It’s that misleading IT ratio, again

An article from the Financial Times serves to highlight yet again the damaging flaws in the often-repeated ratio of IT maintenance to new IT investment.

The article, Does IT work?: IT-related productivity gains in decline is founded substantially on a report from PwC entitled “Why isn’t IT spending creating more value?”.  The conclusion of that report may well be right, but the FT article unfortunately repeats the age-old, and flawed assertion, that:

“IT innovation is the chief casualty of [a] preoccupation with system maintenance” 

It then justifies this assertion as follows. “In 2007, only 13 per cent of the average IT budget supported innovation in business processes or products. The remaining 87 per cent disappeared into the black hole of general maintenance and upkeep.”

This conclusion, its justification and the ratio at the heart of it, perpetuate a number of myths which make it harder for CIOs and their executive colleagues to make meaningful, value-driven decisions.  Here are two of these myths:

The first myth is that IT spending has to be the result of a zero-sum process.  The ratio suggests that total IT spending is a fixed constraint beyond the company’s control: an IT dollar spent on maintenance has to mean an IT dollar less spent on innovation. But executives can choose to spend more, or less, on IT to support business innovation if they want to, thereby changing the ratio.  Similarly, they can change their appetite for risk by spending less, or more, on IT maintenance.  Innovation is not the casualty of “a preoccupation with system maintenance”, except when executives believe that IT spending is a zero-sum process.

The second big myth is that this IT-related ratio means anything useful in isolation of the equivalent ratio for business spending as a whole.  Instead, what may be much more valuable is to know the split in total company spending, between business innovation and the “black hole of general [business] maintenance and upkeep”.  If that seems about right, then do the IT-only figures tell us anything of value?  Conversely, if the split in total company spending seems wrong, then the split in IT spending will probably be the least of our worries.

Any CIO tempted to use this ratio is making life harder for themselves and their executive colleagues.  By going along with the impression that total IT spending is a zero-sum situation, she will encourage executives to set priorities within this assumed limit.  Instead, she should be working to eliminate this artificial constraint from the company’s decision-making processes and help people focus on prioritizing the total business costs instead.