Heightened demand for IT services. Stagnant budgets. Economic uncertainty. What's a CIO to do? Delivering IT projects that enable business growth, as well as linking business and IT strategies, remain CIOs' top priorities. But these days, with IT touching every part of the business, addressing those priorities means the CIO is involved in every aspect of the enterprise. "The CIO job is twice as big as it was 10 years ago," says Stephen Minton, VP of Worldwide IT Markets and Strategies at market watcher IDC.
"It reaches from the customer front end to the corporate back end, then beyond the corporate network to mobile devices. Plus, there's the additional workload of cost management, security and risk management." For the past five years, IT budget growth in the United States has been stuck at an average of 6 percent a year, or about half the rate experienced during the 1990s,Minton adds. So it's perhaps no surprise that in Smart Enterprise magazine's recent "New Breed of CIO" survey, nearly nine out of 10 CIOs call budgeting a challenging proposition. More specifically, 55 percent of the nearly 220 U.S. executives surveyed say they find budgeting "very challenging," while 33 percent find it "somewhat challenging."
When it comes to budgeting, many leading industry analysts and consultants say, CIOs need a contingency plan. This includes a well-thought-out budgetary planning and decision-making process. For example, to support the unpredictable results of these processes, CIOs need a flexible spending environment, one in which resources can be shifted with relative speed and ease as market conditions change. Also, to make the best use of their planning and budgeting processes, the CIO must be credible. This means the CIO has the ear of the CEO, other top business executives and the board, and that these officers respect the CIO as a business peer.
In fact, experts say, smart CIOs have a backup plan at the ready, so they can begin implementing within an hour of the CEO or board's order to, say, start cutting costs and launch a new marketing initiative. "The big thing that CIOs are being asked to do now is work on contingency plans; rather than one budget, they have two or three budgets, with different areas that can be cut," observes Minton at IDC.
"Anyone who is worth his salt has two or three plans," adds Hank Marquis, Director of IT Service Management at analyst and consulting firm Enterprise Management Associates in Boulder, Colo. "The boss may tell you today that you don't have to worry about making cuts, but then will ask everyone else to make cuts. After they say that they can't make all of them, the boss will come back to you."
Further, when devising a budget backup plan, CIOs need to focus on business results rather than simply playing internal politics. "What's important is not making the VP of sales happy, but making the sales numbers," Marquis says. "In times like these, you really need to think about resource allocation. Especially what I call the four Ps: people, processes, products and providers."
More specifically, Marquis advises, CIOs should switch from a political allocation of resources to one that is empirical. With political allocations, the proverbial squeaky wheel gets the grease, and resources are unlikely to be allocated appropriately or in the best interests of the enterprise. By contrast, with an empirical approach, resources are allocated only to where they are needed. "It all gets back to resource allocation," Marquis says. "Unless you know who is consuming how much of what, how much it costs and what the business value is, you can't make an informed decision."
Budgeting Maturity
Another expert on IT budgeting is calling for greater maturity of business processes and governance. "As discretionary funds dry up, while demands continue to outweigh supply, you need maturity within the portfolio management process to make decisions and investments that will generate the greatest value for the business," says David Hebert, Senior Business Advisor and IT Practice Leader at The Hackett Group, a strategic advisory firm in Atlanta, Ga. "Governance around the decision-making process must also be mature."
With demands coming from everywhere in the business, Hebert adds, CIOs need a fact-driven budgeting process. Achieving this level of budget maturity can take a CIO three to seven years, Hebert estimates. That's the price a CIO has to pay to join the management team that divides up the organization's resources. "A CIO must be in that discussion," he says. "You must earn your right to be there, and then to stay there."
Still, many experts shy away from prescribing exactly how an organization should achieve the necessary process maturity. Instead, they say that CIOs should pick and choose features from the various maturity frameworks in circulation. "One of the most important things an executive can do is not to get wrapped up in any one kind of framework," Marquis warns. "We all ran hard at Six Sigma [process improvement and defect elimination] and service-oriented architectures, but eventually we have to realize that there is no silver bullet, no one framework that will solve all issues. You need to pick and choose. When everyone is marching in lockstep to a single big framework, that's where we tend to see huge disasters."
There is another side to the equation, experts say: how the money is spent. IT spending needs to be flexible, since the demands of the enterprise flex according to the changing volume and nature of its business. No one has control over that. In fact, only about 20 percent of contracts are written in a flexible fashion, according to NPI Inc., a spend-management consulting firm in Atlanta, Ga. "Many CIOs are saddled with static contracts that lock them into set spending levels, although the contracts may have looked like bargains when they signed up," says Jon Winsett, a Managing Partner at NPI.
Flexibility can be added to seemingly inflexible contracts. Winsett says that of the 80 percent of contracts that seem inflexible at signing, about half can be altered, or at least optimized, for greater flexibility. Ideally, a contract should be shrinkable by as much as 20 percent to 30 percent, he adds. "Some changes can be made overnight, but some are long-term," Winsett adds. "With contracts that have to wait until the end of the term, a consultant can calendar them and work with the vendor leading up to the renewal time, and then have a new pricing model in place."
Surprisingly, when it comes to renegotiating, most vendors don't put up a lot of resistance, Winsett notes. "Most want to be there for a while and do the right thing by the customer, so they are very open to discussing what-ifs and how to save money," he says. "They understand belt-tightening, so you can get changes."
Flex Power
Three factors are particularly important when designing a flexible IT operating model that supports both fixed and variable spending, says Chris Nuttall, a Partner at PA Consulting Group, a management, systems and technology consultancy in New York. First is having a dynamic portfolio of outsourcing relationships and contracts in place. This can help a CIO leverage economies of scale and scope in the market, meaning the CIO can channel large jobs to firms better able to cost-effectively handle them. These contracts typically include a mix of fixed and variable pricing, Nuttall says.
Second is having an internal shared services delivery organization. This way, the enterprise can enjoy economies of scale, without every division in the enterprise requiring its own private IT organization. "This shared services organization is ideally staffed with a combination of permanent and contingent employees so that it can provide an internal benchmark of the economic alternative to outsourcing," Nuttall explains.
Third, and most elusive, is the establishment of a service-management organization (SMO). An SMO is a governance organization that decides how IT strategy is delivered to meet the needs of the business. It also provides the overall direction for service-delivery and service-management functions. Its responsibilities, therefore, go beyond just worrying about costs. "Most CIOs have the outsourcing contracts and the internal service-delivery organization, but not many have cracked governance yet," Nuttall notes. "They understand where the money is being spent, but they are not getting the flexibility and benefits of combining internal and market delivery."
For instance, as salaries in India rise rapidly, IT outsourcing done in India might actually become more expensive than it is in other countries, Nuttall says. Having a well-designed and competent SMO in place could help. CIOs would then have the governance, organization, process and decision-making framework in place, allowing them to make a service-delivery decision quickly and relatively easily.
Making the most of variable expenses can be an initial first step in reducing overall costs, but doing so may cause friction, Nuttall warns. "The IT organization may be given a specific budget to spend in a year, and if they underspend, they won't get as much next year; while if they overspend, IT leaders may forfeit their bonuses," he says.
Manage Expectations
The best practice then is for the CIO to manage the expectations of the company's business managers and finance executives, including the CFO. CIOs will need to explain that if they underspend when revenue or business volumes have fallen, that is a good thing. Similarly, if they will have to overspend to support an expanding business, that should be part of the analysis of the growth opportunity.
One mistake CIOs often make is maximizing variable expenses without having a sound governance organization in place, Nuttall says, adding, "In these cases, costs typically increase, and this is the root cause of many outsourcing failures."
A CIO can't manage expectations, however, if he or she lacks credibility within the organization. Experts agree that one good way to gain credibility, whether in good times or bad, is to save money for the organization.
How much to reduce? The consensus is that at any given time, you can expect to save on the order of 10 percent of overall costs by locating and ripping out unused systems, systems that have lost their usefulness but have not yet been decommissioned, and PCs that have turned into doorstops. No blame should be attached to the fact that the usefulness of a particular system has lapsed. If cost-cutting becomes a blame game, then staff will not be forthcoming about possible cuts. That's important, because effective cost cutting is a team approach, consultants say. An ideal team will include an internal auditor from the finance department, who will not only be impartial, but will also see that the CIO gets proper credit for cost cutting. Another good team member to have is an attorney. They can identify contractual obligations and risk exposure that must be factored into the ongoing cost-benefit analysis, which, in turn, is the foundation of any successful cost-cutting initiative.
While the team also needs to be aware that every decision to cut costs will incur risks for the organization, "CIOs often don't calculate the risks as well as the savings," says Andrew Bartels, VP and Principal Analyst at Forrester Research. "If you put off investing in new servers, figuring that you can manage for six to nine months, you may not be able to meet all your Service Level Agreements. You might run out of capacity, or other systems might come down because there is no excess capacity. You must document both savings and risks.
After all decisions are made, the CIO should sit down with the CFO and lay out the proposed cuts—along with the risks associated with them, says Bartels. That way the CIO is not acting in a vacuum, he explains, and the CFO, after accepting the proposal, can be the one to tell the business partners that the money is no longer there.
Finally, experts agree, you have to rely on your common sense, rather than the evening news, to figure out that a downturn is in progress. The last recession began in the first quarter of 2001, but was not declared until eight months later. Economists have the luxury of looking backward. CIOs, like all business leaders, must look forward.
