Economic downturns play havoc with corporate strategies and budgets, and, corrupting the old adage, when the corporation sneezes, IT catches a cold.

Cost centers are in a particularly unfortunate position during bad economic times. Companies want to focus what little capital they have on revenue-generating activities, not on overhead functions. Making matters worse, IT is often subject to added fiscal scrutiny because many senior business managers see IT budgets as erratic compared to other cost centers.

In contrast with finance or HR, IT’s costs seems to zig-zag or saw-tooth from year to year, which projects an image of aberrant financial behavior. What’s lost on many executives is that these eccentric budgets are often caused by large one-time business-oriented projects.

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What can IT do? It can help attenuate this disruption by dividing its plan and budget into two separate plans and budgets: an operating plan and an operating budget, and an investment plan and an investment budget.

All activities, resources, and costs associated with keeping the enterprise’s “lights on” should be placed in the operating plan and budget. Data center operations, application maintenance and end-user support are all parts of the tasks and costs associated with maintaining IT services—they are all components of the IT operating plan and IT operating budget.

All new investments and significant maintenance and enhancements—such as providing staff with PDAs or purchasing a customer resource management application—should be included in a separate investment plan. This plan lays out all of the approved major initiatives or investments to be started, continued or completed during the year. Each investment is also part of a separate IT investment budget. 

Why separate the operating and investment plans? There are three main reasons.  First, IT’s operating costs are true IT costs. Operating expenses are what IT has to pay to provide its services. However, IT’s investments are, for the most part, not IT costs at all, but decisions made by the business to invest in its future. For example, we can imagine a company undergoing a loss of business that results in senior management requiring all support functions to cut their budgets by X percent. IT should apply the X-percent cut to the operating budget. Cuts (if any) in the investment budget should be left for the business to decide. 

The business might conclude that to get out of the economic downturn, it needs to invest in new products or new delivery mechanisms. It is an old business maxim that a company cannot cost-cut its way to profitability. Cost cutting simply gives the business some time and cash to make the necessary business direction changes. 

There are other ancillary advantages to the two plan/budget approach.  Separating the operating and investment plans paints a more accurate picture of IT’s ability to manage its resources. Businesses want support areas, such as IT, to track with enterprise growth, although ideally at a slower rate. For example, if the enterprise is growing, then senior business managers would like to see the support functions growing at a similar or slightly slower rate. 

Similarly, if the business is declining, the IT budget should ideally decline at the same or greater rate – though still shadowing corporate performance. Eliminating the business’s investing in itself from the IT operating budget -- the major cause of saw-toothing budgets -- paints a more accurate and conformable picture of IT costs.

Third, separating the two plans can lead to easier plan and budget approval. IT governance bodies like to focus on big-ticket items such as significant changes in services or costs. Once the steering committee has reviewed the annual operating plan two or three times—and if the operating plans are well constructed and any increases defensible and acceptable—then it is more likely to pass future operating plans with less detailed scrutiny. Instead, the committee’s focus can shift to the investment plan, where it will play a more significant role in the selection, approval and funding of company investments.

A good operating plan lets the senior managers involved with IT governance focus on exceptional business issues and not on the mundane, well managed, operational issues.

George Tillmann is a former CIO, management consultant, and the author of The Business-Oriented CIO (John Wiley & Sons, 2008).