In earlier posts, we considered the first two of three principles of aligning IT with business strategy:
Principle I: Strategy execution cannot be accomplished without information technology
and
Principle II: The demand for technology in the enterprise always exceeds the capacity of the enterprise to deliver
Today, we build on these ideas to form Principle III.
How the enterprise allocates its scarce resources for information technology affects both its technology costs, and its effectiveness in using the technology. Certainly not all technology investment opportunities are equally meritorious. But enterprises employ a wide variety of processes and disciplines to choose the technologies that are worthy of investment. From the standpoint of each individual requester, the proposed investment is certainly meritorious. But in the aggregate, these meritorious requests would break the bank (this is Principle II). So by necessity not all requests will be satisfied. The dissatisfaction experienced by the requestor who is denied if he easily transferred from the circumstances of the request to the entire information technology organization. “They just don’t understand what I need to do my job.”
IT leadership, of course, would prefer to satisfy as many requests as possible, especially those from ranking executives and others with power within the enterprise. So the information technology organization aggregates these requests, and presents them to enterprise financial management for resource allocation. Most often, this is done within the context of the annual IT budget.
Perhaps one of the most closely examined aspects of IT management is change in the annual enterprise spending. Industry periodicals teem with surveys, interviews, and other prognostications of spending trends. What seems to be consistent in the enterprises I’ve worked with, as well as reports and industry periodicals, is that over the long run IT spending has increased faster than the other reasonable measures of the size of the enterprise. The effect of this increase within most enterprises is a concern among senior executives, especially financial executives. They are acutely aware of IT spending, which along with personnel costs are the two largest spending categories in most service-related businesses, and find the increase worrisome. After all, they reason, isn’t the role of technology to reduce costs? Thus begins a tension between financial management and IT about the fundamental question of what’s the right amount of spending. The results of the worry is top line constraint of overall IT spending. In the absence of a satisfactory understanding of the merits of increased IT spending, financial management seek to limit the increase according to broad criteria, such as simply keeping pace with revenue, or such ratios as IT spending as a share of revenue, IT spending as a share of expense, or industry average IT spending.
These are not intrinsically unreasonable approaches, but they have been carried to extremes. One multinational firm I worked with a few years ago had publically stated its intent to grow revenue by an aggressive 10% year-over-year while at the same time insisting on a 10% annual cut in net IT spending. The arbitrary target for cutting IT appeared to be arrived at in haste and without consideration for its implications. Over time, IT spending in this organization actually increased, but at a rate slower than the growth of the business. But the pressure on spending caused considerable anxiety, misdirected efforts, and broad adverse implications in the enterprise. Key objectives in the business strategy were delayed or otherwise compromised because of the constraint on IT spending. Unfortunately, this is not an isolated case. Most organizations’ senior financial executives exert downward pressure on IT spending. This leads to our third principle.
Principle III: Impairing technology spending ultimately impairs the ability of the enterprise to execute strategy and create value
Well, duh. It seems so obvious, but time and time again I have seen organizations where good ideas and strategic intent are thwarted because of constraints on overall technology spending. Somewhere between the blank check and the starvation diet lies an optimal level of IT spending that balances the need for prudent investment with the long-term value creation that technology spending can enable. But the ways in which organizations arrive at their actual level of IT spending is remarkably unsophisticated, and rarely even close to optimal.
The consequences for getting this wrong are significant. As seen with our example of the video rental business, and similarly in nearly any service industry, technology-driven change in value creation processes and value propositions themselves leaves little time for firms in competitive industries to dither with technology decisions.
Take a moment to consider your enterprise. A few simple questions, answered honestly and candidly, will highlight the need for change in the relationship between IT and the rest of the enterprise.
- Is spending on information technology viewed by most decision makers as an unrecoverable expense, or as an investment in the future of the enterprise?
- How would you describe the nature of the relationship between IT and business unit leadership? Does the relationship resemble that between a customer and a supplier? A consumer and a utility? Or a durable partnership, in which honest and painful insights are routinely shared in both directions?
- When the enterprise undertakes strategic change, is the IT organization and its capabilities seen as an enabler of strategic change, or as an inhibitor; something whose limitations must be overcome in order to be successful?
- When the CIO communicates with members of the IT organization, is the topic typically about saving money and improving quality, or more effectively aligning the actions of the IT organization with business strategy?
Please share your thoughts in the comments section below.
There is a better way. In future posts, we’ll elaborate the idea of the Strategy-Focused IT Organization, in which IT spending decisions are viewed in a more progessive way, and investment decsions are made in the context of business strategy, not constrained by an IT budget.
(note: This is part of a series of posts on the topic of the Strategy-Focused IT Organization. Its subject is the third of three principles of aligning IT with business strategy that were outlined in an article in CIO Insight Magazine in 2003, and later elaborated in an article in Harvard Business School Press’ Balanced Scorecard Report in 2004.)