How to Stop Competing with Your Own IT

By Tom Cotney (Profile)
Tuesday, October 30th 2012

It’s as though the C-suite can’t get a break when change demands IT investment. The issue of change is self-evident. New technology, new competitors, industry trends, new business models and new markets, demand a rate of investment that is prudently approved in boardrooms on an annual basis.

But to put math to it, Gartner’s Key IT Metrics Data study – a study of over 9,000 public and private companies across 80 countries – estimates that on average, only 14% of IT budgets were dedicated to such obvious investments. Gartner calls this the “Transform” component of IT spend.

The same report shows that 20% of those budget dollars are spent on “Growth” which they define as capacity expansion, software upgrades and dollars spent to accommodate organic growth in users. In addition to this 20%, two thirds of IT budgets were spent on the “Run” component of businesses in 2011. Not surprisingly this is the non-discretionary expense required to operate businesses, meet regulatory requirements and generally continuing operations.

In total, about 86% of IT budgets support the status quo versus 14% transformation, differentiation and building value beyond the current state of affairs for shareholders.

In my former life as an IT outsourcing GM, my value proposition was typically to reduce the cost of the Run and Grow elements. As this strategy proliferated in the 1990’s and 2000’s, the dollars reallocated to transformation have increased for the most active and aggressive companies. My former constituents – Telecoms, Utilities and Media – have reached 16% to 17% in transformation spending, mostly by reducing their run components to between 55% to 62%. Whether leading or following the trend, these entities have done a reasonably good job of evolving in highly competitive industries. They compete with:

  • Rivals, especially with deregulation in the late 1990’s and some blurring of lines among their own businesses, e.g. cable versus telcom.
  • The need for capital inside their own companies where transmission systems and networks are the key delivery mechanisms.
  • And of course, with the cost of their legacy systems.

But what about the others trapped at or below the average of 14% transformation? These companies must virtualize all or part of their IT asset base.

It’s been said that best in class companies reduce their Run expenses to 55% or less of their budgets. If you are one of the companies who still have not exploited outsourcing as an alternative, I recommend it. Tactical payback is available and can be secured contractually.

But for the longer term, I recommend that you engineer “elasticity” into your environment starting with software design and development, and that you only acquire solutions built on the key principles of elasticity and multi-tenancy.