Business demand for IT is outstripping the budget

IT budgets and staffing are expected to be nearly flat over the next two years (no surprise), but demand for IT services will increase by more than 17%, according to a new study of 80 global companies by The Hackett Group Inc.

That's a big gap, which will have to be closed via IT cost control strategies, demand management and discretionary cuts. But budget cutting won't be enough (and eventually hurts strategic initiatives); plus, this "doing more with less" thing is getting old and unsustainable.

Demand management is one ripe area for improvement. The Hackett study found that only about a third of all companies use cost allocation or chargebacks to bill internal users for IT work.

This reminds me of a previous conversation I had with Shvetank Shah, executive director of the IT practice at the Corporate Executive Board, about coping with the recession: 

Even more important, Shah says, is to have a "crisp conversation" with the heads of business departments to manage the demand for IT. What level of IT service can they now afford? Maybe that "gold" level of service needs to drop to "silver"? Maybe IT can't pay for every gadget someone wants?

Have you had that "crisp conversation" yet?

The Hackett study says demand management has been "underutilitzed."

IT has traditionally been more focused on how to meet ever-growing demand than on implementing processes to curb that demand and ensure that the highest value work gets done. As a result, demand management techniques are less mature than other cost control techniques. The study found that few companies use tactics such as chargebacks, service catalogs, or IT portfolio management to reduce costs, despite the fact that these techniques can drive real savings.

Another IT consultancy -- Compass Management Consulting Ltd. -- agrees. In a recent e-newsletter, the firm says bluntly:

For years, the steady decline of IT unit costs has been more than offset by skyrocketing utilization, resulting in an overall increase in IT spend.  The conclusion we’ve drawn: demand management is the key to significant cost reduction in business operations.

The Hackett Group identifes three types of IT demand management:

  • Project portfolio management: A set of processes aimed at rationalization and prioritization of IT investment decisions based on objective criteria.
  • Service catalog: A defined set of discrete service offerings, with an associated price per unit.
  • Chargeback/cost allocation: A financial management technique that charges consumers according to the volume of IT services consumed, or IT work done on their behalf. Aims to control IT demand  through a price-based feedback loop to consumers of IT services.

By the way, the drivers of business demand are shifting, too, the Hackett study found. Organic growth has dropped as a priority in this economy; now the business is looking for IT to help with "process transformation" and "business reorganization."

Finally, some advice for CIOs from the Hackett study:

  • Anticipate intense stress on IT capacity, and high levels of demand on IT resources.
  • Actively manage IT staff to avoid “burn-out” as a result.
  • Take an active role in managing business expectations and prioritizing demand.
  • Avoid over-committing and under-delivering.
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