IT budget for 2017: infrastructure versus product
How to think about IT budget allocation when pressure to cut costs and pressure for digital transformation arrive simultaneously.
December is planning season. The conversation about next year's IT budget in most companies runs in two incompatible directions at once: pressure to cut operational costs on one side, and requests for investment in "digitalisation" and new technologies on the other.
This contradiction does not resolve itself. But there is a way to think about it structurally.
Why IT budgets are usually split incorrectly
The typical IT budget structure in a mid-sized company looks roughly like this: 70-80% goes to keeping what already works - licences, infrastructure, support, updates. 20-30% remains for projects and development.
The problem is that a significant share of "keeping things running" is actually maintaining technical debt: systems that should have been replaced long ago, but replacement feels frightening. That is money not creating value - it is holding the status quo.
When a request arrives for a new project - "implement AI", "build a mobile app", "move to the cloud" - the attempt is to fit it into the remaining 20%. Or to squeeze out additional funding. Or to do it genuinely cheaply, which ends up costing more later.
How to split the budget into three buckets
I use a model sometimes called "run/change/transform" - three spending categories with different natures.
Run - spending to keep current operations going. Everything needed so that what worked yesterday works today. The goal here is to optimise and reduce without reducing reliability.
Change - spending to improve existing processes and systems. Not new directions, but a better version of what already exists: automation of manual operations, replacement of outdated systems with more efficient ones, integration of existing data.
Transform - investment in new capabilities that did not exist before. This is what creates competitive advantage or opens new operating models. Risk is higher, the horizon is longer, and the outcome is less predictable.
The distribution between buckets depends on IT organisational maturity and company ambition. But having three buckets at all already changes the conversation: instead of "cut or not cut" - "how much in each bucket and why".
What is currently pressing on the transformation portion
In 2016-2017 several topics are creating pressure on the transformation budget: cloud migration, analytics and data, business process automation, initial machine learning experiments.
All these directions compete for a limited resource. The mistake is trying to do everything at once with small amounts. The right approach is to pick one or two directions where the company has a real need and real readiness for change, and invest enough there to get a result.
Questions for the budget conversation
A few questions that help structure planning:
- What share of the current IT budget goes to maintaining systems that should have been replaced several years ago?
- If technical debt were eliminated, how much would be freed for development?
- Which two or three IT directions in the coming year have the greatest potential impact on business results?
- Does the company have the organisational readiness for change, or will the transformation budget be spent without results due to resistance?
The last question often turns out to be more important than the technical ones. Digital transformation does not get stuck on money or technology - it gets stuck on the organisational capacity to change. Budget without readiness is money spent for nothing.