In this era of lower corporate profits and tight IT spending, CIOs' careers are on the line when they get grilled during periodic budget reviews. Unfortunately, the CIO's survival kit isn't well stocked with credible analytic methods that will answer the supreme question: How can a CIO prove that IT will deliver a significant contribution to improved profits?
When CIOs prepare for budget reviews, they must overcome rising skepticism about their ability to link IT to improved results. But there is no prescription for how to survive a budget review. As a CIO who managed to get approval for many spending proposals from 1961 through 1993, I found that there are three tests one must pass to be invited back for more budget torture:
The Microscope Test. First, the CIO must propose operational cost cuts in the IT infrastructure, software maintenance and expenses for network services. The CFO knows all about Moore's Law and will start a budget review by requesting an 18% cut because that's the number computer gurus parade before executives when trying to impress upon them how computers are getting cheaper every year.
Second, the CIO must document the ROI for all proposed IT projects that would contribute to reducing corporate assets, increasing revenue, improving market share, reducing production costs or cutting corporate overhead. This can be accomplished only if you compare a "base case" (such as doing nothing) to a projected discounted cash flow over the expected life of every investment. The CFO will make sure that the projected savings are then locked into the corporate operating plans so he can compare actual quarterly results to the new performance targets.
The Window Test. This involves an examination of how a firm stacks up against its peers and competitors. First, the CIO must add all IT costs (including user expenses), such as recovery from systems crashes, systems training expenses and work-inhibiting downtime. The costs must then be compared to IT spending at firms that employ a comparable number of information workers, manage similar ratios of desktops to employees and display similar financial characteristics such as profits-to-revenue or equivalent ratios of transaction costs to cost of goods. Then, you can answer the CFO's perennial inquiry about whether the company is overspending compared with industry peers. Second, the CIO must recognize that even though each IT project may be attractive, the firm's total information overhead may still exceed that of its competitors. If the overhead is out of control, an IT budget that passed the microscope test would be thrown back for resubmission and seen as proof that the CIO doesn't understand the business beyond technology.
The Telescope Test. CEOs recognize that the increasingly volatile competitive arena requires anticipating potential threats to prosperity. External influences such as security risks, technological innovation, value-chain shifts and globalization of competition could lead to mandatory reallocations of IT investments into programs that aren't demonstrably profitable but must nevertheless be adopted as "insurance" to sustain business competitiveness. There are a variety of techniques for dealing with such issues, though I find scenario-driven war games or business simulations exceptionally helpful in reaching consensus on where and how to invest scarce IT funds. If a CIO doesn't address such questions, an IT budget that passed the Microscope and Window tests would be thrown back for re-examination and used as evidence that the CIO should be gracefully moved to a "chief technologist" role.
A CIO's career can either be advanced or shredded after a budget review. No other engagement is more important. To prepare for that, IT organizations must arm themselves with the means and tools to assure passage of the three survival tests. Such formal methods are the only ways to successfully stand up to such challenges. Whether the initiatives for adoption of such methods originate from the CIO or the CFO doesn't matter. What's important is that they be done before an ax is taken to the budget.
Paul A. Strassmann (email@example.com) practiced the art of IT budget justification throughout his career as a CIO.