Brief: IT - An Expense Or An Investment?

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Most IT professionals would rather leave questions like this to the financial types. However, CIOs should take some time to understand how the answer affects IT budgets and the IT organization's ability to do its job. We'll try to keep the answer simple and direct.

What's the difference?

An expense is a cost that is generally recurring (e.g., electricity), delivers a short-lived benefit (e.g., lunch), budget decision-making is relatively straightforward, albeit not simple (e.g., how much to budget for paper), and the consequences of a poor decision can be recognized and corrected fairly readily (e.g., spend more money on paper).

An investment is a cost that is not frequent (e.g., constructing a building), and offers long-term benefits (e.g., improved customer satisfaction).  Budget decision-making is complicated, involves alternative choices (e.g., which desktop standard to adopt), and the consequences of a poor decision may neither be recognized immediately (when they are, they're often catastrophic) nor corrected readily (e.g., the Three Mile Island disaster).

So what?

Organizations that make decisions about IT as if it were purely an expense tend to make decisions that:

• focus more on costs than on needs and benefits
• take a short-term view
• give little consideration to IT projects and activities that don't show immediate and tangible results

That's a recipe for managing costs, not making investments. For example, the CIO of a large organization recently submitted her report on Y2K project performance - the gist was that the project was 20% under budget.  Based on this cursory information, everyone seemed to be pleased.

No one asked why the project was so far under budget, and no one told them why. They were unaware that, 1) essential personnel had not been hired, 2) most key project milestones had been missed or were threatened, and 3) the critical project results were at risk.

How do you know when senior management treats IT as an expense?

Here are a few telltale signs:

• the financial people just want to discuss the costs
• the CIO almost never gets to speak directly with top management
• funding decisions take forever (or so it seems)
• IT budget freezes become routine
• service demands increase relentlessly as IT budgets are cut or held "steady state"

Why does that happen, what can be done about it?

Let's start with three assumptions. Senior management:

1. understands that IT can provide significant benefits,
2. doesn't want to make poor decisions, and
3. is able to make good decisions if they have good information

A recent survey of IT managers revealed that the majority believe that "senior management doesn't have a clue" when it comes to information technology. They are right. Going back to senior management in the Y2K example, they didn’t have a clue about the real situation. All they knew is that the project was 20% under budget.

What senior management does know is that:

• most IT projects end up significantly over budget
• a high percentage of approved IT projects are canceled, with high "sunk costs" to boot
• too many IT projects don't deliver the promised results

Who is to blame?

No one! But, everyone is responsible for improving the situation:

• senior management must assure that their strategic vision is communicated to, and clearly understood by, the IT organization
• the CIO must learn to speak the language of business and insist that senior IT managers do the same
• business units and the IT organization must work together to assure that IT supports business objectives

What can be done?

Nice concept, but how to do it? Organizations that are taking steps to remedy the problem are treating IT as an investment. They are:

• implementing processes that link strategic goals, business objectives, and IT initiatives within a solid analytic framework
• redesigning their IT budgeting process to deliver balanced information on costs, options, benefits, and risks to decision-makers
• requiring better information about projects before they are considered for funding, and managing project budget and operations performance with equal vigor

This is a brief introduction to the expense vs. investment issue. There is a lot to consider that we haven’t addressed. The notion that IT represents "a portfolio of investments" is rather new, and this concept will be explored in the weeks to come.

You can learn what some organizations are doing in "The IT Investment Management Approach" tutorial.