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IT Budgets and ROI

Purse strings are loosening ever so slightly, but that won't slow the quest for better metrics.

After several years of doom and gloom, IT budgets will, depending on whom you talk to, (a) increase slightly, (b) increase very slightly, or (c) stay flat. Even the most optimistic predictions give little cause for celebration because, as Gartner research director Barbara Gomolski notes, “Most companies cut their budgets over the past few years, and [even with an increase in 2004], we won’t have made up for that.”

AMR Research has found that in this year’s third quarter, executives were more optimistic than they’ve been in three years. “People expect to expand their business next year. They see some positive [economic] signs out there,” says AMR research director David O’Brien. But caution, he says, remains the watchword. “Despite some positive signs, companies are not hiring people and not making the dramatic investments they would have if they had seen those signs two or three years ago. We’ve learned some hard lessons about what happens when you invest in the business ahead of revenues and profitability.”

And even if IT budgets increase in the aggregate, loosened purse strings will vary by industry and will likely be driven by a few items on companies’ shopping lists. Gartner says petroleum, retail, health care, and financial-services sectors will spend more, but that manufacturing, transportation, and electronics, among others, will continue to cut. Surveys conducted by AMR find that databases, physical, infrastructure, and security are the areas most often cited as due for spending increases.

“Discretionary IT spending may never come back for some industries,” says Val Sribar, senior vice president and principal analyst at Meta Group, adding, “Unlike in the old days, a significant portion of the budget now gets revisited each quarter. The starting budget can end up looking dramatically different come March.”

Indeed, even though AMR’s survey results were among the more optimistic of the looks ahead to 2004, O’Brien says “the theme for next year is ‘cut costs, cut costs, cut costs.’” So much for good things coming in threes.

Tinkering with the Equation

Whether a company cuts, maintains, or increases IT spending, virtually all organizations will attempt to bring ever-more rigor to spending decisions. That has often been perceived as a CFO’s primary contribution to IT strategy. But these days, pressure for demonstrable returns is just as likely to come from even higher up on the food chain.

“If you are on the board of directors of a company, you are fairly jaded by technology right now,” says Sribar. “What have you heard in the past 10 years? All that talk about Y2K? Or that dot-coms would change the world? Good board members are asking, ‘Why do I want to spend money on technology?’ They’re skeptical; they are questioning more and forcing people to justify what they are doing.” That means the quest for appropriate measures of ROI will intensify.

Some traditional ROI metrics for IT projects just don’t cut it anymore, according to Gartner’s Jeremy Grigg. There’s more pressure to provide robust business cases up front, he says, ones that look past implementation costs to a project’s effect on long-term business plans. Vendor calculators are out, he says, as customers up the ante by asking for “more scenarios, sensitivity analysis, and a better understanding of project interrelationships.”

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