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IT Has Changed, But IT Budgets Haven't

IT's role is shifting to focus more on innovation and driving revenue. So why are budgeting practices so stuck in the past?

Funds For IT Innovation

The yearly IT budget remains a fixture--64% of the respondents to our survey say their company does an annual budget; only 23% do quarterly or twice-a-year budgets. But it's not necessarily the cycle that's problematic. It's that, as one technologist in our survey put it, "budget requests, approvals, and tracking are too cumbersome." Only 18% of survey respondents think their budgeting process is very flexible.

Contrast that lack of flexibility with the expectations of IT: Be agile and innovative. "Sounds like all departments nowadays," says Anua's Smith. Fair enough, but that only means the budget process is a challenge for everyone.

Budgeting is based on modeling the future. But your job as an IT leader is to react to reality. A piece of infrastructure dies, and maybe someone approved discretionary money to replace it, or maybe not.

Your environment gets massively infested with malware, and the cleanup soaks up all of your contracted services funding. Or hopefully, you've come up with an idea to make IT run for less, or to make your colleagues more efficient or your products better. Good luck with any of these, and especially those last two, if you budget for subsistence IT. An essential question for IT leaders is whether their IT budgeting matches the level of tech innovation they expect.

At Sparrow Health Systems in Michigan, healthcare IT spending is the single largest capital expenditure right now--something that's mind-boggling given the other big capital items required by a large healthcare provider. That spending decision came from an executive board that had a "Walmart moment," says Patrick Hale, Sparrow Health's CTO, referring to the strong IT systems that helped give Walmart an advantage over its competitors during its big growth years. "Better healthcare outcomes will come from technology-backed analytics, and this is reflected in our budget," he says.

Sparrow's executive leadership intentionally and strategically raised IT spending with the goal of raising overall business excellence. "We're not spending a lot of money to be mediocre," Hale says. "We're spending a lot of money to lead in healthcare."

Sparrow shows how the budget process reveals a company's leadership and organizational priorities. Hale's leadership prioritizes IT as a major asset--and Sparrow funds it accordingly.

Likewise, it reveals something unflattering about IT planning generally that the No. 1 strategy IT leaders use to deal with unexpected expenses is simply to ask the organization's CEO. No. 2 is a formal process to ask the CFO or similar budget exec.

In organizations that prioritize IT, we would think that IT would at least have a formal request process, or even better some sort of capital reserve or managed savings--let the CIO make the decision to reduce other areas without substantially affecting operations or initiatives before having to use the "mother, may I?" strategy.

This kind of discretion isn't the same approach used by the 6% of companies in our survey that have a slush fund, where they overestimate costs or keep a reserve in their base budget. Intentionally overestimating costs is very different from adding a contingency that's acknowledged and accounted for, and such a slush fund is a sign of a dysfunctional business-IT relationship. IT is planning for a "no" from executive leadership and feels the only choice is to, well, cheat.

Good IT governing boards must help prioritize funding for innovative projects and respond to unanticipated projects and expenses. But the governing board's role at the companies we surveyed is all over the map. Close to one-fourth of survey respondents say they have a board with major influence, about one-third have some influence, and then 21% have weak boards and 22% have none.

Governance is a great answer--when it works right. But if it only means that the CIO goes begging to four or six people, you're better off with no governance--it's easier to just go begging to the CEO or CFO. But if governance is a shared responsibility between the CIO and line-of-business leaders, budgeting can get a whole lot smarter.

A company like UPS shows how good governance, like budgets, can flex to changing business needs. UPS has been developing software for its drivers' mobile devices for decades, but in the past year it created a small, agile team to keep up with the blazing pace of consumer smartphones and tablets. People in IT, marketing, and communications deliver new mobile functions about every month. The team has learned many lessons, one of which is that writing software for customers isn't for the meek. "In the mobile world, in the social world, feedback is almost instantaneous," says Nick Costides, a UPS VP of IT who built the mobile team. "It has forced the developers to have some pretty tough skin."

But they've learned something else: Governance has to move at that same pace. The group has a mobile governance committee that includes Costides and leaders of product marketing and communications. So as quickly as devices and the mobile market change, UPS can change its road map and investments. The point? You can't have a nimble governance and resource allocation process with a governance team that meets twice a year.

chart How will next fiscal year's IT budget change?

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