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IT 'Shadow Spending' Has Doubled

By Tom Pisello
April 7, 2004 12:00 PM ET

Computerworld - From 1995 to 2000, IT spending became the king of capital expenditures, rising from 18.2% of all U.S. business capital investments to a peak of 46.7% -- a substantial jump from $225 billion to $642 billion in five years. Clearly, IT spending has experienced a pullback over the past three years -- as much as 20% from the 2000 peak, according to government statistics. But even though budgets have been challenged, businesses are still hungry for technology. Backlog requests for IT projects have risen over the past three years by more than 30% as older projects remain unfulfilled and new ones continue to arise. These projects include infrastructure upgrades, regulatory compliance, security, integrations and new productivity and business application requests.
The result of the formal budget shortfalls and growing backlog is a remarkable increase in shadow IT spending, also known as "rogue" IT. Business leaders have been gaining stealth approval for technology spending by wrapping equipment purchases, applications and development projects within other business investments. As IT requests continue to pile up, business-unit managers have had a hard time taking no for an answer, and rightfully so. Many of these projects deserve funding, since they deliver quick paybacks and great returns and offer low risk to the company.
Armed with their own capital budgets and resources, savvy executives have found a way around the formal IT spending logjam. But while shadow projects may seem necessary today, they come at a steep cost for the future, when centralized IT will need to integrate these systems back into the mainstream and provide ongoing evolution and support. Original expenditures on project hardware and software typically represent only 20% of the total cost of the project -- meaning that 80% of future project costs may be borne by the formal IT organization.
In the late 1990s, shadow IT spending was estimated to be 10% of the formal IT budget. Most of the shadow IT spending was due to support and training shortfalls from formal IT. Business-unit resources often provide informal support for various technologies and applications as users seek "how to" or technical assistance from local peer experts rather than the service desk. This informal support mechanism was estimated to be four times more costly than formal support. By improving service levels and running public relations campaigns to improve the image of the service desk, CIOs sought to reduce this hidden cost and, in turn, reduce shadow IT. Such best-practice efforts were effective for many companies -- often resulting in 40% reductions in shadow IT costs.
But today's

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