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.
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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
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).
Rachael is leading the corporate strategy for IT. Its
promise is that the company will create maximum value from all
its investments involving IT. That would still be the promise
of the corporate strategy for IT even if there were no IT
The IT numbers that most concern Rachael and her colleagues
are not her departmental budget and the specific range of IT
services it covers, but the company’s total IT costs. In
particular, the two numbers they always want to explore are
total cash spending on IT and the total cost of IT to profit
and loss (P&L). Cash spending is the money that goes out
the door, whereas cost to P&L is how much IT costs the
profit of each business unit and of the company as a whole.
The two numbers are always different and are usually managed
by different people.
Elements of both IT numbers appear in several corporate,
business unit and project budgets. Rachael’s strategy
relies on transparency of both the total numbers and the
business decisions that cause them. So the last thing that she
and her colleagues need is for people to hide IT costs, call
them something else to get around constraints on IT spending,
or call non-IT costs “IT.” Besides blinding their
strategy to the truth, such behaviors also undermine their
tactics for using IT costs to influence business decisions and
make nonsense of their IT benchmarking.
Because Rachael is transparent with her colleagues about her
department’s costs, their underlying causes and what
those costs are paying for, her colleagues are equally
transparent with her about the IT-related costs that come
within their budgets. So they are all confident that they are
working with the bona fide total IT numbers within an
immaterial margin for error.
As a result, Rachael can prudently estimate that the company
will spend a cash total of $316 million this year on IT, 27
percent less than last year. While her departmental budget is
increasing, total IT spending is expected to decline. However,
Rachael also has to tell her colleagues that the total cost of
IT to the company’s P&L is expected to increase by 15
percent to $285 million.
What are the main causes, her colleagues ask, of the
movements in these numbers, and what can we do to reduce how
much is spent on IT? This is where exploring the IT costs in
isolation has to stop and the business context for those
numbers must begin.
Rachael explains that the total cash spending on IT is
mainly expected to reduce this year because the company is
planning to invest less in business projects, and that a lower
proportion of those projects’ total business investment
is planned to be spent on IT. However, she cautions, the actual
total may be different from current provisions because many
projects have yet to be initiated or even conceived.
Spending the Right Way
If the executives want to reduce total cash spending on IT
what options do they have?
There will be some scope to prune total operational
expenditure on IT. However, this will be paying for services
that are used by the company’s employees and customers to
create value throughout the organization and beyond. These
expenses are also covered by contracts with suppliers and IT
employees. Furthermore, CIOs like Rachael have focused
relentlessly in recent years on finding operational
efficiencies and economies of scale.
More likely, the main room for maneuver will be in business
projects involving IT (what we used to misguidedly called IT
projects). Now, with everyone looking at the IT numbers they
might be tempted to prioritize the IT costs within projects to
meet a new, lower, IT total. This is the right process, but is
looking at the wrong numbers.
The cash that executives are planning to spend on IT is only
one element of the total project investment necessary to
deliver the promised benefits. If the executives want to
prioritize investments in projects involving IT they need to
consider the entire project, not just the IT elements. They can
choose not to invest in projects that promise the least bang
for the business buck. But a better process is to explore how
they can achieve the same bang by spending less, or even
nothing, by better exploiting existing systems. When
they’ve finished, total IT spending within projects may
be less or even the same, but the company will have the most
productive portfolio of projects involving IT given the cash
constraints they are working within.
Turning to the total IT costs to P&L, again, where is the
room for maneuver? In Rachael’s company these are
increasing while total cash spending on IT is falling. This is
because the costs to P&L are primarily caused by previous
years’ projects, not this year’s. Capital
investments in IT cause depreciation charges to P&L for
years ahead, while many projects involving IT cause permanent
increases in the operational costs for IT services. The best
time to start constraining this year’s IT costs to
P&L was last year and before!
Therefore, to significantly influence future costs of IT to
P&L we’d better start now. Constraining future IT
costs to P&L needs to be an integral part of our project
approvals process, solution designs, sourcing decisions and
project management. If our projects portfolio is going to
impact our future IT costs to P&L by more than we can
afford, then we need to recraft the business changes that plan
to exploit technology, with no loss of business value, so that
the future IT costs stay within our constraints.
In constraining a company’s overall costs of IT, the
CIO’s departmental budget is something of a red herring.
Business decisions that cause the company to spend money on IT
make the total IT costs what they are. If we get those
decisions right then the most appropriate total IT spending,
and then IT budgets, will emerge. That’s worth remembering when
we’re looking at IT costs, whether times are hard or
Chris Potts is director of Dominic Barrow, an IT
strategy consultancy. Contact him at firstname.lastname@example.org.