Finding the Funds for IT

for Business Communications Review, printed March, 1998

How can you get the resources you need to meet enterprise users' demands? Show them what's in it for them.

Would you like to find money for IT without having to go through the annual budget process? In this article, we'll look at five innovative ideas that have worked when traditional money wasn't available. All use the principle that people who won't normally fund projects you value will cheerfully give you money for an effect they want. That is our starting point.

Whether you are with a business or a government unit, start with a question for yourself: "What do you deliver to your customers?" Do you supply MIPS and digital dialtone? Or do you contribute to an effect, such as market access or the ability to attract and hire new people?

If you define your products and services as an effect your customers want - our second answer - you can find money outside your normal budget. This is because your customers rarely understand your technical products; most look at technology as a tool to contribute to the effects they need - effects that they're willing to pay for. We may see it as technology, but most senior users want to buy the effect and not worry about the technology.

We recently surveyed a group of corporate presidents and general managers from high-tech companies and asked what effects they were most willing to fund. While we expected cost savings and technology issues to be on the list, neither were. The two things that keep these top executives worried are:

-- Finding and dominating new markets.
-- Finding and keeping good people.

The message was clear. While each of these companies has a limited budget for IT (and for everything else), when someone comes up with a fresh idea for finding and dominating a new market, they make the money available.

You can tap new sources for IT projects if you start by defining your products not as tools, but as business effects - such as helping to open up new markets. If you are delivering tools, your funding will be limited. No tool, no matter how strategic, is as compelling as the effect it might help to deliver. With that in mind, let's look at some new strategies to get funding for those effects.

1. Why Own?

Start with a basic question: Do you own your hardware now? If so, why? After all, you ⤘rent' contract programmers. Don't you rent voice and data circuits? Idea number one - Why not let someone else own your hardware?

It is traditional to buy PCs, give them to the users, and then toss them out after a year or two. But do you want to supply your users with hardware or with the effect of that hardware? If you want to supply the effect, ask your PC vendor to create a package for you. Ask them to supply you the hardware on a technology upgrade program. You could structure this as a rental or a lease, but either way, they take the hardware out when it becomes obsolete. Then the cost in your budget goes down this year and the risk of obsolete hardware gets shared with the people who made it. Many suppliers, including Compaq, Dell, Hewlett-Packard and IBM have rental/leasing programs like this. Some will rent out the software as well.

When you rent, you gain the option of delaying the payment over time. You can even walk away from obsolete hardware. When you rent or lease a million-dollar capital investment, it is only a few hundred thousand in this year's budget.

Buying your customer premises networking hardware is also traditional. It allows you to exercise the control you need. But some vendors will spread the cost over two or more fiscal years. For example, if you could get the funds, you could pay $500,000 this year to buy and install a great data switch in your network. Or by deciding not to own, you could drop the cost to this year's budget to $164,880. (This is 12 months' rental at a little less than $14,000 per month.)

This does not mean that you will not have to budget money for next year as well, just that you get to spread the costs out. In three years, you will spend $495,000 to rent the switch and installation. If all you look at is cash flow, this may be a good value over buying the machine for cash. But there is more than cash flow. If you look at the business, the value is that you can install the switch this year instead of waiting for the cash to free up.

Renting like this is a tradeoff. To the financial analysts, it is a calculation of the opportunity cost of money. To that we add the opportunity cost of waiting for the switch. If having it now will deliver an important effect to the business, there is value to that, which may outweigh the value of cash. That value is what should tip the scales toward renting today instead of owning tomorrow. A transaction that saves little money might be valuable in helping your company enter a new market. That is a transaction you want to foster.

2. Bill Your Users for the Effect They Get

Even if you do not stop owning, you can take a different proposition to your users. Idea two - ask the users if they are willing to pay for the effects they want out of the incremental savings they'll generate.

To show how this might work, it is a pretty safe bet that someone will ask you to do an interesting but unbudgeted project. They will suggest that it's a great idea because it will save more than it costs. If you think the idea is interesting, take them up on the offer. But share the risk with them.

We can look to history to see the value of this idea. Remember how hard it was to get your first voice mail system installed? Everyone said they would save a fortune if you put it in, but IT usually got left with the costs.

A few early adopters said yes to voice mail, but asked the requesting departments to fund part of the cost. The conversation went something like, - If you are willing to cut $25k out of your budget for two years, we'll buy you a $50k system right now.' Some users said yes. They were the ones who got more voice mail service, and got it more quickly. Why not respond to special requests that way when they come up now?

For example, someone may come to you suggesting that you should install a network for them and it will pay for itself. Ask them to do a rough cash flow of the savings and commit to it. Then ask the CFO if he or she will supply the financing. Often the answer is no. It isn't because the idea is bad but because no one has time to work on it. Ask if you can arrange the financing yourself. The answer to that may well be yes.

Since a network is rarely a single product, most vendors can't supply the financing you need. You have two options. One is to buy from a systems integrator such as EDS. They can often supply the financial package by using a specialized financing company.

The other option is to deal directly with that specialized resource for IT system financing. The good news is that while few of these people existed when you installed that voice mail system, they are beginning to arrive now. An example is the MLC Group in Sacramento, which specializes in looking at the savings and the costs, and financing technology so that the yearly costs fit inside the savings. If the users will commit to the savings, MLC may be able to make the numbers work so that you can create the requested intranet without touching your own budget.

The California Franchise Tax Board used this idea to fund a project the legislature would not. The FTB (the agency that collects taxes in California) knew it could pay for the $50 million investment with additional collections that the system would enable. As compelling as the case was, the legislature would not set aside that much money.

So the FTB went to MLC and the vendors of the proposed system. The offer to the vendors was easy: If they would find a way to fund it, they would get the deal. That meant some risk for these suppliers. They were betting that they could help the state collect more than the $50 million. If the state failed to collect the money, the vendors would lose some or even all of the investment.

Ultimately, two vendors formed groups and took different phases of the project. When they turned the system on it did not work as planned. It worked better. With so much at stake, the vendors did an excellent job for the IT customer. The result? It paid off more quickly than forecast and generated a profit for the FTB and for the vendors. The FTB has an important positive effect and a new system, all without a budget hit.

Financing companies not only provide a way to fund projects outside the budget; they also provide a reality check on the business soundness of the transaction. Companies like MLC are putting themselves at considerable risk in these deals, so as Bill Slaton of MLC notes, ⤘We ask the tough questions.'

3. Be a Venture Capitalist

If your company takes marketplace risks, why shouldn't you? Make the following offer to a peer: You will install the effect she dreams of (they don't usually dream of technologies) but did not get approved. Let her pay overtime. In return, ask for 25 percent of the amount above the forecasted savings or revenue. She keeps the forecasted return and 75 cents of every dollar above it. Your department gets a bonus for imagination and extra work.

It is a good deal for you. Someone else funds it, and you can be pretty sure your team is good enough to find more ways to save money than her team. Your people will be especially motivated if they know that some money comes back to fund their own dreams (see Idea 5 below.)

Once you've received some payback from such an arrangement, use the money to start a venture capital pool. You can offer to install other projects on the same basis. Not every idea will pay out, but if more than half do, you increase your capital pool. You become your own funder.

If that sounds improbable, consider that the City of Philadelphia did this at the height of its financial troubles. The city created an ongoing capital pool (called the Productivity Bank), and "loaned" money to internal projects that would pay back more than the loan. They demanded that each project return at least $2 for every $1 the bank lent, a difficult hurdle. In five years the bank turned $20 million in loans into $59.6 million in cost savings and increased revenue (see "City as IT Investment Banker").

4. Don't Pay With Cash

Your budget is based on money, but you have many other currencies to deal with; look at what else you have to sell. You may have information, services, market access, testing facilities or other things you can trade for capital equipment and software. Offer to spend those resources instead of cash.

An example is a KPMG/Microsoft joint venture that started as a cash purchase. KPMG had decided to buy intranet software from Netscape. The customer realized, though, that it had information and market presence that Microsoft wanted, and Microsoft wound up paying the customer to get involved. For that payment, Microsoft got market access they wanted and the customer got cash and discounts. Both KPMG and Microsoft wound up winners, and the vendor wound up funding part of the customer's installation.

Look at your own department for alternate currencies. Do you collect data on your systems and network? The data might be valuable to others. For example, most of your vendors have teams that develop new products. They work from what they think happens in the real world. They know that the model may not be right, but they have no real way to test it. These development teams would love the information you have.

A possible transaction scenario: You need to buy $1 million of network hardware and software next year. Why not offer to let the vendor's development team have your RMON-2 data in return for $100,000 in free software? The tradeoff is good for both of you. Remember to make sure that the data you provide is not proprietary to you, or that you will be protected by a nondisclosure agreement.

Two things to keep in mind when you talk to your vendors: One is that you have other currencies, such as your market presence and access to your customers or employees. Are you doing something interesting and innovative? Someone might trade product to get it. The second thing to remember is that software is a very high-margin business. The vendors have room to help both themselves and you.

5. Fund Your Own Dreams

In the scenarios we have discussed, you are funding the dreams of your colleagues in other departments or organizations. Why stop there? Your team has its own goals and objectives that can be fostered with innovative funding. Instead of asking your team to do more with less, ask them to, "Tell me your dream, and what you would cut from your budget to fund that dream."

Identify the dream for the whole IT department, and ask everyone to help with the tradeoffs needed to make it a reality. It does not need to be an even trade. If you need to find an additional 10 percent in your budget, ask the whole team to work out how to get 20 percent; if they know that they get to spend part of the ultimate savings, it changes how they look at the money.

Conclusion

The IT department is charged with implementing technologies that help the entire enterprise achieve its objectives. However, there's no reason IT should bear all the cost; you can use other people's money to fund their needs. This, in turn, frees you up to use your department's money to pay for your own dreams

City as IT Investment Banker

At the height of its fiscal crisis in 1992, the city of Philadelphia decided to let departments borrow from a Productivity Bank to buy the effects of Information Technology. This formed an off-budget capital pool for technology without taking money from the IT or general funds. The hard part is that the department has to return twice the money they borrowed. The good news is that they can return it out of savings or revenue.

This alternate funding project works because the people involved focus on the effect of the funding, not the technology they are buying. For example, at one time officials never really knew how many city vehicles they had on the streets, making it hard to manage this expensive asset. The Office of Fleet Management asked for funding to fix this situation, but money wasn't available in the general fund.

So the department went to the Productivity Bank and asked for a little less than $2 million. With the money, the department installed a system that tells where each car is, when to do the next preventive maintenance on it, and how long before it should be retired. There is no real magic here; it is an information management program applied to a place where there were few controls.

It worked. The system saved the city $3.9 million in the first five years. The department paid back the bank, and the city is still saving money.

Today, "We finance government projects that increase revenue, cut costs or measurably improve services for citizens. The projects pay back the fund," explained Matt Gallagher, assistant deputy mayor and staff director of the productivity bank. The projects run from affidavit imaging to a GIS system. Each is focused on saving money or creating revenue. Each is funded outside the normal budget using the equivalent of a venture capital pool.

This may seem impossible for you. But could it really be any worse in your organization than in a city on the verge of bankruptcy?

This article published in Business Communications Review, March 1988. Copr. 1998 by the Meyer Group, all rights reserved. For information, call (831) 439-9607