Many IT leaders admit their spending is too heavily weighted toward keep-the-lights-on projects. Here's how to tip the balance.
Social! Mobile! Big data! BYOD! You probably already know what your company's executives most want to see from your IT organization. But unless your company is very new, or you're unusually lucky -- or a very, very good manager -- more than half your time and resources are spent, not on innovative projects, but on "keep the lights on" activities whose sole purpose is to prevent existing systems from breaking down. And sometimes the percentage is a lot higher than that.
"I've seen companies where it's 80% or 90% of the IT budget," says Columbia Business School professor Rita Gunther McGrath, who examined this issue for her book The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business. "I think it should be no more than 50%," she adds.
Most CIOs would agree with her, but can't achieve that 50-50 split in their own budgets. In a recent Forrester Research survey of IT leaders at more than 3,700 companies, respondents estimated that they spend an average 72% of the money in their budgets on such keep-the-lights-on functions as replacing or expanding capacity and supporting ongoing operations and maintenance, while only 28% of the money goes toward new projects.
Another recent study yielded similar findings. When AlixPartners and CFO Research surveyed 150 CIOs about their IT spending and their feelings about IT spending, 63% of the respondents said their spending was too heavily weighted toward keeping the lights on.
Why So Difficult?
If no one wants to spend such a huge portion of IT's funds just to run in place, why does it keep happening? One explanation lies in the term "keeping the lights on" itself: Turning the lights off isn't an option. "It's the ante that allows you to hold on to your job," says Eric Johnson, CIO at Informatica, a data integration company in Redwood City, Calif., with annual revenue of $812 million. "If the systems are down and the phones aren't working, no one will care how innovative you are."
Of course, new projects are very important, so the challenge is to do both. "CIOs are striving to be business executives, truly driving value for the organization," Johnson says. "That's why there's so much emphasis on keeping the lights on while still finding the budget to drive innovation."
A bigger problem has to do with the traditional approach to IT at most companies, where techies who are expected to abide by the principle that "the customer is always right" find themselves creating unwieldy systems in an ongoing effort to give the business exactly what it asks for. Keeping those systems running is usually difficult, time-consuming and expensive. "I've worked with a lot of companies where the CEO says, 'I want you to do this, this and this.' The CIO says, 'That'll be $5 million.' The CEO says, 'Do it for $3 million.' So it's patch, patch, patch," McGrath says. That approach creates "technical debt" -- something you'll have to go back and pay for later -- according to Bill Curtis, chief scientist at CAST, a software analysis company headquartered in Meudon, France, with annual revenue around $47 million.
Similar problems arise when IT tries to satisfy business needs too quickly. "Sometimes these things were built as 'Let's just get something up and see how it works,'" Curtis says. "Things that were designed as a demo suddenly have to grow. Or even if something was designed appropriately for what they thought would be the use, people kept adding new requirements and features until it became a kludge."
Perhaps worst of all is the tendency to customize licensed software in an effort to fulfill business requirements -- whether or not those requirements have any real bearing on the organization's goals or success. "We talk about business capability -- the list of things a business needs to do to be successful and achieve its goals," says Nigel Fenwick, an analyst at Forrester Research. "Out of 30 high-level capabilities, maybe two or three are differentiators." When senior executives understand this well, he says, they encourage IT to focus on those key areas and seek standardized, easy-to-maintain solutions for everything else.
Unfortunately, such understanding is rare. "It's hard to get the CEO to stand up and say, 'This is the way we're going to do it,'" Fenwick says. But if the CEO doesn't do that, he adds, "every little department will want to customize the technology to make their part of the business run more efficiently -- and so they should." After all, each department is being judged on its own efficiency, and anything that can make it run better is a good thing -- from the point of view of the department's managers. But the approach leads to systems that are difficult and costly to maintain.
"Over the past 10 to 20 years, we've plowed millions of dollars into software customization to support generic capabilities," Fenwick says. "It has made IT more complex, made interfaces more difficult, reduced IT's agility and added cost."
There's one last reason it can be difficult to contain keep-the-lights-on costs: You may become a victim of your own success. "We've determined that it'll be pretty tough to get to 50-50," says Peter Forte, CIO at Analog Devices, a semiconductor maker headquartered in Norwood, Mass., with annual revenue of $2.6 billion. "The reason is, the more successful you are on the right-hand side, that drives more activity to keeping the lights on. Every new system we deploy is a system that needs to be maintained."
Here's a look at strategies that can help CIOs who want to spend less on keeping the lights on and more on innovations that will help the company reach its goals.
If you haven't gotten around to virtualizing servers, you may find that doing so is an effective way to cut keep-the-lights-on costs. Forte discovered that when a normal cyclical low in the semiconductor industry coincided with the worldwide economic downturn of 2009. "We lost 30% of our revenue almost overnight," he says. As a result, IT had to quickly cut 30% of its costs, leading to significant layoffs.
Innovation vs. Maintenance
Should You Rethink Your Budget?
If keep-the-lights-on work takes up too much of your IT budget, maybe the problem is with your budget. So says Bruce Myers, managing director in the IT and applied analytics practice at consulting firm AlixPartners.
"People make the mistake of lumping keep-the-lights-on and grow-the-business projects together in one budget," he says. "Then they look at IT as a percentage of revenue. It has become a commonly used benchmark. What some companies are doing, and we suggest all companies should, is look at the cost of keeping the lights on as a percentage of revenue and manage that number down as much as they can. Improve-the-business projects should be treated like any other capital projects and compete for funds against other non-IT initiatives. If there's a business case, the only limiting factor should be the amount of cash or capital available."
Why is this better? For one thing, you're likely to make better decisions, according to Myers. Right now, some IT projects that should get done are probably being skipped because IT has used up its budget. And some projects that probably should be skipped are being done so IT can use up funds it might otherwise have to forfeit in the next budgeting cycle.
Myers believes too many bad projects go forward with a weak business case. "We spend a lot of time working in IT organizations from a business perspective," he says. "I can't remember one where we haven't cut 50% of their projects because when you really drilled into them, there wasn't a huge risk it was mitigating, or a real quantitative business case where a business unit had asked for the project's specific benefits."
Perhaps paradoxically, removing grow-the-business projects from IT's budget altogether seems to accomplish the goal of lower keep-the-lights-on costs. "And typically these costs are lower than when there's only one IT budget," says Nigel Fenwick, an analyst at Forrester Research.
More important, if new IT initiatives are paid out of business units' budgets, those business units take financial responsibility for those projects. "My goal is never to have to sit in front of the CFO and explain why IT is spending so much money," says Michael Leeper, director of global technology at Columbia Sportswear. "The question should be, 'Why is the business asking IT to spend so much?' We can turn things on and off -- but it isn't our money."
- Minda Zetlin
At the time, Analog Devices was about 45 years old, with the legacy infrastructure to prove it. "The first thing we did was calculate what percentage of our investment would be needed to keep the lights on," Forte says. "It was in the low 80s." For a technology company whose success depended on its ability to rapidly bring new products to market in large numbers, that was not acceptable. So IT launched a three-year effort to shift that balance. Today, Forte says, Analog Devices spends 62% of its IT budget on keeping the lights on and 38% on growing the business. That's not 50-50, but it's a meaningful improvement.
There were several elements to the program, but virtualization was one of the most effective. "We moved from an environment where we were 100% physical to over 90% virtual," he says. That saved several million keep-the-lights-on dollars that the company poured back into innovation. At the same time, Analog Devices switched to a service catalog approach, automating such tasks as resetting passwords for employees -- something that help desk staffers previously did over the phone about 1,800 times per quarter. "Those technologies swooped in and saved us," Forte says.
For many companies, moving services to a public, private or hybrid cloud also has a huge impact on costs. Johnson estimates that Informatica spends about 60% of its IT budget on innovation and only 40% on keeping the lights on, and heavy use of the cloud is one reason why. "We have more than 30 enterprise software-as-a-service operations," he says. "We have a mantra: 'Cloud first.' Can we do it with a hosted cloud solution? If not, and we have to buy it, that's fine. [But] building it custom is always the last resort."
And security concerns shouldn't keep you out of the cloud, Fenwick says. Business executives "need to look at how much it matters if something is running in a data center 100 miles away and owned by the company versus one that's 100 miles but owned by another company," he says. "People don't really understand the relative risk of someone hacking into our data center compared with Amazon's data center."
Eliminating customization for any function that isn't a key differentiator can substantially reduce keep-the-lights-on costs. "People have done a lot of the easy stuff," Fenwick says, referring to the fact that virtualization and cloud computing have already had big impacts on many IT budgets. Standardizing software is the next thing you can do to meaningfully cut costs.
But while standardization can create great efficiencies, it can be a hard sell. That's because, unlike the cloud or virtualization, standardizing -- whether on SaaS or off-the-shelf applications -- requires users to change how they do their work. "If you're buying something off the shelf, it's by definition not going to be designed for your processes," McGrath says. "And once you start tinkering with it, you lose the benefit."
The key is to have the discipline to say, "We are not going to customize this.... We're not going to make changes that will make it more difficult for us to be agile." Fenwick says.
Johnson says standardizing both technology and business practices helped Informatica get to the point where it spends 60% of IT's budget on new initiatives. "You make sure you don't have 10 ways of doing something," he says. "You have one way of doing it."
One thing that makes keeping the lights on much more costly is the need to make unexpected repairs. You can save money -- and lead a more pleasant life -- if you plan ahead and prepare for system maintenance needs.
For The Reinvestment Fund, a Philadelphia-based community development financial institution that manages $700 million in funds, automatic monitoring of the IT infrastructure's operations has made a huge difference, says CIO Barry Porozni. "Upgrading our monitoring system was one thing that really made an impact," he says. "It probes into applications and devices so we know proactively if email is down -- we don't need users to come to us. Same thing with data storage -- we're very data-intensive, and it tells us how close we are to running out of space."
The new monitoring system has freed up a lot of time, Porozni says. Previously, he and his staff had to go through a checklist first thing in the morning and last thing in the evening to make sure all systems were functioning well. Adopting the new technology and other steps have helped cut the percentage of the IT budget devoted to keeping the lights on from about 80% to about 70%, he says, and he aims to get it much lower.