Trimming the IT budget is too often a poorly planned, knee-jerk reaction for companies tightening the belt. Here’s how to please everyone
Posted on Having IT Your Way: October 6, 2008 11:58 AM
A recent Wall Street Journal blog post mentioned that because of the current credit crunch, IT budgets are being slashed.
For many CFOs, it's like taking candy from a baby.
IT spending is particularly vulnerable to the cold calculus of a CFO because it's difficult to prove that IT investments provide business value and that ongoing, "keep the lights on", costs are well managed.
CIOs can whine about money being taken away, but CFOs are deaf to anything but cold, hard facts.
Organizations are well served if IT funding cuts are based on reducing workloads that, in turn, will reduce costs. IT costs can be reduced by weeding out weak investments and ratcheting back expenses to reflect lower business volumes and decisions to eliminate services or reduce service levels.
Unfortunately, many CIOs can't lead a discussion that will result in smart reductions, and, as a result, the vast majority of hurried, in-the-moment, IT cuts are ham-handed, knee-jerk affairs that negatively impact business capabilities and operations. Good investments are overlooked and services are underfunded resulting in degradation of systems performance that impacts business productivity in subtle ways, where the cause and effect is difficult to trace and manage.
Furthermore, fact-free cost reductions—where money is cut but workload is not—are temporary at best. Calls need to be answered, transactions need to be processed, broken systems need to be repaired, changing regulations need to be addressed, and new business capabilities need to be accommodated.
Grown-up CIOs have the ability to lead their organizations through a fact-based discussion of IT investments and costs. Here's your script for leading a no-nonsense discussion with the powers that be to make smart, not knee-jerk, IT budget cuts (the numbers are arbitrary; yours may vary):
First here's our list in-process and planned projects:
Note that 35% of our IT spend is allocated to projects
5% is focused on meeting regulatory requirements
10% is being spent supporting our key strategic initiative, for example, merging our traditional and online channels
The remaining projects have been ranked by payback
We must continue to invest to maintain regulatory compliance and to support the strategic initiatives that we decide to continue pursuing. For the balance, I recommend that we cut or kill projects where payback is more than 12 months away.
Second, here's our list of "lights on" costs (those costs necessary to keep our systems up and operational) by business unit, service, service level, and cost/unit:
We allocate 65% of our IT spend to in direct support of keeping our businesses operational
We can reduce this spending in two ways. One, cut funds to match reductions in business volume. And two, get business partners to accept lower service levels, requiring less spending.
Our consistent, year-over-year efforts to drive productivity, renegotiate contracts, and leverage outside vendors have resulted in best in class performance in the following areas which can't and shouldn't be cut...
Remaining reductions are possible if we are willing to...
A note to CFOs about the inevitable IT cuts that are coming: Sometimes, when babies whine, something is really wrong. Resist the temptation to take money away from IT without digging deeper as to the relative quality of the investments and a rough guess as what drives IT costs and is controllable in the short term.