Why CEOs Should Stop Limiting IT Budgets

CEOs should stop limiting IT budgetsAs CEOs put IT budgets under pressure year after year, CIOs and their teams focus on balancing money spent on running the business (RTB) versus money spent on growing the business (GTB). By decreasing the percentage of their budget spent on maintenance and ongoing operations (RTB), they aim to have a greater share of their budget to spend on projects that grow the business. In the best IT organizations, the ratio can sometimes approach 50:50 — however, a more typical ratio is 70% RTB and 30% GTB.

Unfortunately, such practices suggest an incremental budget cycle — one that looks at the prior year’s spend to determine the next year’s budget. While this may be appropriate for the RTB portion of the IT budget, it is far from ideal for the GTB portion. Incremental budgeting for GTB results in enormous tradeoffs being made as part of the IT governance process, with steering committees making decisions on which projects can be funded based upon the IT and business strategy. Anyone from outside of IT who has worked through IT governance committees understands just how challenging that process can be. And the ultimate result of such tradeoffs is that sometimes valuable projects go unfunded or shadow-IT projects spring up to avoid the process altogether.

How CEOs Can Get More Value From IT

The best way CEOs can get the most value from IT and avoid limiting the potential upside from new technology investments is to remove the cap on new IT investments altogether. That’s not to suggest CEOs should give CIOs a blank check. Instead, CEOs should hold departmental executives and lines of business accountable to fund technology initiatives, paying for preferred projects out of their own P&Ls, with each project backed by a solid business case.

Instead of CIOs parsing out limited IT funds against scarce IT resources, IT’s role becomes that of business partner — helping leaders figure out how to get their projects completed, sometimes with IT resources and sometimes using outside vendors.

This process puts a natural cap on IT investments (since projects that drain the P&L need substantial payback down the road).

Unfortunately, there are still challenges with this process such as:

  • Funding enterprise-wide, multiyear projects.
  • Preventing silos of automation where shared solutions would be more economical overall.
  • Funding core infrastructure and architecture projects.

Of course, there are several solutions to these challenges, and overall, this type GTB budget will yield more business-driven projects with a greater upside for the business.

Some CIOs go a step further and charge all IT costs back to other business departments or divisions. “Unfortunately, many IT organizations are incapable of providing the level of information required to do this,” suggests Craig Symons, an expert on IT financial transparency. For example, CIOs must translate the RTB budget and allocate by service, business process, LOB, capability, etc. This implies demonstrating best practices in asset management, applications portfolio management, service portfolio management, and financial management. “The result is transparency and information that business leaders and governance committees can use to make rational business decisions about their IT investments, both RTB and GTB.”

How about you? Does your IT budget get divided this way? How does it work for you? What are the pitfalls you’ve seen and how does your group avoid them?

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Comments

I agree with this completely!

I agree with this completely! My company puts a lot of value on IT consulting and development, and if we didn't we would not be as successful as we are today. I suggest hiring outside consultants to get what you need and don't skimp on budgeting for IT.

I agree with this completely!

Thanks Elizabeth - what portion of your IT budget for GTB is spent on outside services?