In its 2000 Worldwide Benchmarking Survey, META Group asked enterprises which divisions within their companies were responsible for IT spending decisions. The research firm found that 52 percent of IT spending is controlled by the line of business rather than the IT or IS division.

“It’s been increasing steadily over the past five or six years, and we predict that that trend will continue,” said Jonathon Poe, vice president of META Group’s Executive Directions, a group that advises CIOs.

Why is IT spending moving out of IT and into the business units? And what does this shift mean for the IT division? We talked with IT budget and strategy experts from four IT research firms—META Group, Gartner,Giga Information Group, and Cutter Consortium—about this trend.

Why is this shift happening?
Analysts interviewed offered several reasons for why IT spending is moving into the lines of business, which broke down into four primary causes:

  1. Technology is used by all aspects of enterprises. Technology, once the domain of the few, is now an essential part of every business function. In addition, business managers now perceive technology as a method to increase revenue, according to Gartner analyst Kurt Potter. They also see technology as a way to gain a strategic advantage over competitors. This shift in thinking means that business managers are now devoting more of their own resources to technology spending. (To learn more about how business managers will promote technology spending, see “The impact of e-business on IT spending and how CIOs should prepare.”)
  2. The proliferation of e-business. Business units naturally look to e-business as a way of expanding revenue, but when the Internet explosion began, business managers did not perceive the internal IT division as being experienced in this area. Therefore, business managers outsourced these projects, according to Gartner analyst Mike Gerrard, who studies IT strategic investments and management.
    Furthermore, according to “E-Business: Trends, Strategies and Technologies,” a study by Cutter Consortium, e-business spending is funded primarily by the business units. The study found that 59 percent of e-business initiatives are funded solely by the business, while 30 percent are a joint funding effort between the business division and IT. Only 11 percent were completely funded through IT.

  1. The trend to outsource some IT functions. In addition to outsourcing e-business, business units are also outsourcing other IT functions because internal techies have been preoccupied with Y2K and other major enterprise-wide initiatives, according to Poe.
  2. A more complicated accounting system. Ultimately, Gartner’s Gerrard questions whether IT spending is really moving out of IT’s control, or whether the statistics simply reflect a shift in accounting for IT spending. “The phenomenon is more bookkeeping than anything else,” Gerrard said. “A simple model of IT spending places all technology expenditures under the CIO’s budget,” he said. “In large companies, IT is involved in the decisions, but the bill is sent to the business unit that benefits from the project.”

What does this mean to IT?
This trend is actually going to work in IT’s favor, analysts predicted.

Why? Until recently, IT has funded all technology projects, which meant that it paid for projects that it neither controlled nor benefited from, according to Chris Pickering, a senior consultant with Cutter Consortium. That system is a violation of basic economic principles, Pickering explained.

“It separates value from cost. The business users don’t have to suffer the costs, and the ones who are suffering the costs—the folks in IT—don’t get to enjoy the benefits,” he said. “We know from economics that benefits encourage certain actions, and having costs and benefits together leads to better decisions. When we separate them, we almost naturally create an impossible situation. Instead of decisions being based on sound financial reasoning, they start to get based on politics and personal issues and that type of thing.”

In a recent survey, we asked TechRepublic members what types of technology spending the business divisions control.

It makes more sense when the business units that actually use the technology must fund it, Pickering added. He proposes a model in which a centralized IT infrastructure is supported by a fee or tax-like structure paid by the rest of the company.

“I believe the folks who are going to enjoy the [benefits] of an investment or an expenditure should be the ones who make the decision on whether or not to do it, how big it should be, and how it’s done,” Pickering said. “The ones who need IT should be the ones who control the purse strings on it.”

Chip Gliedman, a vice president with Giga’s IT Management and Services Group, also recommended a fee structure for IT services. Otherwise, he says, IT may be viewed as a corporate money pit.

“In many cases, the money was spent in one department and the benefit was garnered by a different department,” Gliedman said. “This led to the notion that IT is a cost center, and management 101 says the thing you do with a cost center is eliminate it.”

The shift will also mean that the business units will be held accountable for their own schedules and purchases, analysts said. No more blaming project delays on IT, said Poe.

“They now have the budget, and it’s their choice of whether to allocate that money to the internal IT department or to go out to an outsourcer,” Poe said. “A lot of businesses are now finding out that it’s very difficult to go out to an outsourcer [and] have that kind of communication and collaboration that they did with their internal IT group. Plus, you have to pay the outsourcer some kind of margin for them to be profitable.”

Of course, communication is a two-way street. IT divisions will also have to focus on working with the business units, analysts said. That’s the true challenge for IT now, according to Gliedman.

“You don’t see a whole lot of CIOs becoming top managers,” he said. “They don’t know the language of business, so they talk about MIPS and terabytes, and when you’re a CFO or a CEO, the only thing an MIP or a terabyte is is a bill from IBM.”

IT must learn to accommodate business and user needs, Gliedman said—no matter how painful that might be for IT professionals who are used to focusing on the customary IT metrics of delivery time and price.

“IT traditionally doesn’t like to talk to users because, generally speaking, users need changes. Changes drive costs up and cause project delays. Heaven forbid they might actually get something useful,” Gliedman said.

What it does NOT mean for IT?
There’s one thing this spending shift does not mean for IT: a loss of control. In fact, analysts bristled at the notion that IT’s position might be somehow weakened when business units pay for the technology.

“You don’t have to be in control of something to influence it,” Gliedman said. “There’s this notion among people that if they’re not doing it themselves, it’s bad. But as we manage people, we have to learn to delegate. What is outsourcing or distributed computing other than delegating?”

Business managers are learning that they must work with internal IT divisions, said Gerrard.

“The trend is not to absolutely disintermediate IT from anything to do with e-business. In fact, today it’s the reverse,” Gerrard said. “There’s a lot of thought going on [between] the IT organization, the CIOs, and the business on how together they can cause the right things to happen.”
Disintermediate is a term that refers to the removal of an intermediary, or middle agency.
What’s a CIO to do?
How does this spending shift impact CIOs? Analysts say it’s a chance for CIOs to form alliances with their business peers.

“We think it’s a good thing that’s going on because it’s [forcing] CIOs and CTOs to focus on what we call ‘externalizing,’” said Poe. “You can no longer run your operations within the glass house and assume that the user is very happy.”

But how do you do that? Next week, we’ll share analysts’ tips for how CIOs can effectively handle this shift in IT spending.
Do you think this shift will result in any substantial changes for IT in the enterprise? Has it affected your IT division? Post your opinions below or send us an e-mail.