CIOs have agonized over closing the value gap between IT spending and delivering tangible business results since the CIO job was first invented. Research unveiled at
Suggestions for closing the value gap
1. Conduct a gap analysis between IT funding priority status and the top business priorities.
2. Withdraw requests for large IT project funding (e.g., modernization). Impose a three-year moratorium on all IT-proposed projects exceeding $1 million and/or requiring more than one year to complete.
3. Provide a statement identifying specific IT infrastructure vulnerabilities expected by 2016 and update it annually.
4. Recommend that future IT projects requested by the business predict where the financial benefits will be measured and audit project results.
5. Propose IT zero-based budgeting to the CEO and CFO. The accountability of project spending should be on the specific requestor and not just a governance committee.
6. Create a full-time application decommission team in 2012. Decommission 10% of applications by year end 2012 and 20% by year end 2014.
7. Forecast information and IT exposures expected by 2016 on each of the top 10 revenue and cost-related business processes. Identify how IT will enhance or threaten the top 10 revenue and cost components on the general ledger.
8. Stop cloud-a-phobia. Choose three applications to migrate to cloud services.
9. Don't hoard IT projects. Once IT project funding allocations have been identified, return unfunded project requests to users and suggest they resubmit next year.
10. Stop placing enterprise IT expenses in the CIO's budget. Place all enterprise IT expenses into a person-less cost center.
Source: "The 2012 Gartner Scenario: The Call for a New CIO Manifesto," Gartner Symposium/ITxpo 2011.
Most IT projects will not directly support the priorities of CEOs, according to Gartner Inc.'s survey of more than 200 CEOs and analysis of 22,000 CIO inquiries in 2011. The time is overdue, said the consultancy, for CIOs to strongly align new IT spending with moneymaking business operations, and spread the IT costs of supporting the business throughout the enterprise.
Part of the problem with the mismatch is with technology itself. IT systems are costly to procure, implement and run. An average 70% of CIO budgets are allocated to maintaining the status quo, while only 30% are dedicated to new projects. Adding to the value gap between IT spending and business priorities is how IT costs are accounted for -- unlike other administrative functions, the CIO generally absorbs the costs associated with the services that IT provides.
During the recession, for example, Stamford, Conn.-based Gartner dealt with thousands of CIOs charged by senior executives to reduce enterprise-wide IT spending."When these same executives were forced to lay off millions of workers, they did not charge their directors of human resources to unilaterally dismiss these millions of people," noted Ken McGee, a Gartner research analyst. The task of identifying people to fire in order to reduce costs fell to the individual managers, not the HR department. In contrast, IT has to find costs to cut not just in its operations but also in IT-enabled business processes and systems across the company.
Navigating the CIO job in a flat budget year
The misalignment between IT funding and business priorities is especially troublesome because CIOs won't have money to burn in 2012. Gartner predicts that IT budgets will remain flat or rise only slightly next year, and will actually decline as a percentage of corporate revenue. Worse, citing recent research from IHS Global Insight Inc., Gartner said that a second recession is looming, if not already here. The firm advised CIOs to take radical action to shift IT spending from the expense side to projects that enable business growth and profits.
How to move the needle to close the value gap? Under the rubric of "creative destruction," Gartner analysts urged CIOs to selectively replace legacy systems that do not support a mobile, socially networked workforce. CIOs should make the pay-as-you-go cloud their "first approach to computing" for any new systems that IT builds, rather than making big technology transformation capital investments. The CIO should take a page from risk managers to develop leading key risk indicators, or KRIs, rather than lagging economic indicators, to monitor and measure IT-enabled business decisions (see "Gartner's suggestions for closing the value gap").
Gartner further recommends that business requests for new IT projects be taken on only if they promise auditable benefits for the enterprise. More than 50% of the CIO's annual project budget should be directed to improving the financial condition of the enterprise by reducing expenses. At least 50% of all enterprise information and IT spending should directly support revenue-generating, rather than expense-related, business processes.
CIOs on proving the value of information technology
Many of the CIOs we caught up with after the opening-day session appeared to already be moving to close the value gap between IT spending and business priorities.
Kevin Barrett, CIO at Elan Corp., a Dublin, Ireland-based biotechnology company, said his IT operations have long focused on projects that support business growth. "We're well past the 'stick in an ERP system' and be done with it,” he said. “We have built molecular modeling systems and computational chemistry systems that play a very meaningful part in the development of drugs. What interests me is how we can reduce the amount of people and time it takes to bring a new drug successfully to market.” He said he hadn’t yet heard anything at the conference that moved the needle in terms of closing the value gap. "A game changer to me is like the ATM was to banking. I can't see it, and that worries me."
A CIO who runs the largest IT department within a global insurance company said Gartner’s advice underscored the need to ensure that IT is coupled tightly with business growth. "What is urgent for me is to make sure that I am really leveraging my partnerships with the business around discussions about bringing business value from the IT side,” said the CIO, whose corporate policy does not allow him to be quoted by name or company. “I do realize that we have the propensity in IT to become an order-taking shop." He said the prediction that traditional IT departments risk becoming obsolete, or their budgets subsumed by other departments was all too familiar.
"I am seeing that a lot today. We're in a similar situation where we are hampered by legacy systems. We are trying to move to new systems. We have a lot of application development that is an expense burden on the company. So our goal is to try to reduce that as quickly as possible, but it is a track that is going to take us the next five to seven years," he said.
More on IT transformation
The call for IT to focus on business value resonated with the CIO of a large pulp and paper company. "It was very confirming. We have been doing that for a number of years in our business cases and measuring the results of our investments. The last two years, the conference has talked a lot about the CIO as a revenue generator, and we feel we are on track on that. We also spread out the CIO costs into the businesses and locations," he said, also requesting anonymity.
He calculates that 50% of his IT projects are aligned with business projects that generate growth. "If you buy into the idea that keeping IT systems healthy and reliable creates value by not having the systems decay, then I would say we are at a much higher percentage."
Let us know what you think about the story; email Linda Tucci, Senior News Writer.
This was first published in October 2011