The traditional argument for justifying IT investments – that of cost avoidance -- has lost some of its glamour according to MSB CIOs. Business leaders tend to be more skeptical about the promised "savings" from IT investments.

“Many midsize business CIOs continue to report great difficulty in justifying IT investments internally,” says Jim Browning, Gartner Analyst. “It is therefore essential to illustrate the impact that IT can have on business processes and goals.”

It’s important to remember that business people respond to IT investments just as they would to any other investment vehicle. Positive ROI attracts more investment; negative ROI – or the perception of negative ROI – chases capital away. MSB CIOs need to justify future expenditures based on business rather than technical analyses in order to gain executive support.

Emphasizing IT’s impact on the business performance
Illustrating the positive impact IT can have on business processes and goals should be the overarching theme when communicating with business executives. Customer relationship management (CRM) systems are often successfully justified by showing how the acquisition of new customers and the retention of current ones will result in greater revenue. A business case for an online e-commerce application should cite intangible benefits, such as improved customer convenience and access, leading to tangible financial benefits (e.g., 20 percent increased revenue through new customers) and increased margins (e.g., 15 percent less expensive to sell online).

Start with frontier applications, and follow with infrastructure and utility investments
To stimulate interest and attention in discussions with business unit executives, CIOs should place primary focus on IT initiatives (enhancement and frontier) that directly influence the performance of the enterprise as a whole and, therefore, are direct contributors to the business objectives and to alignment. Success in these areas will usually lead to approval for utility and infrastructure investments that are required to support business applications.

Utility applications are those that are essential but not differentiating. These applications may be mission-critical (e.g., payroll, human resources), but they do not contribute toward improved enterprise performance. Infrastructure represents the foundation of essential elements, such as networks, PCs, development tools, training and help desk, and the maintenance that is required to deploy, run and support applications within the enterprise. It is important to demonstrate how these cost pools are being executed in a cost-efficient manner.

Baseline IT Costs: the 70 Percent Rule
CIOs can enhance their credibility by introducing applications that dramatically change business performance and the competitive landscape, and those that make the enterprise perform better on a day-to-day basis.

Every enterprise needs a steady diet of new development and enhancements to keep it competitive. A good way to measure IT investment allocation is to determine the percentage of IT spending allocated to ongoing operational expenses vs. investments that help the enterprise grow faster and claim greater market prominence. MSB IT portfolios are typically weighted heavily toward infrastructure and utility applications. Infrastructure represents the foundation of essential elements, such as networks, PCs, development tools, training and help desk, and the maintenance that is required to deploy, run and support applications within the enterprise. Utility applications are not differentiating, but they are essential. These may be mission-critical (for example, payroll and HR) but offer little contribution toward improved enterprise performance.

As a general rule, MSBs that allow their IT baseline (infrastructure and utility) to creep above 70 percent of their IT budgets risk underinvesting in their IT futures, which will inhibit their enterprises’ performance and impair their competitive advantage. MSBs spending more than 70 percent of their IT budgets on baseline costs should try and reduce these costs by 3 percent a year through 2006.

While this is a good guideline and indicator of IT spending health, all investments must be justified in terms of their contribution to business value to maximize returns. The challenge for MSB IT managers will be to determine the right mix of IT investment to support the business processes that will improve customer service, drive top-line growth and cut operational costs.

Building credibility also demands full disclosure of ownership costs
Enterprises that present decision-making bodies with hard data concerning the benefits of IT typically have much more credibility and an easier time procuring IT funds. A common mistake which hurts IT credibility when making the case for an IT investment is overlooking long-term costs of ownership. For example, the ongoing cost of an application is typically 40 percent to 60 percent of the implementation costs for each year that the application exists. When ongoing costs like these are not presented upfront, IT investment will appear more costly than originally anticipated, hurting the CIO’s credibility.