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Let's put all IT expenditures into two buckets, mandatory and discretionary. Mandated spending "keeps the lights on" to operate the business into the foreseeable future "as is," without making strategic changes. The level of mandated spending isn't really planned; it's the result of two factors outside the control of the IT organization: the unit cost of hardware, which generally decreases over time, and the demand for existing technology resources, which increases as the business grows. It is no more practical to limit mandatory spending than to tell an executive to stop making long-distance phone calls after the budget for those calls has been exhausted. Because mandated spending is the product of unit cost and demand, which are independent of each other, it is difficult to predict the amount and direction of change from one year to the next. And mandatory spending does not in and of itself improve alignment.
The path to IT strategic alignment follows discretionary spendinghow an enterprise chooses to invest to change its technology capabilities. My first principle of IT alignment states that you can't execute strategy without IT. You can't change the way the business operatesand change is the essence of executing strategyif you don't change the underlying IT. And if you inhibit a business unit's ability to go after change, then you inhibit its ability to compete in its marketplace. Following the money means understanding how companies make discretionary choices.
A third of all companies impose an annual cap on IT spending, according to this month's CIO Insight survey. At such companies, discretionary spending is limited to what's left over after the mandatory spending. Typically, the distinction between mandatory and discretionary spending isn't clear because IT accounting doesn't explicitly segregate them. The result is to artificially limit the level of discretionary spending.
Why a spending cap? When CEOs and CFOs see IT spending growing faster than revenue, they panic. Since most CEOs and CFOs can't tell the difference between legitimate investments and waste, they fear that something really bad is going on in the IT organization, and that it's becoming a black hole for money. Their natural reaction: Put a cap on it.
But capping IT spending across the corporation is a dangerous move, because each business unit requires its own technology investment to compete effectively. A cap puts either IT or top management in the position of making far-reaching decisions about which businesses are going to get the IT and which aren't. Thus, the IT funding decision becomes a proxy for deciding which strategic initiatives will and won't be executed.
My second principle states that the demand for IT resources in any organization exceeds the capacity to deliver them. To improve alignment, discretionary IT spending decisions must be made in the context of business strategy, not IT budgets. It's as simple as that. But most companies aren't very good at describing or executing business strategy, so there's little or no strategic context in which to make the decisions.
The IT organization does have an important role to play in influencing certain types of decisions. Under a business initiative to improve customer information, for example, IT can and should weigh in on which of three CRM systems is the best fit with the current and planned infrastructures. But IT should not be in the position of deciding whether the business unit should use a CRM system to pursue its customer intimacy strategy.
Too many corporate leaders abdicate their responsibility to make the tough decisions. They should be saying to business unit executives, "You haven't made a compelling business case for your strategy, so we're not funding it." Instead, they avoid the problem by capping overall IT spending at a level lower than needed to deliver on all proposed strategies, and let IT pick the winning strategies by proxy through its funding decisions.