Your biggest challenge in 2005 is to grow while shrinking. It's not impossible.

Reader ROI

• How to reconcile cost constraints with the need to innovate
• How CIOs have shifted IT funds from fixed to flexible expenditures
• How to prevent CFOs from reallocating all of IT's freed-up funds

For Catherine Brune, senior vice president and CTO at insurance giant Allstate, business volatility is a way of life. So when four hurricanes slammed the state of Florida within two months last year, Brune was prepared. A catastrophe claim centre with several hundred desks was up and running in Orlando in less than 72 hours, and wireless-enabled satellite vans were dispatched to meet Allstate customers as each storm hit shore. As other hurricanes tore through the centre of the state, that claim centre had to be evacuated and then moved back in a period of days. IT leaders quickly came up with hundreds of thousands of dollars to set up a temporary centre, move desktops and assure connectivity. "Sudden disaster demands flexibility," says Brune. "To be responsive, we need to move quickly and invest in new technologies. And we need an IT budget that allows us to change directions on a dime."

To help Allstate respond effectively to natural disasters and other unpredictable changes in the business, Brune has pushed to expand the portion of the company's $US1.2 billion IT budget that is flexible or discretionary. IT flexibility allows her to respond more easily to business units' needs and invest in technologies they ask for. To improve IT's agility, Brune, who started her career at Allstate 28 years ago in operations, has made it her mission to cut fixed costs and reallocate at least some of those savings to strategic projects. When she took over as CTO two years ago, fixed costs, which she describes as anything that "keeps the lights on and requires people and monitoring", made up 75 percent of the total IT budget. Today, that amount has fallen to 50 percent and could drop even further as Brune continues to find redundant systems and trim fixed costs. The added budget flexibility allows her to invest in new technologies and respond more easily to changing business needs.

IT executives today are caught between the opposing forces of cost constraints and pressure to innovate. One key to reconciling those forces is to shift the ratio between fixed and flexible IT costs. CIOs in many industries are trimming fixed expenses, such as personnel costs, mainframe expenses, hardware and software maintenance, and equipment leases, to free up more money for strategic projects and investments in new technologies. In doing so, they are eschewing the easy route; an IT budget filled with fixed costs means the organization will be more predictable and easier to run. But they are also benefiting from freedom from long-term leases and suffocating maintenance costs as they invest in technologies that can spur growth and competitive advantage. "If you're not spending a third of your IT budget in some discretionary way, you are missing the strategic opportunities to leverage IT," says Steve Andriole, senior consultant at Cutter Consortium's business-IT strategies practice.

Changing your cost structure to create greater flexibility is the best way to keep IT front and centre in business strategy while adhering to the imperative of lower costs. Just ask Rudi Huber, CIO and vice president for global business services of aluminium giant Alcoa, who has cut overall IT costs by 30 percent in the past few years but has also managed to move forward with a multiyear, multimillion-dollar ERP implementation that will replace ageing financial, procurement, commercial and manufacturing systems. During this period of belt-tightening at Alcoa, Huber has gone from a 70-30 ratio of fixed to variable costs to about a 50-50 level. "With more flexibility we have been able to make the investments we need to remain competitive," Huber says.

But with the rewards also come greater risks. Savings from reduced fixed costs might be gobbled up by the CFO to pad the bottom line, rather than being kept in the IT budget in readiness for new investments or unexpected opportunities or needs. In addition, CIOs with larger amounts of variable spending face increased pressure to deliver business value on new and untried projects. "The biggest risk is that you won't deliver on a project," Brune says. "You run a better business when you have more of your dollars going toward flexible or strategic initiatives, but it's a lot harder to do."