The inspiration for this article came while I was reading Innovation Atrophy: How Organizations Can Fight It in the current print issue of Information Week. The article highlights the negative impact on IT innovation that occurs during prolonged periods of shallow IT budgets, which made me think about some recent experiences with one of my sell-side clients.
IT Spending Cycles – When it comes to information technology, organizations tend to cycle among three states: 1) spending on IT, sometimes aggressively, in order to serve a growing business, improve efficiencies, gain a competitive advantage, etc.; 2) cutting back on IT expenditures, which can mean stopping ongoing projects, prohibiting new projects, downsizing IT departments, etc.; and 3) maintaining the status quo, neither spending significantly more nor cutting back significantly on IT expenditures in total. In fact, IT is probably not special in this regard. Organizations’ other forms of capital investment probably cycle in the same way.
So, cutting back on IT expenditures is nothing new, and cutting back severely during tough economic times is very common. But what I find interesting is how organizations decide what or who to cut during spending downturns, and what or who to add during spending upturns. And of these two, what occurs during spending upturns is the most interesting.
Budgets Return – After periods of budget cuts, layoffs, and general austerity, IT departments will eventually see dollars added back to their budgets. This is always an important turning point because IT staffers realize the worst is probably over. Less distracted by the possibility of additional layoffs, they can now get about their work in earnest, and indeed that’s what they would prefer to do. Everyone is more upbeat, and their enthusiasm shows.
But artifacts of the austere period linger. Many within the IT function, and especially those at the top, realize the need to “make up for lost time” and to justify their existence. The result is a sense of urgency that is tempered by conservatism and a heightened awareness of accountability. No one wants to misstep, and now is clearly not the time for another failed or over-budget project. Those precious new dollars added to the budget must be spent wisely.
Cheap Versus Frugal – For those IT functions that have hit bottom and are now on the rebound, I understand their natural tendency toward conservatism. And I can accept that frugality is probably a natural, and even necessary, component of that conservatism. But as we all know, there’s a difference between being frugal and being cheap.
Some recent experiences with one of my sell-side clients demonstrates the distinction between frugal and cheap in the context of information technology. This client sells a unique solution to accessing and better utilizing data generated within enterprise applications. The client sells a “limited” and “full” version of its solution, and with the limited version priced at 70-80% of the full version, there is an incentive for its customers to purchase the full version. Sometimes the limited version is adequate for a customer, but sometimes it’s not.
In the past three months my client has sold limited versions of its solution to customers that would definietly derive more benefit from the full version. The limited version might satisfy 20% of these customers’ needs, and the full version might satisfy 100%. In these instances, the additional expense of the full version was justified, and buying only the limited version probably was not.
So, why didn’t these customers purchase the full version of the solution when doing so was truly in their best interest? Well, I think, because they were being cheap. They were in conservative mode, and they were mistaking cheap for frugal. I saw the correspondence between my client and these customers’ business persons, and it revealed the state of conservatism in which each customer was then operating. Despite my client’s sincere encouragement to purchase the full version, these customers refused. The customers were unable to distinguish between traditional “upselling” and buying what was ultimately best for them (and only fractionally more expensive). Concerned about its reputation and potential liability, my client asked me for the first time to document in the License Agreement for these customers the functionality the customers would NOT achieve with the limited version of the solution.
Lesson – The lesson here is not for IT functions to be mindful of the distinction between cheap and frugal. That rule applies in all contexts and under all circumstances. Rather, I believe the lesson for IT organizations is to be acutely aware of the distinction during periods of budget rebound and conservatism. Being blinded by one’s conservatism can lead to stupid decisions. Being penny wise and pound foolish is — well — just that. Sometimes it’s wise to buy a Chevy sedan instead of a Cadillac, but it’s not wise to buy a Chevy sedan when what you really need is a slightly more-expensive truck. If you can’t afford the truck right now, then don’t buy anything.