Mark McDonald

In the U.S., the debate is over national healthcare.  A central issues is the balance between cost and availability.  It’s a balancing act that business executives and the CIO engage in every year when they determine the IT budget.

In the national healthcare debate the issue is about having a fixed budget in order to care for the nation’s health.  Other nations have such a system and have to manage; some would say ration health services using supply side mechanisms that exchange cost for time.

I am not taking sides in the national healthcare debate, but there are similarities between that system and the fixed supply/infinite demand system used to ration IT.

Using the idea of supply and demand to manage resources is not inherently wrong.  However, we are using it the wrong way.  A supply and demand model exists to determine a market-clearing price and quantity, not allocate a fixed resource at a fixed price.  The result is that enterprises are rationing IT in a way that does them harm.  Consider the following observations:

• Fixing the supply of IT requires the enterprise to ration its use of information technology – which is one of the most highly leveraged resources and known to drive productivity gains.

• IT leaders are encouraged to accept work that fully allocates their current staff. They do this by sticking with the things they know rather than the new things the business needs. Why, because the name of the game is covering their people in a fixed budget.

• IT leaders are less likely to invest in new skills and technology as that would take resources away from meeting demand, or they see no immediate need since their people are fully assigned.

• IT leaders operate under the illusion that business demand for technology is infinite. They see the prioritization process as ensuring that only the highest business demands make it into the plan.

• Business executives know this game and propose projects that fit within existing IT capabilities. They have two demand curves – a false one based on what IT will accept and a true one based on their needs.

• Business leaders get their true demand curve satisfied via external resources, or getting capability in the market from software as a service.

• IT professionals believe that IT demand is infinite when they know it is not. Too often IT productivity improvements are clawed back by the CFO rather than used to deliver more business value. This proves the supply and demand model is a shame.

The supply and demand model for IT is effective in low change, high cost containment situations where little is gained investing in new solutions or new ideas.

Rationing IT resources using this model may also make sense when IT is in recovery – rebuilding its skills and capabilities – but only for a short time until IT capability is back on its feet.

If your are going to use a supply and demand model then use it right – to set a price and quantity for IT services and therefore the budget against actual demand rather than having IT ration itself into a fixed space box.

Why?  Because rationing IT hurts everyone.  It hurts the business, as they do not get the technology capabilities needed to win.  It hurts IT by creating a disincentive to build new skills and solutions.  It hurts financial performance as effective enterprises have greater ROA, ROI and ROIC than there less effective peers.

Finally, rationing IT is increasingly unnecessary as substitutes for internal IT solutions and infrastructure come into the marketplace.

Soon the notion that technology services are fixed will go away and with it the need for rationing.

If only it were that way with healthcare.

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Category: 2010 budgets CFO CIO Leadership Strategy     Tags: Business Leadership, IT and Business, IT budgets, IT Leadership, Strategy and Planning

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