Hidden Pockets

There's more than one way to skin the IT-budget cat.

IT-enabled business initiatives: they're all great ideas, but who pays? Most enterprises either raid the corporate budget or resort to a user pays policy.

The recent downturn in IT spending choked off corporate IT budgets and reduced users' abilities to pay for IT services. This double whammy forced many CIOs to look for other sources of funds. From recent research done with our Gartner EXP members, it seems that CIOs are becoming much more creative when it comes to generating the wherewithal to invest in IT-enabled business initiatives. It turns out that there are eight different funding models in use: four internal and four external.

Internal funding is the most common. The funding model we're most familiar with is the corporately-funded annual budget. In corporate funding the enterprise allocates funds to the IT budget that are then used to fund planned initiatives. This has the advantage of being simple, but not without its challenges. Getting corporate funding takes time and the internal committees who approve the initiatives are rarely generous. This type of funding suits long-term, strategic IT initiatives, like large infrastructure upgrades, where benefits are spread across the enterprise. But it increasingly fails to address more tactical IT initiatives.

In addition to (or perhaps instead of) corporate funding, CIOs turn to the second most common funding model: business-unit funding. Business-unit funding replaces the single central corporate source with funds from multiple business units. Like corporate budgets, business-unit funding is simple to run, but requires strong IT governance if wholesale duplication is to be avoided and enterprise-wide IT initiatives successful.

If the idea of a centrally funded or business-unit funded "IT tax" does not play well in your enterprise, there's always fee-for-use. It's possible to use chargeback to create a pool of "funds on hand" for funding IT initiatives. This approach works for some projects with a long operational life and reasonable levels of investments. However, for expensive or short payback projects, the chargeback payments are necessarily very high, and can be even higher by the need for a risk contingency, making chargeback unattractive.

For very risky projects there is another way. Superficially similar to centrally-funded models, an internal venture capital pool could be used to structure funding. The funds are invested in projects that offer a high payoff, but involve a high level of risk. Among the challenges of funding from a venture capital pool is the selecting of initiatives. Each initiative must be subject to rigorous financial analysis and have a business sponsor who can vouch for the benefit and is willing to pay the chargeback. Sounds like a "must have" for everyone.

There are four ways to get someone else to pay. If none of these internal funding sources appeals, or if all of the sources of internal funds have been exhausted, it's always possible to turn to "the market" for funds. Although there's no such thing as a free lunch, external funding sources have three benefits: lower up-front costs, savings can be used to run other initiatives and the risk is spread across several parties.

The first place to look for external funds is external service providers (ESP). It is not uncommon for an ESP to make an investment in return for a share of a long tail business. In return for upfront funds, the customer commits to regular payments, usually over a number of years. The two most common examples of ESP funding are outsourcing and vendor financing.

If you can't entice your ESP to pay, or don't wish to commit to a long-term contract, another form of external funding you might consider is government grants and incentives. Most government agencies offer grants or incentives to encourage enterprises to invest locally for the right type of initiative. But grants come well wrapped in red tape and require projects to clear some pretty high hurdles. Grants are best suited to long-term strategic initiatives - usually of the sort that employ lots of people, like call centres.

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