Leadership Agenda: Info Tech Economics 101

It seems like there’s an infinite demand for IT products and services. CIOs usually try to address the disparity between supply and demand by implementing various supply strategies, such as improving resource-forecasting techniques and project management, adopting standard software development approaches, and, if they can, increasing the size of their workforce. The fact is, you can work on the “supply side” all you want and never balance the demand and supply for your resources until you work the “demand side.”

Economics 101 tells us that when the price is zero, demand is infinite. People tend to put a very low value on things that are free. Demand management strategies for IT goods and services winnow out those who aren’t ready to leverage IT. You have to somehow figure out how to allocate your limited capital and human resources to the highest value opportunities so that you can focus your IT agenda and improve your ability to deliver.

In the marketplace, suppliers sell to the highest bidder. In an internal IT marketplace, where it’s difficult to price differentially, you have to find out who is willing to pay the highest nonmonetary price. This is a head-scratcher for many CIOs. After all, isn’t “nonmonetary price” an oxymoron?

Actually, many CIOs have long used pricing mechanisms, even if unintentionally. These mechanisms are easy to implement but not always efficient or even effective.

Bureaucracy. Paperwork and approval processes tend to nip some of the demand in the bud. As an entertainment executive recently said to me, “It’s so hard to get IT to do something; users get frustrated and they just give up asking for things.” Needless to say, this approach does nothing for your alignment or reputation with the rest of the business.

Fixed funding. Giving each business unit a fixed amount of IT project funding?with the hope that it will scrutinize the opportunities and allocate based on the highest value?will reduce IT demand as long as people are forced to live within their budget. The downside is that this approach ignores different?and real?needs among business units.

With both of these approaches, funds get allocated to the most persistent or vocal executives rather than those willing to take accountability for delivering results. There is a better way.

CIOs need to take an investment management approach to IT resources. Earmark your dollars based on commitments from operations executives to deliver value?and then monitor the realization of value. Do this by allocating money in stages, proving the benefits of various investments and mitigating the risks as you go. Again, the most practical method is a nonmonetary value commitment, in the form of improvements to operational measurements (say, a commitment to increase distribution cycle time by 50 percent). To bone up on IT investment management, read The Information Paradox: Realizing the Business Benefits of Information Technology (McGraw-Hill, 1999), by consultant John Thorp.

As the saying goes, Ideas are cheap; getting things done is hard. Because it’s hard work, requiring a demonstration of value will reduce demand for IT resources. When I worked as a CFO in the 1990s, I asked a restaurant operations executive to make a value commitment for a project he wanted to start. I gave him some pilot funding so that he could demonstrate the benefits (to him and to me). He was unwilling or unable to do so and did not receive further funding. A year later, another operations executive asked for the same funding and got it because of his willingness to commit to delivering value. Both were competent executives; the first did a great job of managing the people and the numbers, but the second also understood how to manage and change the business processes.

CIOs haven’t fought hard enough (starting with their CFO) to get value commitment built into the IT resource allocation process. As long as you let the general managers focus on IT costs rather than the relationship between costs and benefits, you will lose the organizational survival game. Your costs will always be too high. Investment levels must be set to optimize value?that’s the game you want to play.