Mere Cost Cutting May Not Be Answer

CIOs must keep assets in sync with prevailing direction of companies.

The CIO who breaks out the budget hatchet in a tough economy may be hurting—not helping—the companys business. And, if there was ever a time when draconian technology budget cuts became the norm, it was last year.

"2001 was the first time weve seen IT budgets going into steep decline, and there were many knee-jerk reactions," said Howard Rubin, an analyst at Meta Group Inc., a consultancy in Stamford, Conn. "Some CIOs cut right into the muscle of the organization, decimating key value-producing areas."

This years new reality is that, downturn or no, maintaining a healthy IT budget means more than keeping costs down. Just as stocks, bonds and cash make up a sound portfolio, CIOs must learn to manage capital like a financial planner, balancing value, risk and costs to closely align the department with the companys direction.

"This approach creates credibility with business leaders and gives them confidence that the IT organization understands their issues," said E.P. Rogers, vice president and CIO of The MONY Group Inc., in New York. "We spend less time trying to prove our value and more time delivering meaningful results."

Todays forward-thinking corporate leadership acknowledges that IT organizations must help drive business direction; they cant simply follow along. "Smart companies dont slice what is value-producing to the organization," Rubin said.

To maximize IT capital, an attitude make-over is in order.

A good place to start is the approach to assets. Many companies continue to regard tech properties as expenses. In reality, experts say, they are investments. In a recent Meta Group study of Global 2000 organizations, 80 percent of respondents said they spend more than half their IT budgets on the business, with only a fraction of the budget going toward cultivating new opportunities.

Enter the new IT world order. "There are three fundamental portfolio categories that CIOs should structure their budgets around," Rubin said. "Running the business, growing the business and transforming the business."

While the running-the-business portion comprises core, nondiscretionary costs such as operations and infrastructure, growing the business should be separated and itemized as an equally important entity. For example, IT enhancements should support basic business change and evolution, whether theyre benchmarking against competitors or evaluating service vendors.

Similarly, business-transforming investments—whether theyre a step into new technologies, approaches or models—are just as critical because they lay the groundwork for entry into emerging markets.

Those in the trenches agree with the CIO-as-fund-manager approach. "Systematically managing the IT portfolio of assets and projects should become a way of life for IT execs," said Joseph Castellano, CIO of Verizon Communications Inc., in New York. "The key is to continually assess a portfolios priorities, which helps gain the visibility to make tough business decisions."

MONYs Rogers said, "We aim to spend our IT dollars in ways that make the biggest strategic impact. In fact, this approach helps with recruiting and retention; as employees understand what is important, they feel a sense of making a difference that otherwise they might not have."

While each companys needs are different, a generally well-balanced IT budget dedicates 30 percent of assets to running ongoing applications and operations, with the remaining 70 percent aimed at growing and transforming the business, experts say. Just as important, reviewing those investments early and often should become a part of everyday life in the corner office.

CIOs who have learned to view their budgets more holistically are already beginning to see the savings and benefits. "Over the past five to six years, weve moved from spending 90 percent of our application development dollars on maintenance to spending 30 percent to 35 percent on maintenance," Rogers said. "This has freed up significant resources and money to implement IT projects that help us restructure the way we do business."

At a minimum, IT leaders should undertake quarterly reviews, just like the rhythm of the quarterly financial reporting processes. "Companies are missing out if theyre not using the same tempos in the IT department that are being used in the financial model," Rubin said. "Its shortsighted to focus only on current price. Future yield, risks and benefits timing must all be part of the mix."

This doesnt mean the diligent CIO should reshuffle the game plan every three months. It simply means that a quarterly review should be used as a checkpoint to ensure the IT department is still aligned with the companys prevailing direction, Rubin said.

Then there are triggering events that necessitate more frequent budget examinations. These events include economic shifts or the departure of a visionary IT manager whose project may not be relevant to company goals. Regardless of economic climate, the savvy, post-boom CIO manages the departments investment yield from the vantage point of risk vs. return.

Free-lance writer Cheryl Balian can be reached at [email protected]