The Bane of Centralized IT Budgeting

In the early 17th century, Boston’s leaders set aside the area known as the Boston Common for the communal grazing of livestock.

Despite a small local population, it wasn’t long before the Common was the grazing choice of last resort. Since no one and everyone owned the Common, the way for an individual to maximize his benefit was to graze his stock until there was no grazing left. If he tried to let the Common rest so there would be more grazing tomorrow, someone else would move in and graze his stock today. The result was overgrazing and the ruin of the Common.

Economists call this situation the “tragedy of the commons” (the Boston Common being only one example). It occurs wherever those who use a resource do not bear its full cost. Resource users tend to use a resource until its marginal cost equals its marginal benefit. When the marginal cost is zero any benefit obviously exceeds the cost.

But it’s not necessary to reduce cost to zero to create a tragedy of the commons. Any public subsidy or other artificial reduction of users’ costs will produce the effect.
The tragedy of the commons occurs regularly from grazing stock in national forests, from natural-resource exploration on public lands, from pollution of communal resources, and from other activities.

It also occurs regularly in information technology.

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The way it occurs most frequently in information technology is through centralized budgeting for IT. Centralized budgeting separates users from costs and IT from benefits. To the business units, IT looks like a free resource. To IT, there is no benefit to justify costs. So the business units ask for all the IT they can get, and IT delivers as little IT as possible. No wonder everybody is frustrated and business and IT can’t work together — centralized budgeting puts them at cross-purposes.

A Global Problem

The burden of centralized budgeting is nearly universal. In my company’s latest survey, Strategic Trends in Information Technology, 87% of respondents use centralized IT budgets for at least some of their IT funding. So most companies have created a schism between IT and the business units by the way they fund IT.

The way central budgeting usually works is: IT is the custodian of the budget and the business units are supplicants for budget dollars. At the end of the year IT will be judged by how well it managed the budget, while the business units will be judged by such things as increased revenue, reduced costs, and greater market share.

Whether the business units were able to get the IT they needed to achieve business goals often gets forgotten after the budget battles at the first of the year. Regardless, business and IT are being measured by different standards. It’s no wonder they end up working to different goals – and feeling like they’re on different teams.

When you get right down to it, centralized budgeting for IT flies in the face of common sense. The business units generate revenue, and their day-to-day responsibilities keep them in touch with changing market conditions. They see the opportunities and they feel the pain of any mistakes.

From time to time they see the need for IT systems to support the business. Now the fun begins with a centralized budget. Our business decision-maker — who made the money in the first place — now has to go to IT as the keeper of the treasury for the money he needs.

Since IT is judged by whether it makes budget, it takes money matters seriously. IT’s usual due diligence is to force the business to convince IT of the need for the proposed system through some formal review process. During the review IT will be constantly looking for ways to trim down, shave off, or otherwise reduce the cost of the proposed system — unless the proposed system offers an opportunity to float some pet IT project using the latest gee-whiz technology. Then all bets are off.