Who pays for all those great IT-enabled business initiatives? Most enterprises either raid the corporate budget or resort to a ‘user pays’ policy.
But in fact, there are many other funding options. The trouble is, using a wider range of funding sources presents many challenges to the IS department. It requires skills in financial modeling, financial risk management, financial control and financial data collection. And it means dealing with more stakeholders.
Are the benefits worth it? It’s your call. Using more funding models can lower the up-front expense of an initiative, allow more initiatives to run and spread financial risk.
There are eight funding models – four internal and four external.
Internal funding is the most common
In corporate funding, the enterprise allocates funds to the IS budget that are then used to fund planned initiatives. Getting corporate funding takes time, and the internal committees who approve the initiatives are rarely generous.
The second most common model is business unit funding, where benefiting business units fund initiatives from their budget. It’s simple to run, but requires strong IT governance to ensure that the initiative is part of the enterprisewide IS governance process.
Another way IS can fund its initiatives is from its funds-on-hand. It can then recover the costs from the beneficiaries through chargeback. But because the payback period is short, the chargeback payments are usually very high, and they can be forced even higher by the need for a risk contingency.
Or more risky start-ups can be funded through an internal venture capital pool. The challenge with this model is selecting the initiatives. Each one must have a business sponsor who can vouch for the benefit and who is willing to pay the chargeback.
Four ways to get someone else to pay
Although there’s no such thing as a free lunch, external funding sources do have their benefits: lower up-front costs, the fact that savings can be used to run other initiatives and the ability to spread risk.
CIOs can seek funding from external service providers (ESP). ESPs make the investment in return for the IT services, provided IS commits to regular payments. The two most common examples of ESP funding are outsourcing and vendor financing.
If your ESP cannot or will not pay, there’s always government. Most governments offer grants and incentives to encourage enterprises to invest locally. Although not without their frustrations, governments can be a good source of long-term funding, albeit one that’s best suited to long-term large-scale initiatives that employ a lot of voters, such as processing centers.
If large-scale employment is not you, there’s consortium funding to consider. Here several enterprises pool their funds and resources to develop a common solution, spreading risk across the parties involved. Attracting consortium investors can be tricky, as can protecting your intellectual property, but consortia offer considerable flexibility in terms.
If none of these three ideas appeals, there’s revenue attraction to try. Here the IS organization generates a revenue stream by selling IT services on the outside market. Revenue attraction is useful where the IT service is a commodity that’s similar across enterprises and without competitive advantage. Examples are data-centre capacity, Web hosting and many back-office systems.
Does my future include external funding?
Over the next three years, it is highly likely that an ever larger proportion of IS funding will come from one of these external sources.
To exploit external funding, you’ll need to beef up your IS operation with four new competencies: the ability to work with the CFO, financial skills, sophisticated reporting capabilities, and financial risk management. These competencies demand people with a combined finance and IT background. Not surprisingly, the role of VP Finance, IS’s CFO reporting to the CIO, is becoming increasingly common.
As IS organizations strive for a richer mix of internal and external funding approaches, skilling up to attract the monies on offer, the challenges will be significant. Nonetheless, the benefits look like they are worth the extra effort.
Andrew Rowsell-Jones is vice president and research director for Gartner’s CIO Executive Programs.