The economic downturn forced deep cuts in IT budgets. Now, as CIO’s plan
for the recovery, they are facing unprecedented demand for IT services
from the business. At the same time, organisations are still keeping
spending tightly under control.
As CIOs prepare for next year’s budget cycle, it is unrealistic to
assume that they can simply return to the pre-downturn ways of working
and spending. In this article, we show how an ROI-based IT strategy can
help assure a successful outcome through the budgeting process and avoid
common pitfalls.
The economic downturn forced organsations to make deep cuts in
budgets across the board. IT spend was a favorite target for cuts in
particular. In addition to slashing budgets, leaders also had to make
difficult choices with personnel cuts but despite funding pressure, IT
was still expected to provide technology solutions to help improve
productivity and bridge the gap.
IT organisations face unprecedented challenges. On the one hand,
there is a large backlog of important projects that need to be done,
such as version upgrades in enterprise software, end-of-life hardware
refresh, etc. At the same time, evolving business needs require the
development and implementation of new solutions, such as mobile
platforms for communications and collaboration. As business starts to
grow again, technology is also expected to help bridge the productivity
gap caused by the reduction in headcount. Yet, spending freezes haven’t
disappeared and now IT organisations lack the capacity to run multiple
large initiatives concurrently. And, finally, there is a limit to the
amount of technology change that any organization can absorb in a short
amount of time.
CIO’s need to evaluate alternative approaches that allow IT to
deliver value without a dramatic escalation in costs and spending. And
they need a pragmatic way to prioritise spending on critical areas.
Typically, budget processes comprise of multiple rounds of
negotiations with the final allocated amount often being significantly
less than the original "ask". These cuts are usually across the board,
rather than based on decisions to not implement specific programs, i.e.
across the board cuts of X%, rather than a decision to not upgrade
desktops. As a result, often the decision for which specific projects to
not implement is made based on cost and gut-feel, rather than on a
quantitative determination of the value they provide. CIO’s need a
method based on quantitative data to make such prioritisation decisions
to maximise the value delivered by the limited IT budget.
By developing an ROI-based IT strategy, a CIO can assure a
successful outcome through the budgeting process by showing a
prioritised and sequenced set of projects and justifying their value to
the business. Since the project set is prioritised and sequenced, it is
simpler to identify the specific projects which cannot be completed in
any given year and to show the rationale for this choice to relevant
stakeholders.
So, what exactly is an ROI-based IT strategy? In our opinion, this has the following three characteristics:
- It is based on business needs and is results-focused, rather than solution-focused
- it is built upon a comprehensive view of the desired future-state of
the business and is aligned to strategic goals and priorities and
- it incorporates quantitative measures of costs and benefits to help the business prioritise areas of highest value.
It is quite easy for IT to be inundated with requests for new
functionality and systems. Often, business users see new functionality
and think, “That looks useful, why don’t we have it?” (Whatever “it” may
be). By focusing on business need, rather than on solutions, it is
possible to find pragmatic, cost effective solutions that fulfill the
business need, without getting caught up in technology fads or chasing
“the new, new thing”.
Involving a diverse set of stakeholders from across the business
allows you to build a comprehensive view of the desired future state,
cutting across functional boundaries. Another advantage of this approach
is that it allows IT to become a facilitator of dialogue between the
various functional groups. In many large organisations, IT can add
significant value just by performing this role. It is also important at
this stage, to ensure complete alignment between the vision for the
future state, the set of projects to achieve it and the organisation’s
strategic priorities.
And finally, it is critical to incorporate quantitative measures
of effort, costs and benefits in this strategy development and planning
process. For small and medium projects, an indicative business case may
prove sufficient as the goal is primarily to prove that there is
business value in implementing, and to get an approximate idea of cost.
For large projects, however, it is advisable to build a robust business
case and identifying tangible and quantifiable benefits.
The set of projects to be implemented will inevitably be subject
to some change and possible cuts, through the budget process. If the
effort, costs and benefits for each project are understood, it is easier
to prioritise the project set and identify the right candidates for
delayed implementation. The affected stakeholders will also have a
better appreciation of the rationale for not implementing their project
quickly if the rationale is explained in terms of quantitative business
value.
Since an ROI-based IT strategy is built by collaborating with a
cross-functional team of stakeholders, a CIO can ensure that the
resulting set of projects would address the requirements of all relevant
stakeholders. By quantifying the costs and benefits and using that
information to prioritise the project set, a CIO can ensure that the
projects which deliver the highest benefit to the business are delivered
first. And, finally, by aligning the project set to the strategic
priorities of the business, a CIO can ensure that the limited resources
and budget of IT are being spent in meeting the business’s most pressing
needs.
Nilesh Chandra is an experienced technology consultant and an
expert in helping clients define strategy and implement their large
enterprise programs. Nilesh brings a wide range of strategy, technology
and project management experience to his engagements at PA Consulting Group.
Nilesh is passionate about helping clients get value from their
technology investments and his deep understanding of large enterprise
systems in areas of supply chain, finance and HR enable him to
successfully deliver results for clients. Nilesh can be reached at
by email here.
Ross Smith joined PA Consulting Group after working overseas
in the UK, Eastern Europe and New Zealand for over 14 years in the
utilities (gas, electric & water) and telecommunications sectors. He
is a member of PA's Management Group and he is based in Denver, CO,
where he leads PA’s Denver-based IT consulting team. Ross can be reached here.
Craig Rintoul has been delivering assignments on behalf of
PA’s clients for over 15 years, in Europe and in the US, and across the
energy utilities (electric, oil & gas), telecommunications and
healthcare sectors. Craig is based out of Boston, MA where Craig can be
reached here.
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