If neither ESP nor government funding works, there is a third type of external funding: consortium funding. With consortium funding, several enterprises pool their funds and resources to develop a common solution, which spreads risk across the parties involved. But consortia are difficult and time consuming to set up. Participants need to agree on the working arrangements and how much funding each enterprise will contribute. The challenge is keeping the consortium together and controlling and protecting intellectual property. Consortia also absorb huge amounts of management time so this model may be unattractive from the perspective of non-financial costs.
If consortia are not for you, and you do not wish to turn to government or your ESPs for funds, there's always the opportunity of turning IT into a business and living off the income you can earn from the marketplace. This final external funding model, revenue attraction, creates funds from selling an IT service on the open market. Revenue attraction is especially useful where the IT service is a commodity and can be offered as marginal capacity. Examples are data centre capacity, Web hosting and banking back-office systems. But as you would imagine there are significant disadvantages too. These include the need to be able to compete for, win and execute work profitably: No small challenges.
Another Set of Skills
It seems that there is a trend in funding that will see, over the next three years, a larger proportion of IS funding come from external sources, rather than from internal sources. Outsourcing, a form of ESP funding, will continue to grow both in IT and on the business side, and turn IT fixed capital to operating cost. To make a success of external funding, IS departments need new skills and competencies.
First and foremost, IS must develop four new financial skills. They need to ensure they have financial modelling skills to accurately forecast the initiative's funding requirements and costs. Risk analysis skills will provide an understanding of the variances in benefits and costs that can occur. In addition to skills, the IS department needs to develop financial controls to measure and monitor the flow of funds and chargeback. And it needs data-collection discipline to accurately capture the actual costs and expenditures.
All of these necessary competencies demand a highly skilled individual with a finance and IT background. The role of VP Finance, IS's CFO reporting to the CIO, is becoming increasingly common.
The wider use of external funding brings with it a wider range of stakeholders. IS must manage these relationships and contracts. The contractual arrangements often require detailed recordkeeping and reporting. This is something else that IS must put in place. Grants and incentives are particularly sensitive because they use public funds and require elaborate reporting to Oversight and other bodies. Care needs to be taken to avoid "co-mingling", as grants are, by definition, for specific purposes.
External funding models help to spread the financial risks of an initiative; but external sources often introduce financial risks of their own. As more funding approaches are used, a wider range of risks is introduced, so IS must develop sophisticated financial risk management.
Managing financial risk is highly complex. IS needs to be careful not to over-expose itself to a particular financial risk. Adding just one new model might increase the complexity to the point where it is not justifiable.
Introducing the enterprise to different funding models can lower the up-front expense of an initiative, allow more initiatives to run and spread financial risk. And it can pave the way to fund more innovative or opportunistic initiatives.
But as IS organizations move toward external funding approaches, challenges are set to become more significant. Pursuing these funding sources require the IS department to up-skill in financial modelling, financial risk management, financial control and financial data collection. And it means dealing with more stakeholders.
Are the benefits worth it? Using more funding models can lower the up-front expense of an initiative, allow more initiatives to run and spreads financial risk. Still, it's best to move slowly towards using external funding and take the time to build the vital skills and get the experience required to achieve the desired outcomes.
Andrew Rowsell-Jones is vice president and research director for Gartner's CIO Executive Programs
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