The IT spend time bomb
Provision for costs, or pay the price
The end of the nineties were a boom time for IT spending in financial services technology as front-office technologies surged ahead on the back of advancing Web and state-of-the-art screen-based technology.
This all came to a rather abrupt end around the year 2000. Firstly the brakes were applied by the dotcom crashes; general economic conditions worsened and 9/11 brought further gloom. In these tough economic conditions, IT investment spend was curtailed and slashed, with restructuring, redundancies and layoffs being the order of the day. Strategic initiatives involving IT were often off the agenda. Cost-cutting was the order of the day, and even investment to achieve cost-cutting was frequently deemed an indulgence.
Is this hard-line approach just prudent realism from those who control the purse strings, or are there deeper implications?
The health of the technology supply side of the industry is dependent on the willingness of the consumer side to buy their products and solutions. A great deal of effort goes into analysis, predictions and measurement in assessing when and if IT budgets are recovering.
Historically, IT's spend on capital items and sometimes their associated major project elements have been capitalised by the finance department and charged back accordingly to the business unit.
For example, an IT project that requires £1m of major equipment spend might be amortised over 3 years and thus charged back to the business at £333,333 per annum for the next 3 years. There is probably also a depreciation policy, which might have the book value of the equipment at £1m for the first year, £600,000 at the start of the second year, £300,000 at the start of the 3rd year and book value 0 thereafter. This means that after 3 years there is no charge for the capital as opposed to maintenance cost of this equipment and its book value is notional or zero. So what are the implications if we continue on this basis for the next few years, when times are tough?
There are companies who are operating legacy systems for which the associated expertise has all but disappeared. The functions delivered and the design therein may no longer be recorded and understood. Even trying to construct a replacement and migration strategy alone may incur significant costs to just reach a point where the scope and consequences are understood.
Many financial accounting policies have book value for assets that decline but these do not go negative. How can my ownership of large working pieces of IT equipment be a liability? But it is when considered in terms of replacement cost. By all means delay incurring IT costs but do not fail to understand the implications for your business in not provisioning for them. Often a major IT spend proposal includes scope for expansion and new capabilities to help "sell" it. These elements are frequently emphasised as the key benefits. The risk is that the necessary replacement elements are taken for granted, not emphasised and therefore not properly provisioned for.