How Much IT Spending is Enough?

How much money should be spent on IT by an organization can be the subject of heated debate. Since IT is highly integrated with so many activities there always seems to be requests for more capital and operational spending. New projects, software and hardware upgrades, new infrastructure, and M&A activity all drive IT spending. Most IT investments require not just initial investments but ongoing support and upgrades throughout their lifecycles.

With this in mind, how do companies decide where the IT spending cutoff line is? Like so many things in life and business the answer is “it’s complicated”. In all cases the decision should be based on economic, market, and industry realities, not the squeakiest wheels.

Many companies use benchmarking against industry averages as their primary spending gauge. This should be less of factor than the following:

-          Business Strategy

-          Return on Investment

-          Industry and economic trends

-          Status of your IT infrastructure

The primary factor that determines IT spending levels should be business/organizational strategies and goals. Whether or not IT is viewed as a tool for competitive advantage or just a cost center, this has to be the number one criteria when deciding on spending levels. In many cases companies lose sight of this, which results in less than optimal spending decisions.

Over the long run return on investment should flow from the strategy noted above. ROI should be one of the key criteria used by the business in setting strategy. Rarely should the analysis of return on investment be confined to the IT investment itself. Rather IT should be part of business process design. One major exception to this rule is when analyzing the cost of infrastructure that supports applications already in place. In this case the business benefit should have already been established, but reduced infrastructure costs can drive bottom line benefits and ROI.

Benchmarking IT spending against your competitors and industry is worth doing but be careful not to over emphasize this backward looking approach. Most industries and organizations (for profit, not-for-profit, and government) are undergoing radical changes. Your competitors might be making major changes to their plans. Changes you wouldn’t know about until the next set of benchmarking figures are available, which might be too late. Cutting to the bone based solely on what the other guy is doing should be approached with caution.

Well managed IT organizations try to spend at a steady, predictable level each year. These firms realize that continual infrastructure upgrades are vital to mitigating downtime risks and managing long-term costs. Organizations that do not use this approach often encounter unexpected spending bubbles when they push old equipment way past a reasonable life span.

The decision about how much IT is enough is not easy and should be less about a comparison and more about spending the right amounts on the right things.

IT Orientation and Business Strategy

A company or organization that effectively leverages IT regardless of strategic focus would be considered by most to be “good at IT”. Leveraging strategy via IT means targeting technology investments to enhance specific strategic objectives. For example, if a company’s strategy is to differentiate itself from competitors by creating unique value, then its IT investments need to focus on helping the firm make high quality products and while providing great customer service. If its strategy is to provide products and services at the lowest cost then its IT investments should focus on the ability to provide low costs, and not as much on industry leading customer service. This simply means that good IT investments should be driven by business strategy. We all know this but too often forget it when surrounded by the trees in the forest.

One aspect of developing an IT strategy driven by business is a firms overall technology orientation. At one end of the adoption curve is the cutting edge approach where organizations adopt newly introduced or home grown technologies to gain an advantage over their competition by innovative differentiation. At the other end of the technology adoption curve are those organizations with a conservative, following edge, approach where IT is a less important factor in meeting business objectives. Many companies are somewhere in the middle by focusing more on cutting edge and innovation in supporting their core competencies while offloading more common needs to cloud providers. Understanding and defining your firms’ orientation is a very important step in establishing your IT strategy, yet many organizations have not done a good job mapping their IT orientation to their business strategy. Some steps that could help your company or organization do a better job with this include:

• Gaining a better understanding of what your current state of technology is
• Dialog with business process owners and decision makers to get a better understanding of exactly what their strategies are
• Educating yourself on how your organization operates
• Educating non-IT strategists about how IT can be leveraged, or should not be leveraged, to meet their strategic objectives

Because of preexisting perceptions about IT and friction between IT and business strategists, these sorts of tasks can be much easier by bringing in some external expertise and facilitation. Keep this in mind before throwing your hands up in frustration when dealing with these types of difficult problems.       

Is Your IT Group Reporting to the Wrong Person?

In many middle-market companies, the IT function reports to finance.  This, we believe, is the result of the long-term evolution of IT within the organization – IT began its life, primarily, as the provider of the financial systems used to keep “score” within the company – and the “scorekeeper” was finance, so it was only natural the IT function reported in to finance.  Additionally, many organizations considered IT an overhead cost (and a substantial one) and who better than finance to manage a large overhead item?

But, just because this is traditional and familiar, does it make sense?  And, is it the best structure for the long term health and relevance of your organization?

We think not – let’s see if we can explain.

First, we need to take a quick look at the roles of three key executives within the organization: CEO, COO and CFO.  Here’s what we see as their primary functions:

CEO – the CEO is the “external” face of the company.  They set strategy, deal with key external influencers (key clients, investors, market influencers, etc.) and, many times, become synonymous with the identity of the organization in the market place.

COO – the COO is the “internal” face of the company.  They understand the CEOs’ strategy and formulate an internal execution plan to deliver on the strategy across ALL functional organizations, expect for finance.  They understand intimately how the business operates and what it requires to succeed.

CFO – the CFO is the “scorekeeper”.  They keep track of the results of the CEOs strategy and the COOs tactical execution and deliver a “scorecard” (IE: Financial Statements) to indicate success or failure; as well as monitor the business for early warning signs of stress.

Much like the three-legged stool, each one of these roles is essential to the health of a company and if you remove one, the company tips over!

Now, take a look at what’s happening with IT in most, if not all, organizations – it is undergoing a fundamental change.  No CXO will deny IT is valuable to their company; however, most will also tell you IT is not leveraged to the fullest extent it could be to assist in reaching the strategic business goals.  Most don’t know what to do to make this happen, and feel they are missing a key strategic opportunity!

So, what can you do to make IT more strategic, more relevant and a “partner” to the CEO, COO and CFO in delivering on the defined business outcomes?

SHORT ANSWER – change the reporting!  Have IT report to the COO! 

LONGER ANSWER – in order for IT to become more valuable internally, it must become a “partner” to the entire business. A quick Google search provides us this definition of partner:

A person who takes part in an undertaking with another or others, esp. in a business or company with shared risks and profits.  

Key to making IT a partner is developing their understanding of strategic goals, how the business operates, how the business is challenged, how the “score” is kept, etc.  Once they have this understanding, they will begin to become more integrated and, therefore, more of a partner. 

How do you do this?

Here’s our suggestion – effective immediately, have IT report to your COO!  The COO holds the key to many of the elements IT needs to understand to be successful and also has strong connections and relationships to (if not oversight) the various lines of business with the company.  The COO is the perfect sponsor for the development of IT as a partner.

Your thoughts?

Embrace the Business Case

It is always very important to minimize costly mistakes and maximize return on capital investments. In today’s economic climate this is more vital than ever. I contend that building thoughtful, solid business cases for all major capital investments, including IT investments, is a critical best practice. Yes it requires knowledge you might not have, yes it takes time, but avoiding it can lead to a great deal of pain down the road. Embracing it could expand your career horizons.

As an IT professional how good are you at building business cases for project approval?  You are probably very good at defining requirements and selecting the right solutions from a technology perspective, but how about the financial and business side of project justifications? Do you leave this up to the finance/accounting folks? If so do they truly understand the business value of your proposals?

Are your projects competing against other proposals for funding? Do you use business cases as a way to track and measure project success?

Does the business frequently make decisions that impact IT without up-front input from IT?  Do they consider all of the IT impacts and costs associated with business initiatives as a part of their business cases? (The term “business” in this context refers to those things that are outside of IT. It applies to government and not-for-profit organizations as well.)

As the IT project expert you know a great deal about a particular investment in IT and are likely in a good position to determine its business value, or lack thereof. If you were able to understand and articulate the business value of projects, or weed out bad ideas, do you think this would help your career? Would it help your strategic and operational planning if you could use this knowledge to prioritize projects?

There are some key items to think about when starting down the path to building better business cases:

• Always start with understanding what is important to your organization and more importantly, the decision makers. What challenges are they facing? What opportunities are they pursuing? How are they compensated? What metrics do they care about? Understanding this will lay the foundation for all of your proposals and business cases.

• If you don’t have working knowledge of basic finance and accounting (note I said “basic”), you should read some books and attend a seminar or two. Don’t worry, the concepts you need to master for this purpose do not require higher math skills. Addition, subtraction, multiplication, and division will do. Even if you have some past knowledge from college classes or seminars you probably need a refresher if you have not applied the knowledge recently.

• Apply your knowledge to projects as soon as possible. Vet your analyses with finance/accounting. This is the best way to learn and retain knowledge. The first few times you go to finance/accounting with a business case that includes a cost-benefit analysis they will probably look at it with some skepticism and have a lot of questions.  Don’t worry this will help you hone your number crunching skills. Once you understand what works you will gain a lot of credibility.

• Keep learning, growing, and applying your knowledge.  You will probably find that this will expand your vision of what you can accomplish!

I would love to hear about your experiences and ideas on this topic.