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, organizations 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 organizations 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 organizations 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 organizations 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 prioritize 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 prioritization decisions to maximize 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 prioritized and sequenced set of projects and justifying their value to the business. Since the project set is prioritized 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 prioritize 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 organizations, 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 organization’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 prioritize 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 prioritize 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 [email protected]
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 at [email protected]
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 at [email protected]