How to Fund IT Innovation

CIOs know that their organizations must keep up with rapidly evolving technologies as well as lead the enterprise in the discovery of strategic uses of IT. But with the daily pressures of business, many find there’s just not enough time and money for innovation.

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What happens to innovation projects? Clients need more than IT has resources to deliver. So staff diverts time away from training and product research to fulfill clients’ demands. There just aren’t enough hours in the day to do both.

Meanwhile, IT staff rarely find the time to work with clients to discover innovative, strategic uses of information technology. The last thing staff want is more work, when they don’t have time to satisfy current business requirements. Unfortunately, current requirements are rarely all that innovative. They tend to be projects that “keep the business running” or “improve efficiencies.” They’re not breakthrough opportunities that utilize IT to enable business strategies. Again, short-term needs displace innovation.

Like time, money is tight. IT departments must invest in infrastructure to position themselves for the future. For the few really important, large infrastructure investments, CIOs may acquire funding, but often only after a significant investment of their personal time and “credibility chips” to sell these critical projects. For smaller infrastructure investments, however, IT may turn to clients for funding. But clients would rather pay for projects that deliver near-term business results than spend their money positioning the IT organization for the future.

Furthermore, we all know that when budgets are tight, training is the first thing to go. I call it “eating your seed corn.” For lack of up-to-date skills, many IT organizations are forced to depend on external consultants and contractors to bring in needed new skills and technologies, while staff careers languish and the organization drifts slowly toward obsolescence.

Clearly, it’s not a lack of interest from IT that impedes innovation projects. Time and money are the two constraints on innovation for most IT organizations. The answer to the problem of executing innovation can be found in the ways that an IT organization defines innovation and then funds it using its resource governance processes.

Three Types of Innovation

Innovation takes three distinct forms, and the funding channels differ for each. Distinguishing these three types of innovation is the first step toward designing resource governance processes that ensure a sustainable—and innovative—IT organization.

On the operations side of the IT organization, the word “innovation” connotes infrastructure enhancements. These range from simple additions to capacity to entirely new technologies and services.

Second, for all IT staff, innovation means the opportunity to learn new skills and explore new technologies—”keeping your saw sharp,” as the saying goes.

The third type of innovation is not a matter of new technologies, but rather involves discovering inventive uses of technology to leverage clients’ businesses. These strategic opportunities take an investment of time to discover and a willingness to take risks to implement.

Funding Infrastructure Innovation

Infrastructure enhancements, the first form of innovation, can be divided into two categories: ongoing replacements of aging equipment and minor capacity expansions; and major investments in new technologies and services. Both require time and money. Where are resources to come from?

One large company funded data center capacity by building the price of a new server into each application proposal. In their eyes, this accomplished two things. It incorporated a portion of the life-cycle costs of ownership into the ROI analysis of the project (albeit only a portion). And it induced clients to defend funding for IT infrastructure.

When I visited them, I saw nearly 300 servers running, with a single application on each and all severely underutilized. A study revealed huge savings attainable through server consolidation. But the clients said, “That’s my server. I paid for it. Don’t touch it!”

Clients had a right to feel that way. It’s inappropriate for IT to expect clients to fund its infrastructure. Imagine if you signed up for an Internet service and the provider sent you a bill that demanded $25 for the monthly service fee plus $2,000 for a new server!

How do businesses fund capital investments in the real world? The business owner goes to the bank with a business plan based on market demand, and borrows the money to investment in his or her infrastructure, whether it’s a manufacturing plant or a new server in an IT outsourcing firm. The loan is paid back, the equivalent of depreciation (and, in the real world, with interest). These mortgage payments (not the initial capital) are built into the cost of the service the business provides.

IT departments also need a bank. I call it “venture funding.” Capital investments for infrastructure should not be decided by clients, and certainly not on an application-by-application basis. Instead, IT should present a proposal for funding based on an enterprise capacity plan. Depreciation costs (the equivalent of mortgage payments) are then built into the cost of the services IT provides, which in turn are part of the life-cycle ROI equation for applications.

Major investments in new technologies and services are no different from extensions to capacity. Venture proposals for new services should be judged at the enterprise level, based on the needs of the enterprise as a whole (not a single business unit’s requirements). Costs include both capital and start-up expenses (including losses incurred during ramp-up so that the first client to use a new service isn’t saddled with its full cost). Depreciation of the total is amortized into the cost of the relevant services.

Even in IT organizations that recover their costs from clients through allocationsor chargebacks, venture funding should be provided directly to IT (through a direct budget).

Paying for New Skills

To stay relevant, IT staff must continually learn new skills and technologies, and must continually update its own tools and methods. An IT organization that doesn’t invest in its staff’s careers and its capabilities faces a steady decline in performance and ultimately obsolescence.

Keeping up to date requires funding for training (to cover both the staff’s time and the costs of travel, conferences, seminars and other learning experiences). You also need to invest time and money for staff to experiment with new products that might be relevant to clients and to acquire new tools that might improve internal effectiveness.

Unlike infrastructure, learning does not require capital that will be depreciated. It’s an ongoing process that’s generally treated as period expense.

But like infrastructure, funding for training and technology research is not a decision clients should make. Their response is predictable; they’d always rather have more short-term deliverables than invest in the IT organization’s future. Furthermore, they’re not qualified to judge how much IT should invest in learning to remain competitive; it’s not their business expertise.

The costs of learning should be decided within IT (subject to approval by its chain of command). These costs should then be incorporated into its rates for services delivered, just as is done by any consulting company or technology vendor.

Once this is done, a resource governance process that disciplines clients to limit their demands to what they can afford (as has been discussed extensively in prior columns) will insure that the time and money set aside for learning is not diverted into client deliverables.

Investing in the Inventive Use of IT

The third type of innovation is new uses of technology to leverage clients’ businesses, ideally with a direct impact on their strategies, effectiveness and competitive position. Such projects generally are more risky than conventional ones such as installing ERP. And they certainly require resources.

The problem is that, in many IT organizations, the budget is completely absorbed by “keeping the lights on” or else by those ERP or other projects to replace administrative systems. There’s little or none left for innovative projects. Where’s the funding to come from?

On the surface, the answer is simple: clients. Inventive uses of IT directly benefit specific business units. It’s up to those business units to acquire the funding, either by resetting priorities within available budgets (portfolio management) or by justifying incremental funding for IT.

But there is a portion of the business-innovation process that IT, not clients, should fund: the discovery of these strategic opportunities, including the early steps of requirements planning. This work is the functional equivalent of “sales” in a vendor company and should be paid for, as sales is paid for, by incorporating the costs into overhead. No company charges its customers directly for sales-force time.

IT account representatives should be trained in methods of discovery that translate clients’ business strategies into breakthrough opportunities for IT. They should spend time with clients at the most senior levels—attending meetings, managing the relationship, understanding business strategies and exploring opportunities where technology can have an impact. Account representatives should spearhead IT strategic alignment.

Follow the Money

There’s a popular saying in business: “Follow the money and you’ll understand how an organization really works.” This is certainly true of the processes of innovation.

On the whole, IT staff enjoys learning and wants to stay up to date. They want to be proud of both the infrastructure-based and skill-based services they offer. It’s just that most don’t have the time or money for innovation.

The solution to a funding problem is not to be found in organizational structure. For example, some companies set up a separate “emerging technologies” group to develop innovative projects. But this the wrong answer. Using structure to reserve resources for innovation denies most staff the opportunity to grow, and expects a small “ivory tower” group to do all the thinking and learning for everybody. It’s disempowering to others, and creates a bottleneck for innovation.

The right answer is to use resource governance processes that incorporate the ongoing costs of innovation into the full cost of IT’s products and services, as well as provide direct “venture” funding for capital and any significant investment in the IT organization’s future.

You can read another version of this article on consultant N. Dean Meyer’s website with links to other Beneath the Buzz columns, relevant white papers, books and other resources. Contact him at dean@ndma.com