For CIOs, balancing cost constraints against the need to advance technology initiatives is a perennial issue. IT budgets only grow so much, making cost cutting all too often IT leaders’ go-to approach for freeing up finances to fund transformational projects.
But business-savvy CIOs are embracing a variety of financing techniques to provide stress relief for cliff-hanging budget negotiations. By thinking outside the box, they’re finding ways to further grow IT budgets — with support from the CFO.
Here are some approaches to financing that can help provide funding for key IT initiatives — without having to exclusively resort to cutting costs elsewhere to do so.
Planting seeds for a grassroots approach
Due to time constraints and a surplus of projects, many IT leaders end up minimizing opportunities to build relationships with executives and managers in other company departments. But the more you develop ongoing relationships with others outside formal meetings, the easier it is to introduce them to projects and technologies that you would like to fund and pursue — and that their departments and lines of business can benefit from.
By presenting project and technology ideas long before they become budget room discussions, you can develop in other business managers an understanding of these projects and their importance in developing business value, thereby building a groundswell of support that will assist you when it comes to securing funds. Even better, you’ll have managers and executives in the business who will see the benefits and support your proposals.
Budget share and people share
Collaborative project work between IT and business units dramatically bumps up the potential for project success. And it also helps for obtaining funding for projects in budget meetings.
Let’s say there’s a $6 million CRM project that IT wants to propose to give everyone in the customer “loop” 360-degree visibility into customer relationships — from sales to service to accounting to manufacturing and engineering. For ease of accounting, it has been past practice in finance to lump this entire project cost into the IT budget, making it tougher for CIOs to obtain the full amount of funding.
An alternative is to agree with the business departments that will benefit from the project to share the budgetary costs with IT, including internal staff time commitments. In this cost-sharing scenario, the IT budget could carry $2 million dollars of the cost, sales would get $2 million dollars of the cost, and service would get the remaining $2 million dollars of the cost. There would be sharing of staff time allocations as well, although IT will likely have more staff commitments to fund.
Not only does this approach reallocate portions of the project’s costs from IT’s budget to those of beneficiary departments, it also supplements budget-backing forces, which will now be the CIO and the executives of the beneficiary user departments. The net result is that there are now three executives backing the CRM system proposal when presenting to the CEO, board, and CFO.
Create an ROI ‘cash bucket’ for reinvestment
One of the easiest digital projects to show return on investment (ROI) on is an online ecommerce site that immediately starts bringing in sales revenue — and it’s not far-fetched for a CIO to propose a “cash back” of 1% or 2% of this ROI be placed into a “cash bucket” to fund future technology projects.
In this way, when the CIO comes to the board with the next digital project proposal, there can already be a cash reserve that can be tapped for the new project.
One caveat to this approach is that cash reserves should be established for revenue-earning projects only. If ROI is gained from operational improvements (but not revenue), there are no direct revenue streams coming into the company that can fund a reserve account.
Organize an internal R&D function and fund it
For companies that are aggressive with technology initiatives (e.g., pharmaceuticals, high-tech developers, manufacturers, life sciences), there is an inherent cultural belief in research and development of new technologies as a valuable means for maintaining a leading edge. In these settings, it’s easier for CIOs to push for the industry standard of 15% of budget devoted to new technology research and development. But in this case, this R&D commitment would be in addition to what the day-to-day operational IT budget calls for.
Create an IT P&L function
I’ve headed several IT organizations where staff developed an innovative add-on module for a vendor’s product and we then licensed it to the vendor, receiving revenue in return. We weren’t initially developing the new module for sale. What we were doing was custom-developing a function that we needed, and that the vendor’s product didn’t offer. The vendor wanted to license our module because other clients wanted the same functionality. The licensing agreement with the vendor turned out to be a win-win for everyone, and it enabled IT to establish itself as a revenue-generating department.
A second IT P&L approach is to create a data center with service pricing for smaller organizations in the same industry. Many of the smaller companies can’t afford the same systems and IT resources on their own. We’d bill our clients monthly for services, and this offset internal costs.
Either model promotes IT as a revenue-generating center instead of a sunk cost — and that builds IT’s business image.
Final remarks
For the past five years, CIOs have ascended to the boardroom and the strategic planning table because of digitalization, but how do you prove your mettle once you get there?
No one answer satisfies every situation, but innovative financing and developing a head for business that includes revenue generation is a good start.
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Source: News