A second portfolio of investments aims to drive revenue from customer activities between 18 months and three years out. Finally, longer-term investments—those that enable disruptive capabilities—are intended to drive revenue within three to four years. Business operations. In the last decade, the shift of applications and infrastructure to the cloud has had an outsized impact on operational expense reduction.
Streamlining business operations can free up budget dollars for investment in change and innovation initiatives, enabling CIOs to impact top-line growth. In another example, Cisco Systems leveraged the cloud to develop a complex architectural and operational everything-as-a-service XaaS initiative that allows it to break down silos, deploy and leverage technology more effectively, and align IT services with both customers and the business.
Cisco views XaaS as an opportunity to control costs, create efficiencies, and rethink the way it engages customers and partners. Incremental business change. When CIOs take on a transformational technology initiative such as an ERP or CRM overhaul, they typically focus on the timely and efficient execution of an initiative that will create dramatic, necessary change and ultimately drive top-line revenue growth.
Typically, the business case is obvious and minimizing expense takes a back seat to delivering increased business value. The — Global CIO Survey found that managing large complex transformations is a strength of CIOs in high-performing companies—57 percent of them identify it as a strength compared to only 37 percent in other global companies. Complex transformations can be difficult to manage. Obstacles that can derail them or prevent them from delivering expected value include unnecessary customizations and unplanned delays that could lead to cost overruns; IT or business cultures that are resistant to change; and lack of support or buy-in from key stakeholders.
The new CIO of a major retailer discovered his team was responsible for more than business transformation projects; he soon realized that most of them did not have a defined business owner. He froze these projects and instructed his team to find a business sponsor to spearhead each project. Finally, projects lacking a business sponsor were terminated.
In some cases, CIOs may underestimate the complexity of the project and overpromise and under-deliver on the results. One CIO was hired after a global implementation went awry.
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The best course of action was to abandon the existing investment—tens of millions of dollars—and begin anew. Delivering the news to the board was difficult and the expectation that he deliver a successful business transformation increased exponentially. Innovation investments can allow CIOs to contribute directly to top-line growth. To get the most mileage from their innovation budgets, many CIOs are looking outside their IT organizations for additional innovation resources, engaging with innovation labs, technology hubs, business incubators and accelerators, venture capitalist and private equity firms, and other organizations that encourage rapid innovation.
CIOs report that the majority of their technology budgets are allocated to support business operations 57 percent , compared to only 26 percent to fund incremental business change and 16 percent to bolster innovation figure 3. The allocation of IT budget among these three categories is impacted both by industry and market environment and business strategy and priorities.
Depending on risk appetite and priorities, for example, it may make sense for a government agency to delay procurement of a costly unproven emerging technology, while a retail bank may benefit from an ongoing technology-enabled innovation program to gain or sustain competitive advantage. Technology and telecommunications companies commit far more of their IT budgets 22 percent than the overall average of 16 percent to innovation; on the other hand, construction sector organizations spend less 13 percent. Likewise, technology and telecom companies spend a smaller percentage of their budgets 51 percent on business operations than those in any other sector, while their counterparts in business and professional services dedicate a whopping 62 percent of their budgets on day-to-day upkeep.
Most industries spend close to the average percentage on incremental business change, falling primarily between 25 and 28 percent figure 4. We then compared their responses to those of all global respondents to identify differences. The data showed:. Regardless of the size of IT budget, industry, or business priorities, these key takeaways can help CIOs fine-tune their strategies for allocating and spending IT budgets as they help their organizations drive business growth while maintaining operational efficiencies.
Larger budgets may not always be optimized budgets, as demonstrated by CIOs in HPCs, where IT budgets account for a lower percentage of overall revenue. CIOs with smaller budgets may find that necessity is the mother of not only invention, but also innovation.
By aiming for more efficient use of budget dollars, CIOs may be able to burnish their reputations as effective technology investors who can be trusted with larger budgets and more responsibility for funding. Let business lead IT. Industry and budget benchmarks are useful for understanding the impact of market conditions on spending trends, but they are often not a reliable tool for making strategy choices.
Ultimately, the business mandate is likely a better driver of technology investment and budget allocation strategies. Align IT capabilities and priorities with strategic and operational business priorities, and let business strategy determine how best to leverage technology investments and assets to deliver value.
In addition to creating buy-in and support for IT strategy, this also spreads accountability for investments across the business. When technology investments are structured to provide current value and maximize future options, IT investments will likely be measured by business outcomes and the value they create, not just by IT performance. Develop a finance capability with IT.
Allocate resources to oversee the financial strategy of IT operations and initiatives and support the delivery of IT services from a financial management perspective. In addition to financial planning, this can include the measurement, management, and communication of return on IT investment.
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Not only does this optimize the budget, but it also helps increase transparency and build trust that IT investments are generating value. Adding this capability also helps CIOs demonstrate value and impact over time, and reinforces business accountability for technology investments. Centralize tech spending. CIOs can work to centralize the allocation and prioritization of technology spending and collaborate with other organization leaders to create joint accountability for investment and outcomes. Adopt a portfolio approach.
As the roles of IT and the CIO change, traditional approaches for managing technology investments may no longer be effective.
A portfolio approach to managing technology investments may help CIOs optimize their value. Like a mutual fund or a stock portfolio, some investments will deliver outstanding results, while others will be mediocre or lag behind. CIOs can communicate performance of technology investments that other leaders can easily understand, for example, in terms of value, risk, and reward.
Having a venture capital mind-set is likely essential for driving value and delivering impact for the organization.
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