For many CIOs, the budget story has not been a happy one in recent years. The economic downturn that followed the dotcom meltdown and 9/11 negatively affected IT budgets – a shock to IT leaders after the profligate 90s.

Now IT budgets are beginning to grow again, but under an intense level of scrutiny by executive management. The risk is that while CIOs struggle to provide the business with evidence of IT’s value – as well as its fiscal responsibility – they may cut through any remaining fat in their budgets right into the bones that support their enterprise’s enabling technologies.

This risk, and the fear that comes with it, brings back bad memories of the days when IT was regarded as a mere cost to contain and a part of operations, notes Howard Rubin, president of the consultancy Rubin Systems and a research associate at MIT’s Centre for Information Systems Research.

That cost focus changed in the 1980s when IT became part of business strategy and the fiscal discipline imposed on IT investments was somewhat reduced. “Then, in the 1990s, companies became technology day traders – profits were rising and it was very easy [to] buy stuff,” Rubin says. “But when the bubble burst in 2000, companies said that those investments had done nothing for them, so they cleaned up their portfolios.” Technology, Rubin suggests, “is once again viewed as a cost”.

But that thinking forces CIOs to slash costs while trying to respond to another demand coming from the executive suites: to innovate and thereby grow the business.

The budgetary death spiral
Getting that balance wrong could result in a race to the bottom, says Bob Zukis, a partner at PricewaterhouseCoopers. “It becomes a death spiral,” he says. Cutting costs can impair the CIO’s ability to deliver technology’s benefits to the enterprise, which makes the enterprise question the value of technology, which leads to more cuts, fewer benefits and less value.

It’s the CIO who needs to make the case that IT should not be regarded as a cost to be contained.

“The average C-level executive doesn’t know how to evaluate if a technology investment is doing what it’s supposed to do,” says Richard Chang, CEO of the consultancy Richard Chang Associates. Thus, these executives focus solely on cost, looking for some easy metric such as tying IT spending to a percentage of revenue or benchmarking your IT spend against your industry.

But “that’s a reductio ad absurdum,” argues Bernard Mathaisel, CIO of IT outsourcer Achievo and former CIO of Solectron, Ford and Walt Disney. “Spending needs to be in context. If you’re in investment mode, your IT spend will be higher than for your industry as a whole,” he says.

The trick is to change the terms of the discussion from IT as a cost to IT as an investment. “The holy grail is to understand the inflection point of how much to invest in technology,” says Jim Noble, managing director of global infrastructure solutions at Merrill Lynch.

Rubin says he has found a way to help CIOs permanently alter the nature of technology’s conversation with the business. He believes he can show which spending metrics correlate to real business value and how individual companies compare to peers within specific aspects of their technology portfolios. This should enable CIOs to focus their spending assessments more deeply.

“This research will turn up the heat significantly on CIOs who can’t prove their value creation,” says Zukis, since now there is a way for them to do so. “The days of ‘trust me’ are over,” concurs David Howe, North American VP for benchmarking at Gartner.

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Galen Gruman can be contacted at [email protected]