It has never been more important to make the right IT investment decisions, but what are the fundamentals? Global spending on IT is estimated at more than £1m per year, and there is little doubt that much of this spending under-delivers. At the same time, the risks of not spending enough on IT are all too apparent.
In a world where IT has become a critical component of our corporate infrastructure, it can be a key commercial differentiator. So how should we determine where to direct our scarce IT resources?
It is never easy to determine the required level of IT investment. Cost saving opportunities such as moving IT functions offshore and adopting open source software products are well recognised, but so are the associated potential risks.
It is not a question of how much
But first things first, it is important to recognise that spending less is not the same as spending well. Companies cannot differentiate themselves from competitors just by buying IT, but they can use their IT as a source of commercial advantage.
The difference comes from how IT supports the company's offering, service style and processes, and how it is used to partner or make alliances with others.
It is easy to say that shareholder value is important. It is not so easy to make it drive your IT investment decisions. In a typical organisation, value will often come from growing revenue or improving operating margins, but it may also come from other factors, such as building reputation or responding to regulatory constraints. Within each area there are several choices to be made.
For example, your corporate strategy might major on growth and increasing revenue. One approach to achieving this might be to grow market share and sell to new customers. Another might be to serve existing customers better and gain a greater share of their wallet.
The former lends itself to better marketing and customer targeting systems, and the latter to customer relationship management and service support. It may seem obvious, but IT as a department must be clear on the corporate strategy and how IT investment can support it. Any IT project that is not supporting corporate goals probably needs to be less of a priority.
Where your budget should go
Prioritising IT investments is not as easy as you would think. There are many opportunities and constraints to balance and keep in mind. If too great a proportion of the IT budget is needed to "keep the lights on", ongoing development and innovation will be held back, ultimately impacting the company's competitiveness, and this can work both ways.
A proposed spend balance across innovation, growth, productivity and maintenance categories is the ultimate goal. A target investment mix can also help. This process involves assessing what is the right percentage mix of stocks, bonds and short-term reserves based on business objectives, time constraints, risks and financial resources.
Over time, strategic transformation of IT should support a progressive shift towards future innovation and growth.
Step back to see the big picture
It is easy to get bogged down in the detail. One way to take a step back and look at the big picture is to map it out, quite literally.
One technique used to assess investment priority is to plot the value of projects against the assessed level of risk. A diagram can provide a single pictorial view of the potential investment opportunities, where it will be easier to see all the elements that need to be balanced.
The next stage is to understand how many projects can be taken on within given levels of budget or resources before delivery risks become too great. Project dependencies also need to be considered, to ensure roll out of components in a sequence that makes logical sense.
Business benefits are often difficult to express in financial or tangible terms, but metrics play an important role here. However you account for it, the costs of IT transformation projects must be set against the revenue-generating parts of the business, and the owners of these functions need to sign up to the delivery of the benefits.
Never forget the importance of business sponsorship and buy-in to the goals of IT strategic investment. These will be critical both to programme delivery and ongoing benefit realisation.
● Merlin Gardner is a director, and Phillip Everson is a partner in consulting at Deloitte