A Separate IT Capital Pool Makes No Sense

Many corporations separate the allocation of IT capital from the process that allocates corporate capital in general. This approach is misguided. Corporations don't have IT capital and non-IT capital. Capital should be allocated to the programs or projects with the highest return to the corporation (with obvious exceptions, such as regulatory compliance and not-for-profit endeavors).

All capital allocations should come from a single pool. This approach allocates capital more effectively. It facilitates portfolio management by evaluating all proposed projects together. It allows the company to allocate capital in accordance with corporate strategy while balancing risk and skills across the enterprise. A single pool of capital will also accomplish the following:

Establish corporate priorities. Wrestling with a single pool of capital forces the executive team to discuss and agree on corporate business priorities. This can help you avoid a situation like the one a retail client of mine found itself in. The company had separated IT investments from corporate funding for new-store construction. The committee approving store funding never considered IT projects as alternate investment opportunities. As a result, the client failed to invest in several IT projects that would have had a higher return than building new stores.

Facilitate risk management. High-return programs are often very risky, and most companies have a limit on the level of risk they're willing to undertake at once. They may choose to defer some high-return programs if the overall risk profile gets too high. A single pool of capital makes that easier to gauge.

Exhibit fiduciary responsibility. Shareholders expect companies to invest their capital where it will provide the highest return, regardless of arbitrary corporate divisions or internal politics.

Improve the quality of business cases across the corporation. Allocating capital from a single pool provides consistent criteria for evaluating programs and making trade-offs. Each business case must be robust enough to withstand scrutiny at the corporate level. This forces all programs to be better defined, planned and estimated .

Involve IT early in the project life cycle. Having a single pool of capital helps prevent IT from being excluded from "business" projects. One company built a number of new manufacturing plants, each with a different IT base. Since new plants weren't considered IT projects, the IT organization wasn't involved until construction of the plants was well under way. IT never had the opportunity to suggest a common platform for the manufacturing systems. As a result, the company was left with a chaotic and unsupportable IT infrastructure. This unnecessary and expensive mistake could have been prevented if IT had been part of the capital allocation process.

Help demonstrate IT's value to business initiatives. Virtually every IT project is really a business program with an IT component. Even most infrastructure projects are really undertaken to improve the support provided to the business as a whole. Funding from a single pool of capital clearly demonstrates that IT support is integral to the business. (This is especially useful at companies that don't value IT's contribution appropriately.)

Change the CIO's role in the funding process. With one capital pool, the CIO should no longer be the only voice arguing for IT funding. In most cases, the justification should fall to the executive sponsor of the corresponding business initiative. Similarly, many CIOs currently run the allocation process for IT capital. With a single pool of capital, the executive who oversees corporate capital allocations, typically the CFO, will manage the entire allocation process. (In companies with difficult political situations, an outside consultant may be hired to establish the new allocation process and ensure that it's impartial.)

Remove arbitrary limits on IT capital. When the capital pool available to IT becomes the entire capital pool of the corporation, specific limits on IT capital are essentially eliminated. In theory, as long as the proposed programs will generate a high enough risk-adjusted return, the corporation should fund them even if it has to borrow the capital.

A single pool of capital ensures that IT program funding is based on business benefits, not technical merits. This approach will provide better IT support for your company's business initiatives, so persevere beyond the politics and push-back. Funding from a single pool of capital will leverage your company's available capital resources to provide the best possible return.

Bart Perkins is managing partner at Louisville, Ky.-based Leverage Partners Inc., which helps organizations invest well in IT. He was previously CIO at Tricon Global Restaurants Inc. and Dole Food Co. Contact him at BartPerkins@LeveragePartners.com.

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