Let the Budget Battles Begin
Each year, about the time Halloween rolls around, most executives begin fighting it out for their share of next year’s budget. In the current climate of austerity, IT has been running on empty, with neglected infrastructure and overworked resources. With revenue growth demands returning but budgets still being managed at tightly as ever, even more pressure will be applied in 2011 to do-more-with-less.
So will this budget season prove to be scarier than most?
IT as a Cost Center
Tracking year over year growth in IT spending over the past decade, we see that growth trends follow the macro-economy, but with rather shorter periods of negative growth. To no surprise, a substantial decline occurred following the bursting of the technology bubble and recession in 2001, with a second more severe decline into the Great Recession in 2009. The good news is that most analysts are predicting 4-5% growth for 2011. The bad news is that even with this growth, most organizations annual IT budgets will remain below 2007 levels.
As part of this latest downturn, IT has been asked, more than most business groups, to do-more-with-less. Unfortunately, executives often view IT as a cost center where budgets need to be squeezed at all costs. Comparing IT spending versus revenue, we see that since 2004, IT spending as a percentage of revenue has been declining. As revenues increased during the last growth cycle, IT spending lagged revenue growth substantially, declining as a percentage year over year. This was not the case with many other groups like sales and marketing. Because of the hangover from the technology bubble, and lack of value proof points that IT was driving real enterprise value, IT was being pigeon-holed as tactical, and not getting its fair share of the budget as a result.
But is there a strategy that CIOs can use to make the organization understand that certain IT investments should not be cut, and are required in order to provide a foundation of service, while others are essential for productivity, process improvements, competitive advantage? Is there a way for CIOs to turn IT from cost center to strategic asset in order to garner their fair share of the budget?
IT Doesn’t Matter
In his 2004 tome for the IT industry “Does IT Matter”, Harvard Business Journal executive editor and provocateur Nicholas Carr’s claims that Information Technology has become a commodity – a utility that offers little competitive advantage, and as a result, IT spending should be cut to the bone. CEOs and CFOs in the board room, armed with Carr’s book, made life even harder for CIOs still suffering from the bursting of the technology bubble and recession.
But did Mr. Carr have a point, that technology was maturing and becoming a utility, a commodity that does not deliver competitive advantage, and where budgets should be reduced at all costs? Didn’t we see this in the research in year over year declines in IT spending as a percentage of revenue?
If one examines core IT Services infrastructure like servers, storage and basic applications such as e-mail, Mr. Carr’s assertions are completely correct - that indeed most core infrastructure solutions have become commodities, and should be procured as a utility, reducing costs wherever possible. For these solutions we see little pricing power for vendors, higher performance / capabilities at a lower cost year over year, and standardization / consolidation. It is certainly true that Wintel Desktops and IP networks have standardized and rapidly evolved into widespread use – clearly resembling a commodity. As well, personal productivity applications such as word processing, e-mail and messaging are fast approaching commodities, with many organizations moving or considering software-as-a-service solutions – purchasing them as a utility from the cloud versus an installed asset. It seems that more and more of IT is indeed moving towards utility computing and fulfilling Carr’s assertions that IT Doesn’t Matter.
So Carr is right then, that IT is a commodity and we should cut investments. That the investment in IT does not drive competitive advantage and bottom-line impact, right?
Not yet, and maybe not ever for certain portions of the most innovative applications and services. We see that even though components of the foundational IT Services infrastructure have moved toward commoditization, there are higher-order elements of IT that are not commodities in how they are priced, implemented, integrated and delivered, These higher order components require a solid foundation of services in order to be delivered reliably and effectively.
All IT Investments are Not Created Equal
As a contributor of research to IT Doesn’t Matter, we felt Carr was painting IT investments in too uniform a way. We believed, as did Carr, that commoditization of certain segments of IT was occurring, and accelerating across various solutions as organizations implemented more austerity programs and sought substantial cost reductions. Frugalnomics, the need to do-more-with-less and drive bottom-line improvements was in full effect in IT budgeting. However, we found that organizations that weren’t investing enough in foundational services were faltering. As well, those that cut business productivity, process improvement and intelligence investments were losing their competitive edge.
Examining these investments, we found that IT investments were hierarchically built upon each other, from basic computing, networking and application services, through business productivity, process optimization and information management. When we examined this progression, from the need for a solid foundation to achieve higher level capability and maturity, and a need for an organization to invest in higher order sectors of IT in order to achieve their goals, we found this hierarchy to closely resemble Maslow’s hierarchy of needs, and so the IT Hierarchy of Needs™ was born.
Maslow’s Hierarchy of Needs
The well traveled theory by Abraham Maslow asserts that people are motivated by unsatisfied needs, and that certain lower needs are the initial focus and require satisfaction before higher needs can be addressed or achieved. Foundational needs include physiological requirements such as air, water, food, and sleep, and safety which includes security of home and family. Higher needs include, in order, Love, Self Esteem and Self Actualization. When each of these needs in turn is satisfied, from lower to higher, new (and still higher) needs emerge, and so on. As each need is met, personal achievement rises and purpose is fulfilled.
The theory has been extended from human behavior to economics, whereby marketplaces need to have foundational needs met before demand for higher needs can be pursued. For example, a third world economy focuses on the physiological and safety needs first – basic human survival. Until this can be resolved, whereby people have the water, food and shelter they need, higher level needs and the ability to have a consumer marketplace is not priority. For first world countries, the lower needs are viewed as commonplace commodities, while the focus moves towards meeting much higher end needs of careers, vacations, hobbies and spiritual fulfillment. As foundational needs are met and commoditized, the attention moves upwards towards higher order needs in order to achieve fulfillment.
The IT Hierarchy of Needs for IT Investment Management
If we compare IT investments with Maslow’s hierarchy of needs progression, a new understanding can be developed to guide investment decisions.
The levels within the hierarchy consist of a progression from tactical to strategic, from core infrastructure, to business intelligence and knowledge management as follows:
The IT Hierarchy of Needs categorizes projects and investments into a four level progression:
- Tier 1: Computing and Application Services - a highly available, secure and scalable IT services infrastructure forming the foundation for growth, performance and reliable computing services
- Tier 2: Business Productivity Services - deliver to employees the basic tools needed to communicate and collaborate
- Tier 3: Business Process Services - automate key workflows and gather information about the business
- Tier 4: Business Intelligence Services – leverage information and corporate knowledge to measure performance, aid decision making, and drive competitive advantage.
Too little investment, and the foundation is not stable enough to build upon. Too much investment, and the foundation is overbuilt for supporting the users and business. In these overbuilt infrastructures, too much spent on the foundation leaves too little for innovative investments.
Unfortunately overspending continues in the lower tiers for most organizations, with 60% annually spent on managing the existing infrastructure (keeping the lights on) and 25% on upgrades to existing infrastructure, leaving a scant 15% for new applications, services and innovation.
As technology has advanced, and companies have exploited these advances over the past four decades each successive capability within the hierarchy was the successive focus. Innovation and competitive advantage progressed from those who know how to implement the core technology and basic compute power to a handful of specialized tasks, to those who knew how to arm knowledge workers with tools to be more productive and collaborate, to driving business processes improvements such as CRM and ERP, to those who now are using business intelligence, dashboards, scorecards and real time information to drive superior performance and agility.
This hierarchical nature of IT though is not apparent to budget holders. Because executives tend to paint all IT investments the same, viewing technology investments through the IT-Doesn’t-Matter lens, this IT hierarchy of needs can be the tool to illuminate the reasons behind budget requests, drive more informed budget discussions and treat each successive layer in the hierarchy, from tactical to strategic, with the proper investment criteria. For the tactical investments, these should be treated as a commodity, where cost savings and IT as a utility applies. However, cut costs too much or neglected for too long the foundation will crumble.
To apply practically, CIOs should categorize investments in support of each level in the hierarchy.
Classifying Investments to Minimize Costs and Maximize Returns
To gain visibility into current spending, and make better decisions on future investments, it is recommended that organizations categorize their current IT spending and planned investments according to the IT Hierarchy of Needs. Using this methodology, the team can document which investments are tactical - forming the core infrastructure, and which are more strategic - helping to deliver competitive advantage.
By selecting investments across the IT hierarchy of needs, spending can be optimized such that IT capital and operating costs can be reduced on core infrastructure investments to the proper levels, freeing up precious funds for higher-order needs.
The hierarchy can assist an organization in classifying and benchmarking investments into their proper place in the hierarchy, helping to determine the proper criteria for head-to-head comparisons of various spending scenarios, as each investment classification has a different goal, business contribution and value.
Tier 1: Computing and Application Services
Computing and Application Services is the foundation required to deliver IT services that meet the needs of the business and higher order services. Typically Information Technology includes the plumbing of IT, such as computers, storage, data, networks, as well as the software to manage and maintain the infrastructure, including operating systems, virtualization software, security software, system monitoring, configuration management, data protection, and services management tools.
IT Services includes the people and process that use these solutions to deliver IT services to the organization through disciplines such as Service Level Management, Availability Management, Capacity Management, Continuity Management, Security Management, Financial Management, Incident Management, Problem Management, Change Management, and Release Management. Computing and Applications Services investments form a solid foundation for further advancement, and if not maintained or advanced, can cause issues with availability, security, performance, scalability and agility (ability to handle change).
While not delivering competitive advantage itself, it is hard to advance to the next hierarchical level beyond the core infrastructure unless there is a solid foundation for growth. Try to deploy applications on a shoddy foundation and the applications will have delivery, performance, availability, and scalability issues.
These core infrastructure projects should seek to reduce total cost of ownership (TCO) but at the same time assure the correct manageability, delivery, quality of service, disaster recovery, security, scalability and agility.
Part of the Computing and Application Services includes the Application Lifecycle Infrastructure (ALI), the underlying tools supporting a continuously repeating cycle of visualizing business requirements then designing, building, testing and deploying application software. The ALI encompasses: Requirements Visualization, Requirements Management, Modeling, Design, Project Management, Build Management and Testing. Service Oriented Architecture (SOA) is included.
Tier 2: Business Productivity Services
Business Productivity Services delivers personal productivity capabilities to employees, helping workers be more efficient at authoring and publishing content, finding information faster, and communicating / collaborating more effectively.
Business Productivity Services includes office applications such as word processing, spreadsheets and presentations, but also includes collaboration tools including e-mail, instant messaging, meeting applications, unified communications, collaboration portals, and enterprise content management.
The Business Productivity Services layer has been commoditizing over the past decade, and is now viewed by many organizations as a cost center vs. competitive advantage. However, organizations have not been willing to sacrifice services and capabilities for cost savings, realizing that worker productivity is worth the investment in business productivity infrastructure and that many services solutions are limiting. Solutions that help balance the proper services / capabilities versus user needs versus costs should be sought so as not to sacrifice productivity for IT cost savings.
Tier 3: Business Process Services
The Business Process Services focus on automating key business processes, and streamlining the supply chain and driving customer transactions. Related projects will strive to improve customer and partner care and user experience, reduce business operating expenses, increase business efficiency and productivity, improve business processes and agility and reduce business risks.
Applications include sales force automation, marketing automation, e-commerce, supply chain management, procurement, compliance management, ERP, financial management and accounting, portfolio management, HR automation, custom business applications and more.
Competitive advantage can still be gained by these applications via superior adoption, automation and intelligence, however, commoditization is occurring. Costs are being cut with as-a-service applications such as Salesforce.com. In Business Process Services, cost savings focus is growing, but still takes a back seat to process efficiency and capability improvements.
Tier 4: Business Intelligence (BI) Services
The Business Intelligence Services focus on enabling an organization’s knowledge access and decision making capability with actionable information to track key performance indicators, create on-demand reports and queries, integrate complex information sources, , enabling M&A programs, launching new businesses, driving new go-to-market and direct marketing programs, launching new channels or competitive programs. Technologies and techniques typically incorporate tools for knowledge systems, scorecards, dashboards, portals, and data warehouses. BI investments will strive to empower business innovation and strategic agility to drive top line growth and overall competitive advantage.