007 budgets. Companies that follow the advice of Barrenechea and Warner will be more competitive than those that do not.