Valuedance

There are quite a few companies who have tried to cut their way to IT success over the past five years and are starting to regret it. 

The economic crisis and subsequent lackluster recovery has IT spending at significantly lower levels than 2008.  Companies that have delayed investments – in people and technology – are finding that they are now at a competitive disadvantage.  New competitors, without the burden of legacy IT environments bowing their backs, are leveraging low-cost, fast-cycle disruptive technologies. These fast-moving competitors are pushing industry incumbents to build new IT-enabled capabilities or risk falling farther behind.

Is your company falling victim to this save now, pay later strategy?  Consider the following:

1)    Has your company reduced IT spending as a percent of revenue over the past 5 years?

2)    Does your company have the IT capability needed to exploit new technologies and reshape the company’s operating model, creating “smart” products and services, and enhancing its relationship with customers and suppliers?

If you answered “yes” to the first and “no” to the second, you need to engage with your CIO in a conversation about treating IT as an investment that builds rather than destroys IT capability and value.  Contrary to conventional wisdom, if your CIO isn’t asking you for more money, she probably isn’t doing her job.  You see, when it comes to IT, it takes money to make money and it takes money to save money.

The first point is obvious.  IT should be managed as an investment, not as an expense.  The only factors that should gate IT spending are the quality of the investment opportunities and the capacity of the organization to manage IT-enabled change.  Without a doubt, there is a plethora of exciting investment opportunities.  In my research, business and IT executives estimate the expected return from their potential sustaining investments at 30%, and their innovative investments at 80%. 

The real limiting factor is the organizational capacity to manage IT-enabled change and drive adoption, and thereby realize investment returns.  On average, demand for IT outstrips supply by at least two-to-one.   When asked about supply constraints, few technology and business executives mention money.  Rather, they complain that their companies are woefully short on the internal skills necessary to work with external suppliers (that is, the people with project management, business analysis, and solutions architecture skills) and are constrained by the complexity and hard-to-change nature of their current technological foundations (consisting of a myriad of technologies built over time to serve siloed operational needs rather than architectures built to support change and enterprise needs.)

The second point is less apparent but equally important.  A large portion of IT spending (on average 70%) is required to keep your existing technology up and operating safely.  Lights-on costs increase as your company grows, as new security risks are identified and new regulations imposed, as applications are implemented, and as the technological foundations become more complex.  The only way to save money on lights-on costs going forward is to invest money in order to reduce the total number of technologies you support while adopting new technologies that can do more for less (such as server virtualization and performance monitoring, among others).

CIOs that are doing their jobs will spend whatever budget they have and will keep coming back to you for more.  Of course, these “pay-and-gain” CIOs will do so (one hopes and should expect) in a responsible manner, in partnership with you and other executives to ensure that the company is:

1)    Realizing value from IT-enabled business investments;

2)    Driving down “lights-on” costs – and technology complexity – making it easier to introduce new changes, more quickly;

3)    Building the skills necessary to lead IT-enabled change and leverage external suppliers – in and out of IT.

From a financial perspective, conventional wisdom has long held that the competent CIO doesn’t negatively impact general and administrative expense margins and always delivers their share of any requested G&A cuts.  But this conventional wisdom needs to change.  IT isn’t an overhead expense; it’s an organizational asset that needs to be managed as an investment with a steady hand and an eye fixed on enhancing the company’s long term competitive capabilities and options.

Originally published on CFO.com.