It's budget time again. After a three-year spending freeze, IT directors may find that software upgrades are falling behind and hardware is falling apart. So how can they convince the board that IT's budget is essential to the business? Nick Langley reports
Autumn: a time of falling leaves and, for the past three years, falling budgets. But how much longer can business hold back on IT investment before the cracks start to show? How many software releases can companies afford to miss before catching up starts to cost more than the costs that have been saved? How sympathetic an ear will chief information officers find when they take their budget proposals to the rest of the board? And what is likely to be driving the IT director's budget for 2004?
"Left to themselves, the board would tend to under-invest in back-up," says one IT director. "On the one hand, I will get sacked if all the servers blow up and we cannot recover. But I will not be sacked if the new payroll system is delayed by three months. So to me, back-up has a higher priority than the board might think."
Although there is a growing tendency for IT and the rest of the organisation to sing from the same balance sheet, there are limits to the new d'tente, as our anonymous grumbler shows. "The trouble is, they are always suspicious you are ordering Rolls Royces," he says.
Jonathan Mitchell, chairman of the Corporate IT Forum, Tif, says, "IT investments are being scrutinised more than I have seen in the past. If the proposal says a system is going to reduce inventory by x or product cycles by y, that is being thoroughly analysed before a project is embarked on. IT has to live down its reputation for not delivering the benefits it promises. That obviously induces caution in further investment cycles."
Justin Urquhart Stewart, director at Seven Investment Management, takes a professional interest in companies' IT spending habits and motivations. "After three years of cutting budgets for hardware and software, there comes a stage when the keyboards start falling apart. Companies are going to find it very difficult to delay much longer. We are going to see a pick-up in ordering through the replacement of old kit and updating software."
He says the economy is starting to grow and we should be planning for a reasonable increase in budgets. "That means we can replace kit and software with a bit more confidence. But beware, because there is still a lot of capacity to be taken out, particularly in production. Budgets need to reflect a reasonable level of growth, but we are not yet certain how assured that growth is going to be."
Boards are still extremely wary of committing new money, Urquhart Stewart says, although some have taken the plunge and are putting their faith in a strengthening economy. "We have also seen the stocks of a lot of the technology, manufacturing and software companies rise quite strongly during the summer, in expectation that orders would come through," he says. "Now we will see whether that is going to be true or not. So far we have seen some, such as Deutsche Telecom, putting in quite significant orders, but others are not necessarily doing so."
Urquhart Stewart thinks the climate for new projects is likely to remain harsh. "You are going to need a much stronger business case than a few years ago. The board will be asking questions such as, 'if we put money into this, what else can we use it for if the project does not work?'"
There are positive aspects to the new rigour, as Meta Group vice-president Rakesh Kumar explains. "A cutback on excessive spending was well overdue. IT was spending money without any real financial justification or internal checks and balances. Y2K and the dotcom boom created an atmosphere for more stringent procurement cycles. However, the pendulum has now swung too far the other way."
Kumar points out that technology is different to other forms of investment because the refresh cycle is short, and getting shorter. "If organisations do not invest in the next six to 12 months, they are going to fall so far behind it is going to be very difficult for them to catch up. You cannot begin new application development, integration or infrastructure projects without first making sure what you have is reasonably current. You do not have to be leading-edge, but current enough to be able to move to the next platform."
But to what extent do software suppliers create the upgrade problem by withdrawing support for older software? Should customers be bullied into upgrading when there is no discernible business benefit?
The days when suppliers dictated what their customers bought and when they bought it may be numbered. Instead, Tif members are trying to get into what Mitchell calls sustainable replacement cycles for core systems. "If you look at the software suppliers, upgrade cycles are 18 months to two years. But people are assessing what value that upgrade adds a lot more than they did in the past. Our members' cycles are three to four years for major desktop upgrades. We used to be dragged along by the suppliers. Now we are starting not to go at the pace they want us to."
There is growing resistance to the line "if you do not upgrade, you will not get supported", Mitchell says. "Suppliers will not admit this publicly, but in certain cases where support was going to be discontinued at a set date, our members have been able to negotiate extensions. That aligns upgrade cycles with business cycles."
Businesses are also trying to get more out of the systems they already have by consolidating. Kumar says the priority for Meta clients is to get disparate systems, such as old IMS databases used for pricing or Oracle running SAP applications, working together, leaving new applications to one side.
But if you want your old applications to talk to one another, you may have to invest in new software, middleware or integration skills. Kumar is optimistic. "People are going to be a little bit cautious, but I think they are going to reap a lot more benefit than from the dotcom bubble."
Such optimism ignores other factors that are putting pressure on businesses. "The big driver for my company, and I think for most other companies, is the change in the pension laws," says Colin Mitchell, group director of MIS at Halcrow. "Every company has got to top up their pension fund holdings, and these are big numbers. This requirement will be imposing a constraint for years to come."
So Mitchell's budgets for the next three years are already fixed. There are pluses and minuses. "I can plan ahead sensibly, instead of doing it year by year." he says. "Most of the infrastructure we do in IT takes several years to come to fruition. For example, when we decided to standardise our desktop PCs, it took three years because you only replace PCs every three to four years."
Mitchell's view is that IT directors should treat this as an opportunity. "How I would present it to the board is by making a virtue of necessity. I would say 'I will guarantee to hold my budget and give you more for less'. This in turn will put pressure on suppliers to offer lower prices. So it probably is a good time to buy."
As far as staff are concerned, Mitchell intends to do more with the same people, making them more efficient by using automation to provide support remotely. He thinks staff costs will be self-capping. "The contractor market is not going to pick up. Contractors will be looking for permanent jobs and that will stop any increase in salary demands beyond inflation."
Kumar thinks that instead of leaving people such as Mitchell to make do, financial directors should be prepared to dig a bit deeper. "One of the reasons we got into this mess was that the organisation as a whole, including the finance department, did not take responsibility for its end of the transaction.
"An IT director's financial position should be used to impose stricter financial controls and internal procedures for procurement and investment, but at the same time, the need to reinvest in technology should be accepted. If you do fall behind the curve, it will cost you a hell of a lot more to get back into it. Stabilise and start growing some of those budgets."
But Mitchell thinks there is little chance of growth in budgets. Typically, companies will have worked out ways of spreading their top-up contributions to their pension funds over the next 10 years. "That means 10 years of belt-tightening, unless there is a big upturn in the economy."
Two ways of tackling Microsoft upgrades
Jonathan Mitchell Chairman, Tif
"Some of our members are making the decision that they are not going to upgrade with every version. A lot of large companies are skipping levels, going from Windows 95 to Windows 2000 and then missing XP, or from Windows 98 to XP and missing Windows 2000."
Colin Mitchell MIS director, Halcrow Group
"A Microsoft Enterprise Agreement should be part of a strategy of standardisation. This means you can roll out when you are ready, with costs spread over annual payments budgeted in advance, instead of it all being spent in one big bang."
However, getting on the Microsoft scheme may mean paying the first year's fees as unbudgeted expenditure. Mitchell says this initially causes problems.
"Once you are on the roundabout, it evens out year on year. Microsoft has now added sweeteners such as free training and free home use of software for staff. I think we are entering a period where suppliers will be courting companies."
Selling IT to the board
John Handby, chief executive, CIO Connect
"Specific technology issues should be mentioned as little as possible. I have sat in front of boards before now and covered the technology aspects by simply saying 'there will be some technical issues to handle'.
"Provided you have the credibility, and are confident the issues can indeed be handled, it is not necessary to say more. They are not usually interested and, after all, they pay you to get it right."
Gill Williams, partner, Ernst & Young, UK Information Systems and Security
"There is no such thing as a risk-free IT investment, so acknowledge this before you approach the board. "Help your business understand the degree of risk, probability and risk appetite in the context of the likely benefits.
"Carry out a risk assessment and include your risk register in the business case, ensuring your risks are specific and not generic."
Extracts from "Investing in a cold climate", and "Top 10 tips for developing a successful business case for IT investment", published in the NCC's ITAdviser newsletter ' www.ncc.co.uk/itadviser/index.cfm
What's in your budget?
Colin Mitchell, MIS director, Halcrow Group
"Here is the strategy I am going to be proposing in my budget: more standardisation, more collaboration, more networking, more remote control, but with the same staff. Effectively, I want to offer more service with the same people. "If your company does not have a standardised desktop policy, put one in now. In three years' time, you will be getting the benefit of reduced support and maintenance."
Rakesh Kumar, vice-president, Meta Group
"Integrating business systems with back-end systems. It makes employees far more productive if they can access all the databases they need in one go. Most of our clients say that sales people on the road currently get access to only 60% of the data they need to do their jobs effectively. The rest has to wait until they get back to the office."
Jonathan Mitchell, chairman, Tif
"Instead of implementing ERP systems by factory or by country, there is a tendency to manage and control things such as inventory on a global basis."
Justin Urquhart Stewart, director, Seven Investment Management "The board will be asking questions such as, 'if we put money into this, what else can we use it for if the project does not work?'"