Value, Not Spend, Sets Executive IT Priorities for 2009 and Beyond

Despite the prevailing economic uncertainty, CIOs are reporting that their original 2008 IT budget plans remain largely intact. Where economic conditions are changing, the IT response can generally be described as cost conscious rather than cost cutting, according to a worldwide IT budget update survey of more than 1,000 CIOs conducted by Gartner Executive Programs (EXP) in the first quarter of this year. The projected global IT budget growth originally forecast for 2008 remains at 3.3 percent, which is in keeping with average increases in recent years.

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While 62 percent of CIOs reported no change in their 2008 IT budgets, 23 percent indicated a decline in their budgets, and 15 percent of respondents reported an increase in their budgets. Of those respondents reporting a decline in budget, the decrease averaged at 10 percent in their committed 2008 budget. For those respondents that reported an increase in their budget, they said the increase was approximately 15 percent.

Naturally, IT budget growth reflects industry and geographic conditions and on a global basis, changes in one industry or geography are currently offsetting changes in other industries and geographies. For example, financial services budgets in the U.S. showed a significant slowdown in the first quarter, which was offset by accelerating budget growth in Europe and Asia/Pacific. Nonetheless, as the factors that have influenced the U.S. economy become more widespread, CIOs will be under increased pressure to deliver value for money, regardless of geography.

The Battle for the 2009 IT Budget Is Now

Past experiences indicate that IT budget cuts lag economic conditions, making now and the 2009 planning process the real battle for the IT budget. CIOs who have concentrated on managing IT spend, rather than showing tangible value, face lower budgets the next year. The reason is simple: If you have managed to do without this year, then why not next—particularly when IT has gone above the norm to do more with less? That’s the essence of the “good management penalty” facing CIOs.

CIOs have responded to business-based budgeting, enhancing their financial management capability, implementing portfolio management and the like. But these disciplines that concentrate on financial management inevitably lead to discussions of IT expenditure and costs. Demonstrating that you are a steward of corporate funds is important, but CIOs need to be seen as more than good financial managers, they need to be seen as producers of value.

Over the past three months we have seen CIOs return to the issue of business and IT strategy alignment as a means of demonstrating value and supporting IT in the budget planning process. That step is a good first step, but it can be incomplete particularly when it focuses on issues of technology enablement and initiatives. The strategic question CIOs must answer is the same as every business executive: What will the enterprise get for the resources it invests in it? The answer to that question has changed as the nature of IT budgets has changed.

The Nature of IT Budgets Has Changed

Over the past four years, IT funding has become increasingly business-based, with initial budgets showing modest growth with the operation to add resources during the year. This is in contrast to the late ’90s when IT budgets were more functional in nature—allocations that needed to be spent. Figure 1 shows the change in budget focus over the past 10 years.

Global IT Budget Changes Reflect the Changes from Functional to Business-Based IT Budgets

In an environment of macroeconomic uncertainty, it becomes even more crucial for CIOs to highlight the business impact of IT to demonstrate the returns generated by IT resources. Based on the results of Gartner’s 1Q08 study, there are some immediate actions CIOs should take:

• Turn up the volume on the connection between IT investments and business performance. CIOs must show the value of the business-case IT projects—visible and transparent. That happens when you report on the value produced in terms of the business cases you have implemented, the value of transactions IT supports, and changes in business performance that make the company more effective and efficient.
• Support the top line. How can you use information to give your peers better insight into actual top-line revenue? Use operational information to identify the leading indicators of top-line growth, such as inquires, follow-on purchases and sales effectiveness. Know specifically how you will support enterprise growth in 2009.
• Defend the bottom line. Address the question of how IT can change the company’s cost structure rather than just cut IT spending. Remember if IT represents 0.02 of sales, then a 10 percent cut in the IT budget only saves 0.002. Compare that to a 10 percent change in the cost of operations by using IT with an order of magnitude higher return. Look to areas where personnel, working capital, or cash requirements are increasing faster than business activities. These are areas where information can reduce operational resource requirements and cost structures.
• Protect your future. Recognize that IT budgets and activities have evolved beyond providing technical services, to encompass concerns ranging from information/analytics to business process and enterprise change. Use this realization as an opportunity to build new skills in your personnel and expand IT’s impact on the enterprise. Avoid short-term financial decisions such as postponing operational improvements, thus creating long-term operating constraints on the business due to a lack of efficiency and scale.

Regardless of your approach, have a contingency plan. Most CIOs do not and that leaves them unprepared and vulnerable to explaining what the enterprise gets for investing resources in IT.

The IT budget is not immune to economic conditions, and one in four CIOs has already reported a decline in their originally committed 2008 IT budget. The business value of IT in 2008 is pretty much over, so consolidate your gains, raise the visibility of IT value and use those results to set expectations for 2009 and consider the reasons why resources should flow to IT.

Mark McDonald is a group vice president for Gartner Executive Programs. He is responsible for the research agenda focused exclusively on CIOs and the business of information technology.