Analysts have been running the numbers, and they look good – at least by the standards of recent years.
Almost across the board, IT spending plans for 2005 are “optimistic”, say European IT managers in one recent survey by industry watcher Forrester Research, with only one in five executives planning any kind of reduction in their budget.
And, perhaps more importantly, so-called ‘discretionary’ spend on new projects by those European IT executives will average over a third of their overall IT budgets – well ahead of previous years, and even higher than the 30% being cited by their North American peers.
But no matter how bullish they are feeling, for most IT decision-makers, pushing through the annual budget still requires some tough negotiating and business case justification with finance heads, managing directors and chief executives.
In most instances, IT management needs to adopt a more positive mindset, argues Chris Dale, an independent industry analyst who has made budget-setting one of his core consulting areas after having focused on the processes while at CSC Research, the industry watching arm of IT services giant Computer Sciences Corp.
“Do not fall into the trap of treating budgeting as an annual chore for the benefit of the finance department. The finance department drives the corporate budgeting process, and you have to use the formats that it demands; but your budget can also provide you with a useful tool for financial management of IT,” he says.
That approach will give senior IT management a better level of visibility into their division’s annual spend, he says, and will free up more funds for new projects that serve emerging business needs – a point with which Stephen Hand, IT director at risk management organisation Lloyd’s Register Group, agrees completely.
Certainly, Hand says, greater visibility has enabled Lloyd’s to achieve new efficiencies that have enabled funds to be diverted to new developments. And that paints IT in a better light, making it appear less of a cost centre and more of a source of revenue for the business.
“Budgets are up with more spend on projects, while operating costs are down,” he says. In fact, as at other organisations, the trend has been for operating costs to fall year after year.
Taking a longer term view than the coming year is a key aspect of the process. Budget strategy at Lloyd’s Register is typically set for a three-year period, broken down into yearly chunks, Hand explains. An executive committee, which he chairs, drafts a long-term spending framework that includes some flexibility to undertake projects unforeseen during planning meetings. All such proposals are then passed to executive committees for approval.
That is a growing trend, says Manuel Angel Méndez, an analyst with Forrester Research. “In this healthy spending environment, executive committees are gaining control over the approval of new IT investment decisions,” he says. In a recent poll by Forrester, almost 40% of the business and IT executives surveyed claimed that this was the process at their organisation.
Lloyd’s Register also keeps a tight rein on spending by charging internal departments within the company for the technology services that they use. That is sound – and common – thinking, says Dale.
“The first point to consider is where spending actually takes place,” says Dale. “The budget is often used up piecemeal by business units and it is easy to lose track of how the money is being spent.”
Dale cites the case of a company he worked with that had an average of 1.4 PCs per employee. The extra PCs all had costs associated with them, such as licence, maintenance fees and support, in addition to the up-front acquisition costs.
Not being able to track and spot such waste can have highly negative consequences, Dale adds. When the cash seems to be draining away, the knee-jerk reaction is to let IT employees go. Apply proper financial discipline, he counsels. But, also, bring the consumer into decisions.
As well as tying IT service costs to specific departments, Lloyd’s Register allows business units to have a say in how their services are delivered. That is in line with another growing European trend, according to Forrester’s Méndez. “For 60% of the companies [we questioned], IT budget committees are usually formed by cross-functional business units,” he says.
Even though spending may be up, the targets for new investments vary hugely from company to company. Lloyd’s Register, for example, has made mobile technology a priority for 2005, says Hand. Voice-over-IP (VOIP) telephones and PDA devices are proving essential for its revenue-generating, highly itinerant agents that spend the bulk of working hours outside of the office, explains Hand.
Mobility is also a priority at satellite communications provider Inmarsat, where money will be spent on VOIP and on providing GPRS mobile data connectivity to staff in 2005. However, top of the company’s list for IT spend for the year is a more mundane set of technologies – storage and archiving. That is always a significant expense for the company, says the company’s IT director, Pete Smith. But it is increasingly necessary as part of Inmarsat’s efforts to ensure compliance with a slew of legislative pressures, including the Data Protection Act.
Different sets of pressures are seen elsewhere. At manufacturer James Walker Group, a specialist in fluid seals, closer integration with customers is the main priority, says Adrian Wakefield, business services director, “and the budget has been drawn up to take account of this.”
The company already has a solid infrastructure in place; it now needs to provide customers with the ability to integrate directly with James Walker’s ERP system. “We are seeking tangible and real contact with our customers,” he says.
More for less
Despite the disparate priorities, there are a few ‘constants’ that have driven IT spending in 2004 that will continue to be important throughout 2005, says Forrester’s Méndez. “Functionality and reliability are the two key criteria that European companies use when purchasing enterprise applications, infrastructure software or networking technologies,” he says.
Vendor reputation and post-sale service are also increasingly a factor in deciding how IT budgets are spent. “More than 40% of companies see post-sale service as the most critical vendor characteristic when selecting technologies,” he says.
However, even where the pot of money available is fuller, companies are still looking to create efficiencies that will allow them to stretch the IT budget further. At Lloyd’s Register, for example, application development now takes place within the company’s Philippines operations, where skills are cheaper. In addition, the company is planning to migrate from a number of proprietary, legacy systems to a Microsoft environment that uses commodity hardware and the Windows Server 2003 platform.
Outside of the norm for next year, Inmarsat is part of the group of European companies that will actually see its IT budget fall in 2005. However, IT chief Pete Smith says that his department has proved it is possible to “do more with less”.
He reports that he has been seeking out covert cost traps, such as those related to the company’s use of printing. “While printers are cost-effective to acquire, consumables, such as printer cartridges, are hugely expensive,” he says. His solution: to invest in cost-efficient, multi-function copier and printing devices. Like Lloyd’s Register, the company is also migrating to a Windows-based server environment.
Meanwhile, consultant Chris Dale argues that, while such reviews are necessary, changing the actual basis of IT budgeting is still essential. He observes that budgets are mostly based on the previous year’s total, with some simplistic adjustments. There is a better way, he says, proposing that each year the IT budgeting process should start with a blank sheet of paper (see box, ‘The new budgetary landscape’).
Dale strongly advocates this so-called ‘zero budgeting’ approach. It allows each year’s spending quota to be calculated from the bottom up, without any reference to the previous year. Funding for IT can then be allocated according to the actual requirements for a particular year.
He backs up his argument by citing an article entitled ‘Beyond Budgeting’ that appeared in the Harvard Business Review last year. The author, business performance consultant, Michael Contrada, argues that budgeting as a major restraint on businesses, limiting their agility and potential. There are better ways of measuring performance, Dale claims.
“Executives have a choice between constructive thinking and taking the line of least resistance,” he says. “In any case, the budget is just one round of the game.”