It’s as though the C-suite can’t get a break when change demands IT investment. The issue of change is self-evident. New technology, new competitors, industry trends, new business models and new markets, demand a rate of investment that is prudently approved in boardrooms on an annual basis.
But to put math to it, Gartner’s Key IT Metrics Data study – a study of over 9,000 public and private companies across 80 countries – estimates that on average, only 14% of IT budgets were dedicated to such obvious investments. Gartner calls this the “Transform” component of IT spend.
The same report shows that 20% of those budget dollars are spent on “Growth” which they define as capacity expansion, software upgrades and dollars spent to accommodate organic growth in users. In addition to this 20%, [i]two thirds of IT budgets were spent on the “Run” component of businesses in 2011. Not surprisingly this is the non-discretionary expense required to operate businesses, meet regulatory requirements and generally continuing operations.
In total, about 86% of IT budgets support the status quo versus 14% transformation, differentiation and building value beyond the current state of affairs for shareholders.
In my former life as an IT outsourcing GM, my value proposition was typically to reduce the cost of the Run and Grow elements. As this strategy proliferated in the 1990’s and 2000’s, the dollars reallocated to transformation have increased for the most active and aggressive companies. My former constituents – Telecoms, Utilities and Media – have reached 16% to 17% in transformation spending, mostly by reducing their run components to between 55% to 62%. Whether leading or following the trend, these entities have done a reasonably good job of evolving in highly competitive industries. They compete with:
- Rivals, especially with deregulation in the late 1990’s and some blurring of lines among their own businesses, e.g. cable versus telcom.
- The need for capital inside their own companies where transmission systems and networks are the key delivery mechanisms.
- And of course, with the cost of their legacy systems.
But what about the others trapped at or below the average of 14% transformation? These companies must virtualize all or part of their IT asset base.
It’s been said that best in class companies reduce their Run expenses to 55% or less of their budgets. If you are one of the companies who still have not exploited outsourcing as an alternative, I recommend it. Tactical payback is available and can be secured contractually.
But for the longer term, I recommend that you engineer “elasticity” into your environment starting with software design and development, and that you only acquire solutions built on the key principles of elasticity and multi-tenancy.
A few keys for the CXO here:
- The underlying driver to become elastic will not be the CXO’s understanding of “Cloud” technologies. Rather, the inevitable comparison of large capital requests for new projects that fail 24% of the time[ii] versus operating expense requests for pay as you go solutions and infrastructure will fuel this trend.
- A rapid expansion of your Service Oriented Architecture skill set to prepare for both migration to and the incorporation of Cloud-based services is a must.
- Move low visibility applications to Cloud service providers and platforms to develop your knowledge base with the inevitable.
- Another key is application modernization, but I will defer those issues to a later blog.
- Remember that traditional vendors have installed bases as well, and may not always (or quickly) be the answer during the elastic revolution. An example of forward thinking architectural engineering is available at http://catavolt.com/dualmodelwhitepaper.html.
The great thing about ramping up your experience base in the area of elasticity is that it will serve equally well in the “Grow” the business category. Elasticity, while helpful in reducing the costs of “Run” the business assets, is essential in the Grow component.
For growth, the primary key is to avoid making your “Run” problem worse. Obviously an elastic “Run” foundation will accommodate growth more economically. But the definition of “Growth” includes enhancements and upgrades to IT systems. In this category a mild phenomenon is evolving to address the needs for device independent mobile interfaces.
Strategic Spending by Vertical Industry – Run, Grow and Transform the Business (Percentages) Source: Gartner (March 2012)
Enterprise application availability on mobile devices is in high demand. It is estimated that by 2014, 90% of organizations will support corporate applications on personal devices.[iii] The value of this trend is hard to dispute. Having the right data at the right time to make a better decision is powerful.
Not many of us work at our desks all day, yet decades of investment in IT systems are available to us “in the saddle.” Extending existing applications is one of the best examples of how to get more value out of “Run” classified assets, and an inexpensive means to address Growth”. The method is the key differentiator here.
Beware of development kits called Mobile Enterprise Application Platforms (MEAPs) whose purpose is to simply delivery device agnostic versions of applications (old and recent). This approach is double indemnity for CIO’s – development time, risk, and cost to meet Growth requirements, and a compounding effect due to ongoing maintenance in future years (aka, added Run costs).
More elastic products have arrived in the market to address this need.
Additional reading suggested: Why isn’t IT spending creating more value?, PriceWaterhouseCoopers connectedthinking, June 2008.
[i] Gartner’s RGT Definitions
- Run the business: This is an indicator of how much of the IT resource is consumed and focused on the continuing operation of the business. It includes all nondiscretionary expenses as part of the run-the-business cost. Examples include capital expenses for replacement of laptops at the end of their useful life, operating expenses for software maintenance contracts, operating expenses help desk outsourcing, infrastructure utility computing for human resources applications and software maintenance for regulatory software.
- Grow the business: This is an indicator of how much of the IT resource is consumed and focused on developing and enhancing IT systems in support of business growth (typically organic growth). Discretionary investments are more likely to be included in the grow-the-business or transform-the-business cost. Examples include ERP upgrade project capital expenses to expand the capacity to include organic growth in software users, bandwidth capacity expansion project capital expenses to accommodate an organic forecast increase in customers using existing Internet applications, or software license upgrade for engineering software.
- Transform the business: This is an indicator of how much of the IT resource is consumed and focused on implementing technology systems that enable the enterprise to enact new business models. This is very much a venture category, and would be represented by activities such as a brick-and-mortar retailer moving to online shopping, a traditional bank offering online banking (or moving into offering insurance services) or a commercial airline offering new freight services.
[ii] Gartner IT Metrics Data 2012
[iii] Gartner, Mobile Scenario, Local Briefings (April 2012)