Value versus cost: governing IT on a reduced budget

The current wave of IT budget cuts can be turned to advantage if companies grasp the opportunity to align IT more successfully...

The current wave of IT budget cuts can be turned to advantage if companies grasp the opportunity to align IT more successfully with business objectives, argues IT governance expert Paul Williams. The key is to seek highest value rather than lowest cost.

The pressure on IT budgets continues to increase, and does not show signs of lightening soon.

Recent surveys find that spending is expected to remain sluggish at least through the middle of 2002, with CIOs throughout industry finding their budgets cut and IT departments suffering significant staff redundancies.

It's all a far cry from the boom days of the 1980s and early 1990s, when investment in IT grew dramatically. Between preparation for Y2K and the early exuberance over e-commerce, it seemed no investment was too great, no business case too spurious.

Perhaps in IT spending, just as in the stock market, the occasional correction is healthy - a good way to shake out the weak performers and end up with a stronger, more focused team. It is certainly true that reduced budgets provide the opportunity, and the necessity, to exercise more prudent governance over IT.

Appropriate governance of IT at the boardroom level will encourages a tight focus on IT budgets and investments - particularly in times like these when all corporate expenditure is under review.

In my experience, historically IT budget discussions too often have been focused on "how can we trim 15% off this budget?" rather than on "how can we ensure that IT delivers the best value for the lowest cost?"

The key question is whether a firm's investment in IT is in harmony with its strategic objectives and is thus building the capabilities necessary to deliver long-term sustainable business value.
Paul Williams

This has encouraged some CIOs to pad out their budget applications to provide some easily disposable items that can be eliminated with little pain to the IT function. This may make both IT management and the board feel that they have made the appropriate sacrifices, but it does little to ensure value has been and will be obtained from the remaining spend.

However, increasingly and encouragingly CEOs and other board members are asking "how can I be sure that I am getting value from my IT investments?". Today's economic climate and the increasingly competitive environment will lead many more companies to ask this question. It is not always easy to find an answer which provides the board with the assurance it should be seeking.

Aligning IT with business strategy

The key question is whether a firm's investment in IT is in harmony with its strategic objectives and is thus building the capabilities necessary to deliver long-term sustainable business value.

This state of harmony is referred to as "alignment". It is complex, multifaceted and rarely completely achieved. It is about continuing to move in the right direction and being better aligned than competitors. It is about IT needs and capabilities being considered as an integral part of the development of corporate strategy.

There is a new TV commercial for IBM which demonstrates graphically how the development of a business strategy is so much waste paper if technology needs and capabilities are not properly understood. If you have not seen this commercial, look out for it.

Cost versus value

IT budgets usually are categorised by expense-type classification - for example, staff costs, technical infrastructure and so on. It can be a useful and revealing exercise to attempt to link IT budgets, and particularly individual project costs, directly with the company's agreed strategic aims and objectives.

Measuring the cost is the easy bit. Determining the value is much more difficult. But unless this is done, company boards will find it very difficult to discharge their governance responsibilities with respect to approving IT budgets and investments and, in particular, determining priorities.

I continue to come across organisations with several hundred IT-related projects in progress at any one time. Often this makes little sense and is a throwback to the "fiefdom" concept that still exists in many large corporate entities.

These organisations often would be best advised to re-examine their project portfolio in terms of value versus cost relative to business priorities. Few such organisations will fail to identify unnecessary, unfocused or no longer relevant projects that could be relatively easily be dropped, shelved or merged thus releasing resources for the more strategic and necessary projects.

Other cost savings

We will look in more detail in future articles at targets for costs savings but in the meantime all companies would be well advised to look at their IT asset management processes to ensure that cost is not being incurred in respect of redundant or retired technical infrastructure or software licenses that are no longer needed.

Although not always the panacea that it is often made out to be, all organisations should at least have considered the merits or otherwise of outsourcing certain IT related activities (eg, helpdesk or training). Use of contractors should also be kept under tight review.

Delivering value from IT

The basic principles of IT value are delivery on time of projects that support, enable or enhance the business, within budget and with the benefits that were promised.

The value that IT adds to the business is a function of the degree to which the IT organisation is aligned with the business and meets the expectations of the business. This requires constant vigilance, not only on the part of IT management, but also very specifically by board members in the discharge of their governance responsibilities

To deliver value, IT must provide infrastructures that enable the enterprise to grow by breaking into new markets, increasing overall revenue, improving customer satisfaction, assuring customer retention and driving competitive strategies.

Boards of directors and executive management must show increasing concern over IT investments because they ultimately affect shareholder value.

Given the current weak outlook for corporate profits and companies' determination to get the most from their existing systems following the spending binge of the 1990s, enterprises must rely on IT governance to provide a maximum return on decreased IT investments.

Paul A Williams, FCA, MBCS, is an independent consultant and immediate past international president of the Information Systems Audit and Control Association (www.isaca.org). He can be contacted by e-mail to paul@paulwilliamsconsulting.co.uk

This was last published in February 2002

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