Mark McDonald

Warning this may be controversial, but here is a contribution to the budget debate.

How low can the IT budget go?  It’s a fair question and one that CFOs are certainly going to be asking as they prepare for 2010 budgeting.  Given that IT spending increases often lag economic activity, the initial scene for 2010 budgeting could easily call for additional cuts, on top of the cuts taken in 2009.

When does IT budget cuts shift from reducing fat, to cutting muscle and breaking bone.  Well there is no single answer to that, but there is a general indicator of when the IT budget has gone too low.  When that happens, the enterprise has to realize that they have gone too far.

So what is the number?

$73 on a base line IT budget of $100 — particularly without making structural change to IT.

That is 73% of your 2006 IT budget or a combination of budget cuts with transaction volume/systems growth.  So if your budget was cut 10% since 2006 and you have had a 20% growth in your responsibilities with NO CHANGE in the way you work, then you are on the borderline.

Why is this number necessary?  Well because many CIOs have absorbed budget cuts in 2009 by ‘working harder’ or ‘doing more with less.’  They are delivering in 2009, nothing is breaking and things are getting done.  So the natural question is, if you did it with 10% less this year, I bet you can do it with 10% less on top of that next year.

At the same time, CIOs report continued growth in their operational footprint — measured by transaction volumes, applications and business processes.

CIOs need to show that; yes they have done a good job this year delivering IT services with less resources.  But without some structural investment and change, simply doing more with less sets the stage for a major IT failure.

It is not a matter of ‘if’ but ‘when and how bad.’

How do we know?  Well we have talked with IT turnaround specialists about the nature of catastrophic IT failures – the kind that get the CIO and senior leadership team dismissed. (full report available to Gartner Executive Program Members – subscription required)

The IT turnaround specialists experience covers more than 40 major IT turnarounds and they report that an IT collapse happens after two to three years of consecutive and significant under investment in IT.

They measure significant as greater than 10% for three years or two years of greater than 15% reduction year over year.

That is to say once the funding level for the next year falls below 73% of the base year, you have set the stage for a major failure.

A major failure is defined as either an infrastructure/operations issue that inhibits business activity (run the business, limits the strategy, makes the company unattractive in M&A), or an investment failure, such as the inability to implement a major system project such as an ERP, Supply Chain, CRM or other system.

The turnaround specialists offered other indicators, for example good people leave IT at an increasing rate, or you need to go off support to make ends meet.  Those are in the report.

The point is that $73 off a base of $100 seems to be an important investment level when things go from “working harder” to “working in vain.”

Why is this number important?

Well first as a warning of future IT failure, it is an indicator of when you have gone too far.

Second, reaching this level is an indicator that the days of IT investment are coming.

What?

Yes coming as the same turnaround specialists say that after the turnaround the IT budget is between 125 and 140% of the original baseline.  That is to say, you can cut the budget to get two years of cumulative savings of $29 dollars only to have to pay out more than $33 dollars in the fourth year not counting the cost of a major IT failure.  See the example below:

So when the IT budget gets cut toward $73 of its 2006 baseline AND there is no structural change in IT, then you know that you have gone too low, smashed bone and are on the road to recover and reinvesting in IT.

Break the cycle!  Stop cutting the budget blindly, invest in structural change to change the cost structure of IT, stop doing more with less because its not sustainable.

Better yet shift the relatively paltry savings of an IT budget cut which often amount to less than one half of one percent of sales (0.005%) from IT spend to changing the enterprises cost structure.

Better to reduce the cost structure of the 95% of your operations by another percent, (0.95% of sales) than just making an administrative cut in IT.  That change would yield a return on investment of 190% (0.95/0.005)