Can understanding past IT department spend revolutionise its future? – The problem…

IT budgets are generally agreed on an annual basis, and as the costs associated to them are spent they are allocated into predefined buckets throughout the year.  The allocation buckets are jointly defined based on the needs of the IT and Finance departments.  While these allocation buckets do an excellent job keeping track and categorising the total spend of IT in a way that those two departments can easily manage, they do not provide much transparency into the cost of IT aligned to business activities.

I have heard these budgetary meetings referred to as the CIO’s yearly root canal, I don’t think that reference accurately describes the pain that these budget reviews cause.  I was a corporate CIO for over 10 years and fully empathise with the plight many CIO’s and IT directors face.  As a general rule, with the assistance of the Finance department, IT places itself in a bit of a quagmire, they must support long established and absolute legacy systems, while also providing cutting edge technological solutions to meet new business initiatives.  All solutions must freely converse with each other to be a success.  Business leaders rarely appreciate the resources necessary to maintain the legacy systems in both financial terms and the challenges that brings in delivering new solutions.

As a CIO, I supported the accepted and established budget practice.  I understood that my budget needed to be split into two portions – an operations budget and a projects budget, otherwise known by the Finance department as OPEX and CAPEX.  The ongoing conflict faced was that the operations portion was always growing and competing with the projects portion.

  • OPEX being the portion of the budget reserved for reoccurring running cost of operating established processes like salaries, utilities and license fees.
  • CAPEX being the portion of the budget reserved for one time project related expenses associated to delivering new solutions.

These buckets were broken down further with subcategories that were normally aligned to the separate functions within the IT team.

A common challenge many IT leaders face today is that the solutions must compete with an individual’s technology at home.  Individuals are inaccurately comparing the price of their personal technology needs with the costs and perceived value of maintaining an IT department.  There are a number of reasons for the substantial operating costs in IT that ensure this is not a true comparison, the biggest being:

  1. IT departments must ensure compatibility with the existing environment.
    1. As an example, the HR system must converse with all of the legacy and the new Finance systems in real time.
  2. Businesses have IT assets on their books which can be considered legacy systems.
    1. These older systems substantially influence the total costs of running IT by driving up costs in support and maintenance as well as increasing the project complexities and costs of new solutions that must interact with these legacy systems.
    2. Projects are depreciated and amortised as business assets over a period of time which is determined by the estimated life of the product.  In IT this normally ranges from three to five years.  Due to this, a considerable portion of the IT budget is pre-allocated to depreciation of the existing assets prior to the IT department spends additional funds.
  3. To ensure new solutions work with existing solutions IT departments require funds for research and development.
    1. An individual might be able to justify purchasing the newest smart phone and if it fails will accept the loss and purchase another one.  IT departments cannot risk these new solutions impacting the current environment and legacy systems so they must extensively test new products against the current environment.  These tests aim to ensure the solutions work together seamlessly with little or no adverse impact on other departments.  They take a considerable amount of time and effort depending on the complexity, so IT regularly purchases one off devices to test which may be deemed inappropriate and discarded.
  4. The individual departments within a business are competing for budgets.
    1. As an individual, you have the ability to choose whether you purchase a new computer or clothes based on your immediate needs.  In a business, this must be planned up to a year in advance, so choosing the technology that will dominate in a year, before it goes to market is a bit of a black art, and if tests and designs do not meet the needs of the legacy systems, plans must be adjusted or cancelled entirely. To change the plan mid-year requires a redistribution of the business’ budgets for other departments, or a direct impact on the bottom line.

Business leaders are normally reluctant to provide funds to retire legacy systems when they have not been fully amortised or if there is not a future business benefit in doing so.  CIO’s understand this, so they attempt to assign the necessary costs required to decommission retired systems and simplify complex IT environments through budgeting migration costs into projects designed to replace them.  When these plans cannot be completed, for instance, where there is not a replacement system or the project is postponed due to temporary budget constraints, these systems can often be left to co-exist for years.  CIOs find it very difficult to explain the risks and consequences of keeping these systems running versus justifying the need for added expenses to retire them.  To avoid conflict and achieve the savings targets, the IT department regularly reviews the OPEX budget, searching for potential savings that can be achieved and squeezing vendors.  Business leaders will often not be given an alternative option other than to either increase the budget or accept that a majority of the IT OPEX budget is already committed and that they will have to reduce their CAPEX expectations or compromise on service levels to meet tough financial targets.

In my next post I will review a potential solution to permanently solve this IT financial conundrum.  One that will affect how the running costs of IT are interpreted, and provide the IT department with necessary Board level mandate to deliver the necessary programmes.

These are my thoughts, do you agree?  I, as well as many of the other readers, would be interested in understanding your thoughts on this matter.  Helping you understand and/or improve your IT costs structure to enhance your delivery capabilities and help you achieve the best outcome for your business are some of the things that Willard Enterprises specialise in.  If there is something I can do to help your business or someone you know achieve their next challenge, please contact me for more information.  If you would like to stay up to date with news from Willard Enterprises including new blogs, service changes and availability, please subscribe to the newsletter.

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Posted in General, IT Transformation, IT Transparency

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