Although we managed to avoid The Great Depression, Part Deux, “all we have to show for it is this lousy [jobless recovery.]” Times remain challenging. Profits are less difficult to come by but “confidence” and “calm” about future prospects remain fleeting, amorphous, a hoped-for future reality. On this Thanksgiving Eve we can be thankful that we’re still here and wishful that the hunkering-down will abate in a somehow foreseeable future.
For those who are CIO’s or who are planning IT spending the message is, “hold the line.” It’s a rare thing to find an IT organization that is expecting increases in budget for 2010. Jason Hines of
The CIO’s also discussed with enthusiasm the hottest trends in IT that they are pursuing. The ideas of the 5 in the video clip are Das Kloud, Open Source, Green IT, “bringing value to the business” and the “consumerization” of IT. The first three can be viewed as ways to deliver IT at lower costs. In fact, the CIO who is implementing Cloud Computing, Larry Bonafante of the USTA, is planning a drop in hosting costs to 1/3 of current spending! At one point in that interview the saving is 1/3, later its 1/3 OF current spending. Regardless, it’s a big bite and some of that saving is going to the bottom line and some is being reinvested in business value, i.e. new development.
The pressure on costs leads to headlines like "Seriously, I can't imagine any company that's looking at any upgrade to its telephony system not going the IP route at this point." It’s hard to argue with statements like this. If you want to have any room for new development you’ll have to find money in Das Kloud, in VoIP, in virtualization and in a myriad of places like them.
So, what’s the math on holding the line on IT spending while retaining some money for new development? How much new development restraint is too much? If you assume that you can’t stop keeping up with demand but you have to keep overall spending flat, what innovation does that demand elsewhere in your budget?
Working on Step 2
Remember the classic IT Funding Model, each new item of value built today requires both operations and support resources and maintenance and enhancement resources for the useful life of the system, application or feature that’s been built.
As covered in a previous post, “your mileage may vary” based on organization size, the systems you have in place, the burden, or benefit you enjoy in matching previous systems decisions to your actual capabilities or needs. Leaving all that aside the “rule of thumb” ratios to use in this model are that for each dollar you spend in developing systems (D) in year one expect to spend twenty cents in out-years on the maintenance and enhancement (M+E) of those systems and on total operations and support costs (P).
- Classic IT Funding Model -
(adapted from original work by Nolan, Norton & Co.)
As a starting example if you assume $1,000 in development spending (lever this up to your actual spend if you wish) and an existing equal maintenance and enhancement costs and ongoing operations costs 2.5 times as large, i.e. a typical distribution, and then continue your development spending for 5 years, with the above ratios for D->M+E and D->P your overall IT spending will rise at a compound rate of 8%:
| | Year 1 | | 5 Year Total |
| Development | $ 1,000 | | $ 5,000 |
| Maint. and Enh. | 1,000 | | 7,000 |
| Production | 2,500 | | 14,500 |
| Total IT: | $ 4,500 | | $ 26,500 |
The reason the IT budget rises at that rate is that the M+E and the P numbers are compounding year after year. The only way to keep the IT budget flat is to constrain development spending or to continuously find savings in both M+E and P.
Were you to hold the overall IT spending flat year over year you would spend 15% less than the classic model suggests. Suppose you refuse to compromise on your support of existing systems and their users and you refuse to compromise on your maintenance of assets you already have in place. That is, suppose you don’t change your M+E or P behavior but you constrain development spending only. Can you hold your IT spending steady? Surely, it will look something like this:
| Constrain Development, Keep IT $ Flat | | | | | | |||
| | | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | | 5 Year Total |
| Development | | $ 1,000 | $ 600 | $ 360 | $ 216 | $ 130 | | $ 2,306 |
| Maint. and Enh. | 20% | 1,000 | 1,200 | 1,320 | 1,392 | 1,435 | | 6,347 |
| Production | 20% | 2,500 | 2,700 | 2,820 | 2,892 | 2,935 | | 13,847 |
| Total IT: | | $ 4,500 | $ 4,500 | $ 4,500 | $ 4,500 | $ 4,500 | | $ 22,500 |
In this approach the available investment for developing systems in support of the business drops precipitously and, most would argue, dangerously for any business. If your competitor does this while you keep development spending steady they will end up spending roughly one half on development in a five year period than you will. It’s hard to imaging a greater gift for your competitive advantage from IT than a competitor lying down in this manner. While you are building extensions to the supply chain or luring new customers through IT enabled channels and systems your competitor is flat-footed and inactive. You win.
You should be so lucky. What is far more likely is that everyone in your and your competitor’s shop will be asked to contribute and the development spending might be cut to, say, 75% of current levels. The remainder of the savings needed to keep overall IT spending flat must come from M+E and P spending. If they participate proportionately then the planned spending would look like this:
| Development reduction. Constrain M&E and P | | | | | ||||
| | | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | | 5 Year Total |
| Development | | $ 1,000 | $ 750 | $ 750 | $ 750 | $ 750 | | $ 4,000 |
| Maint. and Enh. | 20% | 1,000 | 1,157 | 1,209 | 1,239 | 1,258 | | 5,863 |
| Production | 20% | 2,500 | 2,593 | 2,541 | 2,511 | 2,492 | | 12,637 |
| Total IT: | | $ 4,500 | $ 4,500 | $ 4,500 | $ 4,500 | $ 4,500 | | $ 22,500 |
There are innumerable variations on this theme. In this case, in order to retain development spending at three quarters of previous budgets and keep overall IT spending flat, M+E and P must each drop by an average of 15%, compounding year over year, from the “no change” model introduced as a baseline. The USTA taking 30% out of their hosting costs by going to Cloud Computing is but contributing to this ongoing need for operations, support and maintenance productivity enhancements.
For many readers these models put numbers around a reality that they’re quite used to and have been living for years. If the models themselves clarify a planning task or enable a more quantified and less emotional discussion on “What do we do now?” that is good.
Here’s a different discussion to think about while you’re watching interminable Thanksgiving football games. Whose more athletic, the offensive and defensive line players or the backfields with the flashy players? There is no interception without the nose tackle disrupting protection. There’s no touchdown pass without the guard picking up a blitzing linebacker. In the same manner, there is no innovative, inventive, dare we hope game-changing application without the budget to pay for the conception and planning, the design and the prototype, the development, testing and roll-out. Who’s more “athletic,” the developers or the management and staff in support and operations who run ever larger systems complexes with larger and larger stakes at risk on budgets that go down, on a unit cost basis, 10-20% per year?
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