IT Budgeting for Uncertain Times - ' Evolving Process '

Evolving Process

Stanford's Mendelson is a strong proponent of a "continuous improvement" model for cost management. Back in 2001 and 2002, he says, IT departments were under pressure to drive down costs. But times have changed: The focus has shifted from cost-cutting to innovation, and constantly evaluating and quantifying expenditures and how they play into the company's overall strategy.

Despite current worries over economic conditions, IT is sitting pretty. "Especially in times like the present, IT is not in a crisis at all," Mendelson says. "They've accomplished substantial results since 2001 to 2002, so they can show the numbers. Most people came out of that experience saying, 'We can do it. We've already done it and done a good job.'" In those earlier troubled times, the pressure to cut costs led many CIOs to slash investments, staff and projects blindly, without considering the business implications, according to FedEx's Carter. "When you talk about these things, you talk about them across the key drivers you have to balance," he says. "Those things all work together."

Carter prefers the term "cost effectiveness" to "cost management." Managing costs—and making them more effective—means considering the people and capital the company invests in its business processes and how well they're following the courier service's core business principles of speed to market, innovation, providing levels of service and creating business alignment to ensure transparency and visibility around how dollars are being spent.

Incorporating those principles lets FedEx executives weigh more selectively whether the company is spending the appropriate amount on IT. But Carter believes companies continue to struggle with providing that level of transparency. "As simple as that sounds," he says, "I find that level of transparency to be one of the missing ingredients sometimes in seeing where the dollars go."

The process has clearly improved industrywide, with CIOs and their staffs looking more strategically at their investments and working with business units to meet operating needs. But measuring their success remains an obstacle.

According to our research, companies are shying intuitively, to be helpful in quantifying their cost management efforts. More than 40 percent of respondents say benchmarking against other companies provides minimal savings, for example, while slightly fewer say they don't or don't plan to employ that option. Similarly, nearly two in five respondents say post-investment ROI analysis yields minimal savings; almost 30 percent say they don't or don't plan to do ROI analysis.

For David Johns, CIO of Owens Corning, successful collaboration with business-line executives usually provides all the analysis his company needs. By communicating goals and results across departments and combining all the thinking, Johns says, the company gets a clear view of how, and how wisely, its IT dollars are being spent. For the building materials maker, cost management took on something of a new meaning in late 2001, when the company declared Chapter 11 bankruptcy protection due to liabilities from asbestos litigation stemming from products sold in the 1950s.

While Johns says the IT budget wasn't shaped by the move and hasn't changed much since, the Chapter 11 filing gave Owens Corning, which emerged from Chapter 11 last October, the impetus to reevaluate its spending companywide.

During that period, Johns and his business-line colleagues established better collaboration on strategy and spending by identifying how they wanted to operate, building the process and applying technology where appropriate. Today, that process is in full swing, with executives focused on identifying places where IT can help automate processes.

But like the majority of survey respondents, Johns says it's an evolving process with plenty of room for growth. "Collaboration and communication is just what it is—I don't think there are any specific secrets to it," he says. "We're still working at it and getting better at it, but we've come to see that collaboration and alignment is key to our success."