Management's View of the Return on IT Investments

In our conversations with both IT and top business management, it is clear that, in most organizations, there is often a difference of opinion regarding the contribution of IT to the overall growth, or increase in value, of the organization. Deconstructing the IT budget and segmenting spending into discrete categories allows us to attempt to quantify these differing perceptions of IT. To estimate the ROI of IT, as management views it, we first segment the IT budget into "maintenance and operations" (M&O) and "new applications." This split is frequently noted and reported in many organizations. Such segmentation is also often the basis of the IT budgeting and reporting structure.
All business processes incur both maintenance and new investment expenses. When segmenting the IT budget at a typical organization in this way, approximately 75 percent of the budget is spent maintaining and operating existing infrastructure, systems, and technologies. For most, this budget segment is perceived not to create new value to the organization. This is not to say that the systems being supported do not provide any value to the organization. Rather, the year-to-year change in value is minimal, if any. An analogous situation would be to look at year-to-year corporate revenue. While all revenue (and IT value) may be significant, the corporation will likely emphasize increases in annual or quarterly revenue when discussing results. In fact, as with corporate revenue, there can be significant turnover within this base. However, reaching the level of last year is assumed, regardless of the changes within the installed customer or infrastructure base. A large percentage of maintenance is, in fact, new investment or would be treated as new investment in most other contexts. Major among these are support for the prior year's new investments that become this year's new maintenance projects. There is, however, a general blindness to this, since traditional notions of maintenance versus new investment tend to assimilate this dichotomy to recurring revenue versus net new revenue, and the latter typically implies competitive differentiation. Therefore, when viewed by management, the perceived increase in value of this segment is zero, since the major changes to the M&O suite are "last year's" differentiators.