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Perspective matters when considering IT investment budgets.

by Mark P. McDonald  |  March 16, 2010  |  2 Comments

Pundits use IT portfolio measures to justify observations regarding the health and future of IT.  The average quoted in some quarters is 71% to operations with the remaining 29% allocated to investment.  Pundits claim that a ration of slightly more than 2:1 restricts IT form achieving its full role in the enterprise.  IT needs more money applied to change in order to be taken seriously in the enterprise.

They do not understand why the business does not believe that IT investments should be increased and the increase dedicated to further IT investments.  They talk about this in terms of a lack of business vision and an inability to understand its role to transform the enterprise.

It is all a matter of perspective and knowing that perspective matters.

On the surface the idea has some merit until you consider one thing …

What is the ratio of the average business unit?

It turns out that its close to 97%+ to 3% in many business units according to informal polling of BU leaders and CIOs.  It is not uncommon for the answer to be ‘what investment in change?  That is what we have IT for.”

Let’s put this into perspective.  The figure below shows the relative ratios of investment and operational budgets between IT and the line business.

Slide1

These figures are representative and demonstrate that IT has a significantly higher proportion of their budget dedicated to investment and change than a line organization.  Placed side by side on a percentage basis, it looks like the business should fund more business investment and curtail the IT investment budget.  The figure below concentrates just on the percentages dedicated to investment in the average IT and business unit organization.

Slide2

This view is magnified when IT capital expenditures and operating budgets are compared to other Sales, General and Administrative (SG&A) cost.  In that comparison concentrating the entire enterprise’s IT costs into a single line item – gives the impression that it represents at least 30% of the company’s operating cost.

So what is IT and IT pundits complaining about?  IT is a major part of my operating expense, IT is a major part of my Capital Expenditures, IT has a major part of its budget dedicated to investments.  From this perspective IT should be held to the highest standards of research and investment, as they constitute the majority of company investments.

Simply put, from this business perspective, the IT advocates and cheerleaders have it dead wrong.  It seems like we invest excessively  in IT.

***

Where is the truth? Both sides can claim a deficit of investment funding.
Well consider reality which is the actual dollars a hypothetical company spends on business operations, IT, and investment in each.  Assuming a company with a 20% EBITDA margin and a 3% of IT budget to sales the actual dollars turn out to be 4:1 in favor of busines investment.  See the figure below.

Slide3

Who is right, well everyone and no one.

IT has a significant part of the investment budget, particularly when you consider that IT investment is centrally managed versus business investment that is often dispersed across the entire operations.  IT should be a leader in how to make and get business value out of investments because they do it more often than anyone else in the company.

Business operators also have a significant role as they spend more dollars on business change and improvement.  They would be well advised to see how those investments get leverage across the entire operation rather than addressing point needs in specific operations.  Such point investments often solve short-term problems without generating enterprise wide results.

***

The idea that sets of general rules or guidelines apply to your specific company and situation is questionable at best and often dangerous.

Pundits live by these simplifications so beware their advice.  Even from this author who tries to provide a broader view on the issues.

As you can see perspective matters and no one is served by looking at a complex issue from just one point of view.

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Category: cfo  cio  economy  strategy  technology  

Tags: 2010  2010-planning  cfo  finance  strategy  

Mark McDonald, Ph.D., is a Vice President and Fellow Emeritus in Gartner for General Managers Program.




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