“Balancing strategic investments with the need to control costs begins with having full visibility into how IT dollars are being spent,” says Anja Allen, an Ernst & Young LLP (EY US) Technology Consulting principal.
Too often, IT budget reviews are conducted as a “big bang” exercise every three or four years. This allows costs to become entrenched and difficult to refine.
“Too little is done to give organizations the ability to manage costs on an ongoing basis and make cost optimization a core competency,” Allen says.
Candy shop syndrome
IT organizations often also fall victim to what Allen calls the “candy shop syndrome”: Business users, who have no stake in IT investment decisions, demand shiny new technology without conducting a thorough ROI analysis.
“IT tries to please everybody, costs go up, and everyone ultimately suffers as those investments are cut back,” she says.
The antidote: shared accountability. When IT and business stakeholders co-own cost decisions, investments become smarter and more likely to stick.
“As IT organizations build their budget management skills, they should look to redirect saved costs into investments that grow and transform the business,” Allen says.
Many adhere to the traditional ratio of 80% of the IT budget going toward maintenance and 20% to growth.
“If that’s the case, then you probably have opportunities to improve,” Allen says.
She believes the average organization should be closer to a 70:30 split, with world-class organizations approaching 60:40.
“You should always look for opportunities to shift spending to projects that grow and transform,” she says.
Rare opportunity
Artificial intelligence (AI) presents a key opportunity to put these principles into practice. While half of the leaders EY US surveyed noted a decline in company-wide excitement around AI, those committing 5% or more of their technology budget toward AI investments reported higher rates of positive returns than those spending less than that.
Allen suggests that tentative AI investments are less successful than commitments. The ROI for AI doesn’t always appear in conventional metrics.
For example, some clients have told her that using AI copilots for software development has enabled them to reduce the need for offshore programmers.
AI agents have shown the potential to invent new ways of managing workflows, creating order of magnitude efficiency improvements.
“We need to think about changing our operating model to drive new ways of working and on active change management,” Allen says.
The way to do that is by making AI tools broadly available. “You have to expose people to the technology and let them figure out what it can do for them,” Allen says. “AI is unlike a software package with certain functionalities and process flows. There are limitless capabilities to solve problems in new ways.”
The closer an organization is to that magic 60:40 budget ratio, the easier those investments are to make.
As technology continues to shape the future of business, CIOs must embrace the challenge of balancing cost control with strategic investment. Organizations can survive and thrive in a cost-constrained environment by leveraging AI and fostering collaboration.
