New Initiatives Spending Versus Keeping the Lights On

With the economy slowing, IT managers are going to have to make do with less money than they thought come 2008. While this is not new news to many, to counter this trends adverse effects, it is important to look at and track two numbers: new initiatives spending and spending for ongoing support (i.e., keeping the lights on).

In periods of economic growth, businesses focus less on restraining costs and more on making investments to capture new business. But, when things slow down, it’s all about saving money.

“The expectation for IT spending growth for next year has been greatly diminished,” said Frank Scavo, president of Computer Economics. “We’re not saying there’s expectation for budget cuts, but organizations are not giving as much expansion to budgets as they had expected to earlier in 2007.”

The median expectation for budget growth overall is 2.5%. This is the lowest number they’ve seen since 2005. And this is even less at larger firms at just two percent. What this means is in real terms is IT managers need to be ready to defend the efficiency of their ongoing operations against pressure to make cutbacks all the while sustaining investment in high-priority strategic initiatives.

This often means keeping a good handle on just how much it costs (or should cost) the IT group to “keep the lights on” verses new initiatives spending, said Scavo. Tracking the ratio of ongoing IT support costs to new-initiative spending can be critical for maintaining a proper level of investment in IT infrastructure and keeping your job.

“Both of those numbers are important for different reasons,” said Scavo. “Focusing on the piece that’s going towards new initiatives shows how much the organization is investing in capabilities. So, that’s an important number to measure. And measuring the cost of ongoing support allows you make an apples-to-apples comparison, year-over-year for how your IT spending has been most effective in efficiency and productivity of the IT organization.”

At least that is the consensus of IT executives who participated in CE’s new report IT Spending For New Initiatives: Key Measure of Efficiency, Competitiveness.

How it helps you keep your job is pretty straight forward. If the “higher ups” are looking for cost savings in IT and you don’t know where the money is going you are not going to be able to make good decisions about where to find those savings. And that could be bad for your career in the long-run.

Having these numbers handy “would certainly help you in a cutback environment,” said Scavo, “because you have a hard number you can point to and say, ‘This is the number that we need to simply continue doing what we’re doing today … to do the types things you’re doing today and to continue to support the business without a reduction in service levels you need to spend this amount of money’.”

Negotiations can then turn to new initiative you are not going to complete, for example. So, you always start saving money by cutting what hasn’t happened yet as opposed to cutting what you already provide.

The Benchmark for Spending on New Initiatives

Over the last few years, business and governmental organizations of all sizes have been giving priority to spending for new initiatives. The CE survey indicates that new-initiative spending remained strong throughout 2007. Respondents in the survey reported spending, on average, 27% of their IT budgets on new initiatives.

Surprisingly, the survey showed very little difference in average spending on new initiatives as a percentage of total IT budget among small, midsize, and large organizations. In other words, the 27% average ratio appears to be fairly consistent, regardless of organization size.