IT budgets neglected stepchild |
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By Linda Tucci, Senior News Writer
25 Jul 2006 | SearchCIO.com |
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IT budgets are the first to get the ax when company revenue drops and late to rebound when the coffers are full. That's the conclusion of a new study from Gartner Inc., the Stamford, Conn.-based research consultancy.
The study analyzed spending patterns over a period of three years at some 900 companies worldwide in 20 different industries. Even at companies where revenue grew 10%, the increase in IT budgets rarely topped 5%. Case in point: the financial services sector, where IT spending increases were less than half the revenue growth, at 4.2% versus 10%.
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Businesses really haven't learned what to keep in-house that they can optimize and to buy out-of-the-house what is variable.
Jed Rubin
director of consulting, Gartner Inc.
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"I'm standing here in the World Financial Center in New York. For these guys their product is technology, whether they want to admit it or not. So if they're not advancing in their IT spending, they're holding back the core aspect of their product. The same is true for telecommunications," said Howard Rubin, director of consulting at Gartner.
The disconnect has less to do with the importance of IT to a given business than with the crude -- or nonexistent -- cost models most companies use to budget for IT, Rubin said.
Companies need to get a handle on fixed and variable IT costs, in order to calibrate IT investment to revenue. "Businesses really haven't learned what to keep in-house that they can optimize and to buy out-of-the-house what is variable. The trick is to really minimize your fixed costs," he said, making a comparison to cell phone economics.
"You buy the number of minutes you need. Then you pay by the drink when you go above that. And as soon as you see your consumption goes up after a long period of time, you buy more fixed-cost economics. It's figuring out the balance between fixed and variable costs. That's how you buy your cheap minutes -- in bulk, and if you can't roll them over, you're stuck."
According to Rubin, however, companies don't have an IT cost structure that can follow revenue. The problem is that if the revenue doesn't materialize, IT can't back off and reduce expense quickly.
"If you look at technology spending over time, occasionally technology spending accelerates ahead business growth. I think what we found in our study is really almost like a leading indicator of the economic condition. Companies are being cautious. They have not decoded the structure of their IT spending. What happens is that they build up a lot of fixed expense, and when the economy gets rough, they can't shed expense fast enough. They have been caught with a surfeit of stuff."
There are exceptions. Information technology companies, maybe not surprisingly, aligned their IT spending more quickly and closely with their revenue conditions than companies in other sectors. Government agencies also bucked the trend, for another reason: Their IT budgets barely budged even in the face of organizational changes, a characteristic Gartner attributed to the government's longer budget cycles.
The study gives CIOs another reason to keep the conversation going between IT and the business: IT budgets were more closely aligned with business revenue at companies where there appeared to be good communication between the IT department and leaders in the business. But Rubin cautioned that "good communication" is not just a lot of talk.
"What we're seeing now is an unfortunate economic circumstance where companies have not mastered the art of IT finance, they don't have good cost transparency, they haven't been able to build fixed versus variable cost models, like companies have done in manufacturing," Rubin said.
Let us know what you think about the story; email: Linda Tucci, Senior News Writer
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