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6/10/2004
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Reining In IT Budgets

CIOs use IT spending as percentage of revenue to gauge but not determine corporate tech budgets

IT consultant Bruce Rogow, who spent the past year interviewing 120 CIOs and other IT strategists, sees companies reining in IT spending even as the economy grows. Many CIOs have been placed on strict IT budgeting diets. Many of the CIOs told Rogow interviewed their bosses have restricted IT spending to a specific percent of revenue.

"CIO after CIO said enterprise IT expenses are now expected to live within some affordability boundary or metric," Rogow writes in the June issue of Optimize, InformationWeek's sister publication. "This boundary--for example, IT as a percentage of sales--may be arbitrary, but often it's not open to debate. It's meant by the board or CEO to influence behavior, thinking, and discipline."

InformationWeek sent E-mails to CIOs and other senior managers from companies that made it into the InformationWeek 500 seeking their thoughts about Rogow's findings. We asked them to respond to the following thesis:

In the 1990s, companies deployed enterprise systems, built Internet platforms, and tackled the year 2000 problem as they invested heavily in business-technology foundations to make them competitive. Today, a new normalcy has taken hold, in which IT spending is curtailed, and many companies tie IT investments to a percentage of revenue, just like other types of capital spending.

Here is a sample of the responses:

David Edelstein, Dade Behring Holding Inc.: I agree that IT budgeting moved beyond normal controls in the mid-'90s, driven largely by the confluence of distributed computing, business-process reengineering, and integrated software packages. A related driver was the advice of management consultants who saw huge revenue potential in the implementation of integrated software packages. With the quiet passing of Y2K, the burst of the Internet bubble, and difficulty in finding the benefits supposedly produced by integrated-software-package implementations, IT budgeting has fallen back into the appropriate controls [that] all investments of scarce resources require. At Dade Behring, we do not set percent-of-sales targets for investments. We are focused on our successful customer-excellence strategy and have well-established governance mechanisms in place to ensure investments are explicitly linked to the strategy. Setting IT investment levels at a percent of sales will unnecessarily either starve needed activities or waste money.

Steven Birgfeld, CompuCom Systems Inc.: At least in our case, I disagree with this statement. Our budgeting process has no direct correlation to percent of revenue. Particularly related to capital acquisitions, each funding and budgeting request is looked at as a whole related to business priorities.

The entire IT budget is not limited to a percent of revenue. As an interesting point, however, I do indicate to Finance what percent of revenue our budget does cover and how that compares to industry averages. We typically do a zero-based budgeting exercise, based on previous year actuals. All initiatives are categorized (i.e., mission critical, housekeeping, etc.) and then addressed with the senior management. Naturally, an assessment is made to determine if the revenue forecasts can support the IT budget.

David Guzmán, Owens & Minor Inc.: I agree with the thesis for most companies, but we have always tied our IT budget to the performance of the company. A clarification: Although we use percent of revenue as a guideline and yardstick, spending on IT is really driven by the strategic needs of the company. In short, our budget is not determined by an arbitrary factor like percent of revenue, it is driven by the company's strategic needs for information-technology solutions, and return on investment is the key criterion. IT investments are not treated any differently than any other investments in this regard.

Bruce Fadem, VP and CIO, Wyeth: The thesis reflects a broad generality and does not reflect my experience in two Fortune 100 companies during the period. In both companies, the economic environment had a major influence on the investment and budgeting process, but percent of revenue was a result of the budgeting process, not the guidance for it.

The investment in IT is not limited by percent of revenue. It is determined and limited by the business opportunities and the needs for IT investment and the amount that the company determines it can afford to invest based on its overall financial performance.

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