The Strategy to Bottom Line Value Chain

 

Annual and Capital Budgets

Excerpt from "From Business Strategy to IT Action"

"Businesses feel three pressures when trying to control IT spend while producing bottom-line impact.  First, the overhang of existing IT activities (legacy systems, infrastructure, personnel, etc., which we will call the "lights-on" expense) usually requires annual spending increases.  Second, business is more effective each year in defining new IT investments  ("projects"), increasing the budget requests for future periods.  Finally, business managers continue to put downward pressure on IT costs, forcing hard examination of lights-on expenses and new investments.

From a practical perspective, we see these pressures play out in the annual IT budget cycles.  First, companies develop future lights-on budgets with pro-forma increases, with little examination of the underlying bottom-line impact of the activities and expenses.  Second, new IT investment proposals are developed (often as business wish lists), and combine with the lights-on expenses to complete the overall IT budget proposal.  Finally, business management places spending constraints on the organization, forcing a close examination of all IT expenses. 

In many companies, the lights-on budget (up to 85% of IT expense in some companies) takes on the mantle of an entitlement, with little examination of the value of those continuing expenses.  Consequently controlling IT spending means controlling the costs of new investment, squeezing new projects out rather than reducing existing activities.  In effect, the amount of new IT investment is the difference between overall budget targets and the budgeted lights-on expenses.

We propose that the role of management in this context is to force the examination of all IT expenses, using the yardstick of  bottom-line impact, and creating IT spending patterns and budgets that are affordable for the business, given budget constraints and guidelines, while supporting the new IT activities that the business needs.  To do this management must address two complementary sets of questions:

 Affordability Questions: 

  • What can we afford to spend on IT?

  • Can we reduce unnecessary IT costs?

  • Can we redeploy expenses to support needed projects?

 These questions address management's judgment on where, and how, to spend company resources on its operations, of which IT is but a part.

 Impact Questions: 

  • Are we investing IT resources in the right places?

  • Do our business strategies drive our IT actions and produce bottom-line impact?

  • Are we getting bottom-line impact from our lights-on resources?

  • Are we balancing our strategic and tactical investments?

 These questions address the alignment of what IT spends with the company’s basic strategies and goals.  The question also gets at IT’s performance with respect to doing the “right” projects and the “right” way to allocate IT resources.

We also want to point out a question we are NOT asking:  we are not being distracted by the “IT Value” question.  Considerable energy has been expended throughout the IT industry to answer the “What is the Value of IT?” question.  We do not believe at this stage of business and IT development that this is the right question, because it does not lead to the appropriate management actions.  We are focused on the actions needed to control IT spending and improve IT’s impact on the bottom line.

To ask and answer these questions effectively, we need to engage senior managers in discussing and resolving the basic affordability and Impact questions, in order to take the actions that effectively control the IT spend and improve IT’s bottom-line impact.  Senior managers should be responsible for a number of actions::

  • Establishing spending targets and specific justification criteria for IT spending.  IT spending is like any other business expense, and managers need to set affordable and realistic IT spending targets.

  • Understanding investments.  Senior managers should understand where and why money is being spent for new projects and on-going IT.

  • Understanding the business impact   Senior managers should know  the connection between IT investments and accomplishing what is important to the business (reflected in the company’s strategic intentions.)

 By considering affordability and Impact, the management team can most efficiently focus their own activities and drive the actions of the IT management group."

Excerpt from "From Business Strategy to IT Action"