Budget battle: Increasing IT's business value

CIOs who report only IT's "burn rate" and not the "earn rate" are just asking for their budgets to be cut. Gartner advises CIOs to frame the discussion in a new way: Yield.

ORLANDO, Fla. -- Come budget time, CIOs can have their cake and eat it, too, if they start thinking about financial accountability in a new way. Rather than talk about IT budgets in terms of expenditures, research consultancy Gartner Inc. advises CIOs to focus on the benefits IT delivers to the business.

"If all you do is report your burn rate and not your earn rate, you are looking for more cost cuts," said Gartner analyst Mark McDonald, a featured speaker at the Stamford, Conn.-based firm's Symposium/ITxpo conference last week.

If you can raise test efficiency 100%, throughput increases by 400%.
Mark McDonald
analystGartner Inc.
The IT budget is by nature a strange animal, because information technology works in the business and for the business, McDonald said, citing the familiar statistic: As much as 80% of IT expenditure is devoted to keeping the business up and running.

But if 100% of your department's contributions to the company is based on only 20% of your activities, the business is recognizing very little of the value that IT generates. Rather than talking about costs, Gartner advises that you think about your financial accountability in terms of "yield" -- the value created divided by the resources applied. In other words, what is the business benefit realized for the resources applied to IT?

The equation can be modified in two ways: either by increasing the business value, that is, the numerator, or by holding the numerator constant and decreasing the denominator, or expenditures.

Denominator management

McDonald offered strategies -- other than Draconian cuts -- for lowering the bottom number. The first task is to know where your budget stands in relation to peers. IT spending is typically calculated and measured as a percentage of revenue. If your department is not in the ballpark for your industry, identify the areas where your expenditures differ from the norm, and analyze why those expenditures are higher. If your higher expenditure is being driven by your company's particular business needs or goals, make sure you link those higher costs to the business imperatives. Other places to look for costs cuts include:

  • Start-and-stop projects -- the kind that revs up for a few months, then peter out -- waste money. If you don't have a project management office (PMO) now, establish one, McDonald said. PMOs can reduce false-start projects by more than 50%, according to Gartner research.
  • You can reduce costs by more than 80% the first year by implementing Software as a Service.
  • Check software licensing for billing errors and group discounts.
  • Consider server and storage virtualization.
  • Look at Voice over Internet Protocol.
  • Aim for a standard operating environment (SOE).
  • Explore offshoring as a long-term cost-cutting strategy.

Raising the numerator

Raising the numerator -- or enhancing the value delivered by IT -- will mean increasing IT throughput, McDonald said. Asked to name the biggest bottleneck for IT throughput, the audience rattled off a list of culprits: application development, the CIO, business requirements, funding, consumption. Not so, McDonald said.

"The biggest inhibition to throughput is testing," specifically getting out of testing, McDonald said, offering another tantalizing Gartner statistic: "If you can raise test efficiency 100%, throughput increases by 400%."

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The single most effective way to improve test time is not to stop testing (you'll pay through the nose on maintenance), to do a better job of documenting the testing process, or even to find better testing tools. To unclog the bottleneck, McDonald said, circling back to the theme of the hour, CIOs should change the terms of the discussion.

So instead of asking 'How do you like the system?,' you simply ask, 'Does it meet your needs?' If you ask users how they like the system, requests "will come flooding in at the back end. Ban the question," McDonald said. According to Gartner, companies that asked, yes or no -- 'Does the system help you?' -- completed four times more projects. Their project size also got smaller, because they were not asking for fixes.

A project that adds business value either solves a business problem or creates an opportunity. IT's job is to provide the means or vehicle for enhancing value. "You are the manufacturers of potential energy, and IT unleashes that kinetic energy," McDonald said.

So, for example, if on a new sales system, the CIO can show that the new system allows salespeople to complete a sale in half the time, then the question of why the company is not meeting its sales goals goes from the CIO to the head of sales.

"So now, instead of tweaking the new sales system, you can increase the number of dollars to spend on new development -- that 20% we're judged on," McDonald said.

Jolanta Zwirek, CIO of Coca-Cola Bottling Company Consolidated in Charlotte, N.C., said she is going through budgets right now. For the past few years, IT budgets at the bottling company have increased, but "we are looking at a tough year," said Zwirek, who gave the talk high marks. "It was excellent. The yield concept positions IT spend as a value to the business." She added that it is not easy to convey that value to the business. "IT takes a lot of focus and effort and putting metrics in language the business can understand."

Let us know what you think about the story; email: Linda Tucci, Senior News Writer

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