CEO 'You're Fired' Threat, Part 2: McKinsey Pushes Maintenance Cuts

Posted by Bob Evans on Dec 17, 2008 08:20 AM

Just three days after we posted our "Letter From CEO: Cut Maintenance To 60% Or You're Fired," McKinsey has released a big study saying that CEOs, CIOs, and other executives want to spend 40% of IT budgets on customer-focused investments but can't find the cash to do so. Enough already: it's time for CIOs to declare all-out war on the 80/20 monster.

While the McKinsey analysis of its survey results doesn't break much new ground, the impact of the McKinsey name tied to a study specifically calling out the 80/20 ratio as a barrier to enhanced competitiveness will surely raise this issue to an extremely high priority for CIOs in 2009. (In many IT budgets, 80% is gobbled up by maintenance, leaving only 20% for innovation.)

My colleague Marianne McGee outlined the major McKinsey findings in that news story posted yesterday, and CEOs desperately seeking to unlock growth strategies in this difficult economy are going to seize onto those recommendations and not let go. McGee wrote:

Executives would like to allot up to 40% of their companies' IT spend on business initiatives that help match or surpass their competition, but typically today that allocation is just around 20%, according to the report.

In today's difficult economy, companies are trying to squeeze out costs related to the "running and maintaining" of IT; however, many also are looking to shift those savings into new IT investments that improve the business, said Roger Roberts, a McKinsey partner and an author of the report, "IT's Unmet Potential."

I think they've nailed it with that title, "IT's Unmet Potential." Great skills and ideas and energy and talent abound in many business-technology organizations, and surely those teams have the ability to deliver huge business value for their companies and for their customers. But they can't do it without funding, and the funding is all tied up in constipated maintenance budgets that give new meaning to the term "perpetual."

As I wrote in that recent "Letter From CEO: Cut Maintenance To 60% Or You're Fired":

[CEO addressing CIO:] I don't want to waste our valuable time hashing over any excuses you might have about how some acquisition threw us behind schedule or how these crazy "perpetual licenses" can't be avoided, because those are just excuses and don't address the real issue. As I see it, the real problem is one of leadership and decisiveness. Your peers all love their systems because they're familiar with them -- those folks don't want to change, and in some ways I can't blame them. But I do blame you. Because you haven't figured out a way to show them that these old, fat, slow, redundant, inflexible, and expensive systems are killing us.

Pat, I don't doubt your creativity or your technical knowledge for a second. But on top of those skills, what we need now from our CIO is leadership: I need you to get beyond the planning stage and to dive into some tough decisions to get things moving and then execute relentlessly. We need to get back out in front by creating dazzling new products and approaches that give us the ability to compete in new markets and in new businesses, and that make customers eager to do business with us.

In McGee's news story from yesterday, McKinsey's Roberts says many companies have realized that the drastic IT budget cuts they made earlier in this decade have come back to haunt them as the short-term savings didn't come close to covering the lost value that those people and budget dollars could have contributed to productivity and cost-control.

As an example, Roberts says an IT investment in a new pricing system that more accurately calculates the best price and discounts for goods sold could generate a return "five times" greater than the IT cost, McGee wrote.

I haven't seen the full McKinsey report, but from the tone of what the authors said in McGee's piece, I don't think McKinsey has grasped how serious and how urgent this situation is. Some CIOs will realize the risk they face in tolerating another year or two with most of their budgets wasted in the expensive and no-return maintenance bucket, and they'll find ways to shift many of those dollars from that do-nothing category to the customer- and business-driven side of the ratio. And those companies will be the winners. The rest? Well, would you accept a job with a company that thinks 80/20 is just fine?

CIOs, buckle up. It's time for war.