InformationWeek.com

Welcome Guest. | Log In| Register | Membership Benefits

September 14, 1998

IT Dollars and Sense

Technology managers must understand the new economics of business before allocating their money

By Howard A. Rubin

emember those times when the nation's economy was in an inflationary phase and a dollar seemed to buy less while income wasn't rising fast enough to cover the gap? Despite the current economic prosperity and rising "star" of IT at many InformationWeek 500 companies, CIOs face a similar-and worsening-gap.

IT dollars are not going as far as they used to, and that means IT managers--and business managers, by implication-must be more diligent than ever in investing these dollars and managing their yield in terms that CEOs and chief financial officers understand: growth in revenue, growth in income, and improved customer service.

Understanding the new economics of IT requires examining some hard facts. For one, the demand for information systems is growing about 30% per year at corporations around the world, according to a 1998 worldwide IT benchmark study of more than 1,000 companies by Rubin Systems Inc.

The PC/network revolution and the Internet have given business people-who have historically been insulated from IT-a firsthand opportunity to manage and use technology. Where IT solutions were once similar to prescription drugs dispensed by the CIO, they're now available over the counter. The areas in which IT dollars are being invested are increasing more quickly than in the past. Today, the Internet, intranets, and global networks dwarf the IT operations and data centers of 10 years ago.

As a result, the thirst for IT support and integration with the business is rising at a double-digit rate. And while demand is so fierce, IT budgets are increasing an average of only 5% to 7% per year, according to the benchmark study.

Bug Alters Budget Scope
At the same time, the year 2000 crisis is putting additional resource and financial pressures on IT. Cost estimates for fixing the millennium bug are rising and resources are being diverted. U.S. companies allocate an average 25% to 30% of their IT budgets to year 2000 remediation, according to a survey in the second quarter of this year by Rubin Systems in conjunction with Cap Gemini America.

In addition, the accelerating rate of technology change is forcing IT onto a continual and changing learning curve, and the price of that curve is high. Companies embarking on new projects with new technology, or existing technology, must expend people, time, and dollars to learn as they go. Learning includes making mistakes and lots of rework. One solution is to hire experienced people with the right skills, but these are scarce, expensive, and subject to the needs of continual learning. Increased demand and the year 2000 problem are making the labor shortage worse, resulting in higher salaries and increased turnover. All of these "people costs" compound the spending-demand gap.

While companies struggle to find skilled workers, there's a continuing increase in systems and project complexity. Enterprise solutions require more components and development analysis than ever, and building a system involves architecture, connectivity, and business process integration that are more labor intensive than ever. The result has been decreased productivity.

Add to all this an increased scrutiny of IT dollars. More CEOs and CFOs are asking "What am I getting for my IT dollar? Am I spending the right amount? Is the money being used efficiently and effectively?"

According to past benchmark studies, top performing companies can support as much as $1,000 in revenue and $50 to $100 in income for every IT dollar invested. Average performers have historically been at $50 in revenue and $1.15 in income supported per IT dollar. CEOs and CFOs want their companies to be at the high end of the band, and are demanding answers to questions about IT spending in business terms they understand.

continued...page 2, 3

Back to InformationWeek 500 menu page

Back to This Week's Issue

Send Us Your Feedback

Top of the Page