The New Normalcy

The economy may be recovering, but IT spending isn't. What's the new norm for IT budgets, and how are companies looking to cut spending intelligently?
In the late 1990s, medical-diagnostic-testing kit maker Dade Behring Holdings Inc. wasn't focused on specific business processes that IT could support. Instead, it was in an IT buying frenzy. The $1.4 billion-a-year company was formed from several spin-offs in the mid-1990s, and IT spending was anything but discretionary. "Our IT job was to put a platform in place so the company could conduct business," senior VP and CIO Dave Edelstein says. "Virtually everything we did was mandatory or the company wouldn't operate." Today, IT spending tends to be more discretionary, and like FedEx, Dade Behring has become more focused on ways to shave IT costs.

Dade Behring is heavily into lean manufacturing, a concept that closely analyzes the way products are produced and seeks ways to eliminate unnecessary procedures. Edelstein has taken lean-manufacturing methods and applied them to IT. For instance, the Food and Drug Administration regulates the testing and validation of software Dade Behring uses in relation to medical-testing instruments it manufactures, so Edelstein's team looks to cut unneeded steps from the process. The savings from this efficiency process may be small, but repeated often enough, the dollars add up.

Getting a handle on how IT money is being spent is crucial in getting it to work more efficiently for a company. The ability of IT tools to provide managers with detailed budgeting data is helping management consultant Booz Allen Hamilton to budget its IT outlays more effectively. While many companies base their IT budgets around their organizations' structures, such as business units, Booz Allen's spending blueprint focuses on a formula that accounts for the IT that's being used by each unit and office, partner and CIO George Tillman says.

In the not-too-distant past, $2.7 billion-a-year Booz Allen employed a complex allocation formula in which the company charged various units and offices proportionately for corporate IT expenditures, not necessarily based on each unit's actual use. In fact, some units found themselves paying for IT services and wares they didn't want. This wasn't a significant problem when the economy and corporate revenue were growing rapidly.

As the economy faltered, Booz Allen jettisoned that budgeting approach. Using a variety of spreadsheets and business-analysis tools, Booz Allen budgeters today can zero in on each office's specific IT needs, creating a more efficient budgeting model, one that can save the company millions of dollars that can be used where needed. Technology also lets Booz Allen track spending as it occurs. Now, IT spending as a percentage of revenue has decreased marginally. "And we have better control and accountability on what we spend," Tillman says. "I don't see us going back to the old way [of allocating IT funds], even as the economy gets better."

To succeed, IT budgeters must show more restraint in picking the solutions to fund. "That discipline and focus is great for the company, great for IT," Dade Behring's Edelstein says. "It may sound trite, but making trade-offs for scarce resources is something you have to do."

This story was updated June 14.

Illustration by Marc Rosenthal

Continue to the sidebars:
"The Odyssey: Sit-Downs With CIOs Yield Insights" and
"Reining In IT Budgets"

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