Making IT Budgets Strategic
I believe we’d agree the business landscape has changed. The evolution of border-less interactions, secure, remote workers and client driven security and compliance puts immense pressure on the executive staff to identify and execute against their goals. The achievement of those business goals relate proportionately to the executive’s understanding of their organization’s current technology capabilities, business strategy and the overall competitive landscape.
Often times this becomes a three-legged stool. If the organization’s strategy is to grow (organically or through acquisition), there must be a very high understanding of how they define their competitive landscape. Once that has been identified, the executives map their business model (strategy, infrastructure, execution) to delivering against that stated goal. Interestingly, most organizations overlook the relationship between the technology they use internally to secure their organization and its’ responsibility to supporting those future objectives.
The ability of the CIO to deliver technology against the businesses’ objectives has never been higher due to the emergence of cloud and next-gen technologies, IoT and edge devices, business insights and technical analytics. Through these technologies, CIO’s are able to collect data, both technical and competitive, thus providing the organization with multiple internal and external, actionable scenarios. One scenario might be: an agile infrastructure provides a reallocation of costs from a CapEx to an OpEx model thereby potentially freeing up additional funds to invest in growth strategies. The CIO maps the internal investment (CapEx to OpEx strategy and execution) to the external investment (newly available funds allocated to acquiring additional, outside resources) to achieve the objective. In order to achieve this symbiotic relationship between IT and Business strategies, a redefining of traditional IT budgets is required.
IT budgets have been the bane of most organizations. They are generally viewed as only a cost center and therefore one of the first items to be pressured during the budgeting cycle. Year-over-year flat, support-based IT budgets aren’t satisfactory in times of evolution. Since traditional budgets have focused almost exclusively on maintenance, refresh, support of the current infrastructure along with FTE’s to deliver, there isn’t much room for the delivery of value towards achieving business goals or business unit strategies. The national average for IT budget spend as a percentage of revenue is between 3-4% (Deloitte, IDC, Gartner research), and yet most organizations will admit IT is underfunded as an internal organization. What if the funding categories of an IT budget were defined to better align with the organization’s business strategies?
From an IT perspective, there are three distinct activities that occur within an organization: support of the current infrastructure, design and implementation of solutions that support incremental business changes and delivering on business innovation. If IT budgets evolved to include a percent allocation of the above items against the overall budget, then the CIO has effectively addressed how to optimize current operations, deliver insights to business units and prepare for the execution of business strategies.
An example of this could be: Organization Revenue: $25 M, IT Budget: 3.5% ($875k). Through annual strategic business planning sessions, the short- and long-term goals of the organization are identified, and the CIO determines the allocation of the IT budget to be:
- 57%: Support of Current Infrastructure ($498,750)
- 26%: Incremental Business Change ($227,500)
- 17%: Business Innovation ($148,750)
In this example, the CIO is presenting to the executive staff an understanding of the goals and how the investments will support the objectives. The internal “support” investment ensures the organization is utilizing the tools and infrastructure to secure it’s current and future operations. “Incremental Business Change and Business Innovations” investments attempt to clearly align tactical enhancements to the organization (departmental and company-wide) to achieve those strategy-based goals. Too many times the lack of foresight and planning leads to an inability to define an IT Budget as strategic but is extremely important given the change and speed of the market.
Hopefully, clarity has been brought to defining the business value of the CIO as they are driving the convergence of Business and IT strategies / objectives. This powerful, business aware CIO is now helping to delineate the “what the organization wants to achieve”, and “how those investments” will drive the execution. When an organization appreciates the value of documenting a 3-5 year plan, their IT budgets become strategic and a huge competitive advantage.