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IT Funding Increasingly Comes From...Not IT

Figure out how to engage business-unit leaders, if you're not already. And if you are, realize that, moving forward, you'll be increasingly dependent on their budgets, and make sure you document success of all projects to validate what IT can do.

We read a lot--some may say too much--about the state of the U.S. economy and how businesses fare, and which industries are hurting the most and healing the best. But what about IT, specifically, and how does your company compare with others?

The trends for IT budgets mirror the economy, in some respects. If you consider an IT budget increase a positive sign (and not everyone does; some would argue a leaner IT budget is a good thing for the organization, depending how effectively IT uses the funds and negotiates its deals), then 2010 is a better year than 2009, according to Nemertes' latest research benchmark, which involved interviews with more than 200 IT professionals.

About 77% of companies are running IT with flat or decreased IT budgets this year, and only 23% are enjoying increased budgets. Among those with decreased budgets, the average decrease year-over-year was 23%, and among those with increases, the average increase was healthy at 27%.

On average, companies spend 3.2% of their revenue on IT. Small companies (with less than 250 employees) assign 4.3% of their revenue to IT, while very large companies (those with more than 10,000 employees) devote only 2.2% of their revenue to IT. Midsize (250-2,500 employees) and large (2,500-10,000 employees) both spend an average of 3.6% of their revenue on IT. Although these percentages are lower than pre-recession (when the average company devoted 4% to 6% of its revenue to IT), these figures may be a bit misleading because IT spending increasingly is coming from business units. (More on that in a minute...)

IT leaders are dealing with the budget decreases in a variety of ways--reducing staff, reducing maintenance contracts, and using technology itself to reduce costs. For example, the IT director of a software and high-tech company says the economy drove down the IT budget, leaving the staff no choice but to figure out how to operate efficiently. "We've virtualized and consolidated, so that brought our costs down," he says.

Even among those companies with increases, most must adhere to strict policies mandating payback periods of 12 months or less. "We had a crunch before the crunch went below sustainable," says the director of IT for a $25 billion global manufacturing company, which increased its IT budget in 2010 from $150 million to $175 million, after a drastic decrease in 2009. "We shut down PC refresh, for example. You can only shut this down for a year to 18 months. We just kept the lights on and worked on strategic initiatives with a strict six-month ROI."

One indication for IT vendors and service providers is that there will be a pent-up demand for new projects throughout the next few years. We already have started to see this in the second half of 2010, as IT staffs begin planning phases for new architectures supporting new technology initiatives in the areas of unified communications and collaboration, social computing, and virtualization, among others. One way for IT leaders to increase their chances of higher IT budgets and budget increases is to improve their stature within the company. Among companies that received budget increases this year, 61% considered IT a strategic asset to the company; 14% are viewed as cost centers. Nemertes asked participants to rate how the business views IT on a 1-to-5 scale, where 1 is a cost center and 5 is strategic, and we then correlated various data points.

What's very convincing are the actual budget figures. The average IT budget of strategic IT staffs is 5.8% of the revenue, compared to 0.75% for IT staffs that the business views as a "cost center." Virtually all IT leaders want the business to consider IT strategic, but the reality is that it takes a lot of work to get there. "We have made a lot of progress making IT a partner in a lot of projects," says the CTO of a financial-services company. “We joke about it, but we tell people: 'You wouldn’t be a profit center without our technology'"

As business-unit leaders begin to understand that mantra, they are more apt to fund IT projects. In fact, strategic IT organizations receive 66% of their funding from business units or a combination of business units and central IT. In contrast, IT departments whose companies view them as cost centers receive only 40% of their funding from business units.

On average, 15.2% of companies say they receive funding for IT projects from business units, and 40.5% receive their funding from a combination of business units and central IT. These figures are a much more simplified view of IT funding processes, which vary widely depending on the size of the organization, industry, type of project, and funding type. In the end, either IT or a business unit funds the IT spending, but there are numerous paths to get each company there.

In some cases, for example, capital costs come from the business unit and operational costs come from central IT. In other cases, the business units fund operational costs of the IT projects, as well, because IT charges back business units for the cost of IT. The decision point also varies. In some cases, the business units simply inform IT of their needs, and IT decides who to use and what to spend. In other cases, the business units have more of a say-so. "The business teams review the priorities and decide what projects we’ll do," says the IT director for one financial-services company.

The key for IT leaders, though, is to be assertive! Figure out how to engage business-unit leaders, if you're not already. And if you are, realize that, moving forward, you'll be increasingly dependent on their budgets, and make sure you document success of all projects to validate what IT can do to improve business operations, revenue, and productivity, while reducing costs.