Originally published October 11, 2010

Too often over the years IT has been accused of big spending without big results. And with the recession adding new financial pressures, it’s time for CIOs to stem the tide and demonstrate their fiscal responsibility. How did we get here and how do we fix it?

Howard Anderson, founder of The Yankee Group research firm and a senior lecturer at the MIT Sloan Entrepreneurship Center, places the responsibility squarely on CIOs. If they had not damaged their credibility by going “crazy for a while,” overstating the strategic value of IT and overspending on hardware and software, there would be less pressure to reform. Now, they are being reined in by CFOs and other top managers who want lower transaction costs and more innovation for the same or less money. “CIOs are clearly being told: ‘You are part of the administration, and you need to get more from your vendors,’ ” Anderson says.

At the same time, he acknowledges that line-of-business managers and departments are “running stealth operations,” bypassing CIOs when purchasing consumer IT products and Web-based services. “These are really a big management issues, not just cost issues” that have to be addressed, he says.

Taking Control of Costs

The need for substantial change — not just belt-tightening — is familiar to Albert Lee, CTO of Freelancers Union (non-profit) and Freelancers Insurance Company (for-profit). He says that CIOs are well aware of the economic environment and what they have to do. “In the current economy, everyone is paying close attention to spending,” says Lee. “There are no unlimited IT budgets; cost control is crucial,” he says.

Rather than working at odds, Lee says, IT should be partnering with corporate finance to discuss common goals and objectives as well as define acceptable risks. Only once those are decided, can IT can carry out its mission. “What will the business tolerate in terms of uptime?” he asks. For example, “If five 9's[99.999%] uptime guarantees are not necessary, IT spending can go down accordingly.” The same is true for the frequency of equipment upgrades, as well as security and storage requirements. “Finance [departments] need to understand the impact of spending less on IT,” Lee says. “Everyone must agree on what the acceptable risks are and

collaborate on the compromises to be made,” he says. These are decisions and tradeoffs he has to make every day.

Matthew Smith, managing director and CIO consultant at Harvey Nash Plc in the U.K., also sees reform and collaboration taking place between IT and the business. Smith, who regularly speaks with global CIOs at the recruitment and IT outsourcing firm, says that there is “real awareness [about] fiscal responsibility” and the need to mesh IT value and business objectives. To achieve this, CIOs must “create absolute transparency in terms of spending” so they can gain trust and make sure they have business sponsors for new efforts. “If you have a clear value proposition, IT becomes the business,” he says.

Cloud Solutions?

Many view widespread adoption of cloud computing and virtualization as the silver bullets that will tame server sprawl, overcapacity and runaway costs — but the jury is still out on the actual ROI for these new models.

According to the 2010 global CIO Survey conducted by Harvey Nash and PA Consulting Group, software as a service (SaaS) is gaining ground. It has become “more important” to 35 percent of more than 2,000 respondents this year overall. In Germany, adoption will spike to fully 83 percent of respondents, and in Scandinavia 42 percent of CIOs will be increasing their use of SaaS. Cloud computing is on the agenda for 51 percent of CIOs globally.

Nevertheless, Smith says there are caveats to cloud and on-demand models. “SaaS can enable the business to bypass IT,” he notes, “and while entry costs are lower, exit costs might be substantial. We don’t have five years of experience yet to know that.”

CTO Lee agrees that the new delivery models are not a panacea. While using cloud services will immediately lower capex spending, it won’t lower administrative costs, he says. “You still have to redesign your software to accommodate the new models, and there are hidden costs that make meaningful ROI difficult to show,” he says. At his shop, Lee says many IT resources are underutilized — making a “compelling case for the cloud.” Yet he knows that he can take steps to improve utilization in-house as well.

MIT’s Anderson is not very sympathetic to CIOs. “If cloud and virtualization can really lower costs in the short term,” he says, “why are CIOs moving so cautiously?” His view is that entrenched mindsets

and fear of losing clout are preventing some CIOs from moving ahead more aggressively with new platforms. To give them a nudge, he recommends financial incentives for CIOs who consolidate data centers and get rid of underutilized equipment. Establish clear metrics and then measure the results, Anderson says. “Better performance and ROI from virtualization should be immediate,” he says, and CIOs should be held accountable to achieve what they promise.

For Lee, there are lessons to be learned on both sides: “if business executives don't fully understand the value of IT, they will never want to invest in technology,” and the value won’t materialize, he says.

Accountability, it seems, has to flow upstream as well as down.