Getting Ahead by Staying Put

by Doug Brockway, Advance Consulting
Dec 2, 2009 12:35:09 PM

Doug Brockway is the founder and Managing Principal for Advance Consulting. He blogs on IT management topics at Working on Step 2.

For those who are CIOs or who are planning IT spending, the message is, “hold the line.” It’s a rare thing to find an IT organization that is expecting increases in budget for 2010. The pressure on costs leads to conlusions like, "Seriously, I can't imagine any company that's looking at any upgrade to its telephony system not going the IP route at this point." It’s hard to argue with statements like this. If you want to have any room for new development, you’ll have to find money in Das Kloud, in VoIP, in virtualization and in a myriad of places like those. Here’s a handy CTO Edge list of Ten Technologies to be Thankful For.

So, what’s the math on holding the line on IT? The “rule of thumb” ratios are that for each dollar you spend in developing systems (D) in year one, expect to spend 20 cents in out-years on the maintenance and enhancement (M+E) of those systems and on total operations and support costs (P).

As a starting example, if you assume $1,000 in development spending (lever this up to your actual spend if you wish) and existing equal maintenance and enhancement costs, and ongoing operations costs 2.5 times as large, i.e., a typical distribution, and then continue your development spending for five years, with the above ratios for D->M+E and D->P, your overall IT spending will rise at a compound rate of 8 percent:

The reason the IT budget rises at that rate is that the M+E and the P numbers are compounding year after year. The only way to keep the IT budget flat is to constrain development spending or to continuously find savings in both M+E and P. Were you to hold the overall IT spending flat year over year, you would spend 15 percent less than the classic model suggests.

Suppose you refuse to compromise on your support of existing systems and their users and you refuse to compromise on your maintenance of assets you already have in place. That is, suppose you don’t change your M+E or P behavior but you constrain development spending only. If you do, the available investment for developing systems in support of the business drops precipitously and, most would argue, dangerously for any business:

If your competitor does this while you keep development spending steady, they will end up spending roughly one half the amount on development in a five-year period that you will. It’s hard to imaging a greater gift for your competitive advantage from IT than a competitor lying down in this manner. While you are building extensions to the supply chain or luring new customers through IT-enabled channels and systems, your competitor is flat-footed and inactive. You win. You should be so lucky.

What is far more likely is that everyone in your and your competitor’s shop will be asked to contribute, and the development spending might be cut to, say, 75 percent of current levels. The remainder of the savings needed to keep overall IT spending flat must come from M+E and P spending. If they participate proportionately, the planned spending would look like this:

There are innumerable variations on this theme. In this case, in order to retain development spending at three quarters of previous budgets and keep overall IT spending flat, M+E and P must each drop by an average of 15 percent, compounding year over year, from the “no change” model introduced as a baseline.

Holding the line on IT spending may be a good thing or a bad thing, depending on the company. A well-oiled IT function can be a great asset to a company. You may find you don’t have the budget for it. You may find you can’t afford not to.

It takes executive management with some level of IT savvy and an IT organization that is performing at a high level. If either is thin, you must either repair or hold the line and look for cost reductions.