Rebalancing IT Cost to Fund Business Change

Rebalancing IT Cost to Fund Business Change

IT executives continue to be challenged by their ability to meet cost and agility demands from business partners. This is largely due to the fact that today’s IT cost is predominantly devoted to “running the business” (80%), leaving very little for “changing the business” (20%). Recent analyses also suggest that the cost of running infrastructure is increasing disproportionately
to the cost of application developing, further impacting business innovation.

Does the root of the problem lie in the cost structure itself? How can IT be a self-funding function, keeping itself aligned with changing business imperatives? How can we set a methodical roadmap to such a cost structure? This white paper suggests how the much needed transformation can be brought about.

Introduction

If your IT cost structure has not changed significantly in the last few years, it is in urgent need of an overhaul. We have nursed a legacy cost structure, which is now consuming our capacity to innovate and be agile. Our cost model has left very little room to adopt important business model changers, let alone its inability to contain rising costs.

As a result of years of merger and consolidation activities, cost deferrals, ad hoc cost saving initiatives, and siloed approaches to cost restructuring, our current IT cost structure is no longer sustainable. Consider this: on average, 80% of the IT budget is spent on running existing IT operations (we call it Run the Business or RTB) – and a measly 20% on strategic new investments to Change the Business (CTB). Worse, the amount available for strategic investments has actually decreased from 25% in 2005. Your CFO is right; he/she has reasons to be skeptical about IT spend. Furthermore, IT budget allocated to application development services as percentage of overall spend is shrinking relative to infrastructure; impacting our ability to drive business innovation.

So, when it comes to leveraging important business model changers like service oriented operating models, adapting cross-enterprise global resourcing models, or product innovation, CIO’s are hobbled with limited opportunities to invest in such initiatives without significantly increasing the overall IT spend as a proportion of revenue – and we all know that it is rarely an option! His/her agility in this age of rapid adaptation is restrained. It is time to get a handle, or it would be too late.

Get a handle - having said that, we may be naturally inclined to rationalize our spending model keeping most of it the same. Yet, we have been trying to do this for a while, and it has not worked. IT spend is stuck in a gridlock, making it extremely difficult to break the logjam. For too long the focus has been on year over year cost containment (creeping incrementalism), preoccupation with near term one time cost saves, and willingness to accept cost deferral to meet short term cost saving requirements. In addition, repetitive organizational, industry and regulatory pressures - such as mergers and acquisitions, Y2K, T+, SOX - has left us with baggage of the past, with complex IT architectures and incompatible applications.

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