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Thursday, June 24, 2004

The coming IT fiscal squeeze Via Optimizemag

CEOs, other senior business executives, and corporate CIOs are insisting that financial discipline return to the enterprise management of IT. That's causing a fundamental shift in the basic premise of directing and managing business technology, creating a division between the haves and have-nots, with clearly defined vertical-industry leaders emerging. Those leaders--companies demonstrating staggeringly efficient funding and use of technology--are prompting almost every company in their markets to make difficult choices about how they budget for and finance their business-technology needs. The relative efficiency of their IT expenditure is forcing many businesses to rethink their IT strategies. Simply increasing funding for every IT opportunity that seems to have a proven ROI isn't guaranteeing a company's chances of being a winner in its category.striking findings from the interviews:Most companies are looking for a 15% to 20% reduction in their overall IT spend as a percentage of revenue; these executives say they can drive the base cost of existing IT down by 10% to 15% per year.Many of the executives feel that IT deployment is limited by business users' ability to participate in the process and absorb new capabilities. Therefore, they believe they should be limiting new initiatives to a level that will create no more than 8% to 13% new IT spend annually. Information-intensive companies tend to be at the higher end of the range.Most CIOs expect their overall IT spending to be flat or down on a year-to-year basis. If companies can cut existing IT base cost by 10% to 15% per year and also deliver new business-absorbing IT initiatives amounting to 8% to 13% of new IT spend, then the result can be a cut in overall spend by 1% to 5% per year. As revenue increases over the planning period, they should reduce IT as a percentage of revenue by the desired 15% to 20% overall.There will still be leeway at these companies for funding critical, business-driven technology initiatives.Clearly, companies in severe catch-up or aggressive breakaway mode would follow a different multiyear IT financial pattern.The respondents all agree that IT spending as a percentage of revenue is a controversial metric. However, they feel more comfortable when they understand their budget or spending boundaries. Also, such a metric provides the CIOs with a rational mandate for not spending on any and all projects they think may pass an ROI test. As one CIO said, "It's OK to be prudent once again." Redirecting IT to an affordable-IT set of premises may be essential to move ahead constructively.

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