Innovation vs. Maintenance
Should You Rethink Your Budget?
If keep-the-lights-on work takes up too much of your IT budget, maybe the problem is with your budget. So says Bruce Myers, managing director in the IT and applied analytics practice at consulting firm AlixPartners.
"People make the mistake of lumping keep-the-lights-on and grow-the-business projects together in one budget," he says. "Then they look at IT as a percentage of revenue. It has become a commonly used benchmark. What some companies are doing, and we suggest all companies should, is look at the cost of keeping the lights on as a percentage of revenue and manage that number down as much as they can. Improve-the-business projects should be treated like any other capital projects and compete for funds against other non-IT initiatives. If there's a business case, the only limiting factor should be the amount of cash or capital available."
Why is this better? For one thing, you're likely to make better decisions, according to Myers. Right now, some IT projects that should get done are probably being skipped because IT has used up its budget. And some projects that probably should be skipped are being done so IT can use up funds it might otherwise have to forfeit in the next budgeting cycle.
Myers believes too many bad projects go forward with a weak business case. "We spend a lot of time working in IT organizations from a business perspective," he says. "I can't remember one where we haven't cut 50% of their projects because when you really drilled into them, there wasn't a huge risk it was mitigating, or a real quantitative business case where a business unit had asked for the project's specific benefits."
Perhaps paradoxically, removing grow-the-business projects from IT's budget altogether seems to accomplish the goal of lower keep-the-lights-on costs. "And typically these costs are lower than when there's only one IT budget," says Nigel Fenwick, an analyst at Forrester Research.
More important, if new IT initiatives are paid out of business units' budgets, those business units take financial responsibility for those projects. "My goal is never to have to sit in front of the CFO and explain why IT is spending so much money," says Michael Leeper, director of global technology at Columbia Sportswear. "The question should be, 'Why is the business asking IT to spend so much?' We can turn things on and off — but it isn't our money."
- Minda Zetlin
At the time, Analog Devices was about 45 years old, with the legacy infrastructure to prove it. "The first thing we did was calculate what percentage of our investment would be needed to keep the lights on," Forte says. "It was in the low 80s." For a technology company whose success depended on its ability to rapidly bring new products to market in large numbers, that was not acceptable. So IT launched a three-year effort to shift that balance. Today, Forte says, Analog Devices spends 62% of its IT budget on keeping the lights on and 38% on growing the business. That's not 50-50, but it's a meaningful improvement.
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