How to Manage IT Budget Effectively

IT is facing pressure to prove that they are the most effective route.  

It states that in the typical enterprise, 70% of their IT budget is being spent on “keep the lights on” activities, leaving only 30% available for innovation. Generally, these numbers do not get any pushback. With the accelerated digital speed, IT faces the pressure to transform from a cost center to a value creator, corporate IT has no choice but to embrace transformational change or literally face extinction. From the budgeting perspective, what’s the ideal ratio to both “keep the lights on” and drive innovation and business growth?

All IT spending must be rationalized against the business benefits. This discussion and these arguments are not new. IT is always striving to improve its value to the business. Some of the "long poles in the tent" tend to be labor; depreciation and (new) capital spending. It isn't just the IT spending ratio as a percentage of budget numbers (70/30, 85/15), but the question of what is real - tangible - measurable business value? And who is measuring/driving the perceived value? When all departments truly collaborate with IT to improve the vision - realized of using IT as a competitive weapon versus just another utility, everybody wins. Top companies leverage technology. Dinosaur companies maintain legacy apps and spend the majority of the budget "keeping the lights on.”

IT is facing pressure to prove that they are the most effective route. More and more of the budget is being allocated to the departmental heads and that they are being given (demanding) the option to spend this money at their own discretion (either with corporate IT or elsewhere). This is putting pressure on IT to prove that they are the most effective route. The 'threat' that business units will procure SAAS solutions based on slick sales patter without involving IT. Organizations then inadvertently increase the overall cost of IT, creating silos of data, disjointed strategies, and integration nightmares. The best solution is to have IT represented on the Board, and Directors that understand the value of a strategic partnership with IT, and a CIO that can 'talk business' not just technology.

 IT needs to stay in the mix: IT needs to find ways to move up the stack and provide business value (innovation) and not spend their cycles "keeping the lights on" as just a cost center. For example, just keep the lights on to contribute 25 percent of the profit sounds better than just keep the lights on as an act of pure overhead cost. Part of the problem is most internal IT organizations still don't do a good job at financial management. Consequently, no one knows if those legacy systems are still contributing to the top and bottom line or not and by how much. That means no one knows if they are worth investing in to modernize them. The cost/benefits analysis started collecting dust as soon as the initiation phase ended. There may not even be a good cost model in place, let alone a cost allocation model.

With customer demand for mobility, organizations are being forced to invest in newer technologies and that is evident in reduction (reallocation) of KTLO (Keep The Light On) budget to other initiatives. More and more C-levels get to understand the need for a rearranged budget, the business leaders of large and small companies no longer look at IT as a loss leader or necessary evil, but as a revenue center.

Posted in: IT Finance