The key to better IT portfolio management

In an era of budgetary constraints, regulatory mandates and calls for modernization, agency IT leaders need to think creatively about how IT investments can effectively drive mission outcomes. Lack of visibility into relative IT spending levels can lead to subjective project funding processes, which create misalignment between IT expenditures and agency goals.

CEB has researched publicly available IT spending reports to benchmark and compare agency investment patterns. Our analysis has produced several insights that agencies should consider as they think about strategic planning and portfolio management.

In fiscal 2012, on average, more than 80 percent of IT spending in the U.S. government was allocated to operations and maintenance (O&M). Those expenses refer to the projects and costs needed to sustain existing IT assets at their current capability and performance levels. Examples include hardware and software maintenance, voice and data communications maintenance and service, replacement of broken or obsolete IT equipment, and associated labor costs to support those systems.

That means less than 20 percent of IT spending was allocated for development, modernization and enhancement projects. DME projects support innovation and lead to new IT assets and systems, or they modify existing IT assets to substantively improve capability or performance, comply with legislative or regulatory requirements, or meet a request from the agency's leaders.

By comparison, in the private sector, 68 percent of spending on average is allocated to O&M projects and 32 percent to DME. Thus, government agencies are spending a relatively larger share of their IT dollars supporting the IT systems of the past rather than investing in the technologies of the future.

Based on our interviews with IT leaders, we believe the ratio of spending on legacy systems versus future innovation could get even worse in the next several years as IT leaders are forced to make post-sequestration budget cuts. It is usually easier to cut spending on proposed projects rather than turn off existing systems that have uncertain interdependencies and entrenched user constituencies. Therefore, new projects will be squeezed from budgets while maintenance spending will continue to grow.

Lack of visibility into relative IT spending levels can create misalignment between IT expenditures and agency goals.

However, the Federal IT Acquisition Reform Act under consideration in Congress could provide CIOs at major civilian agencies with additional levers to address the balance of funding between DME and O&M. The legislation would increase the authority for CIOs to deliver portfolio simplification strategies to reduce spending on O&M through steps such as data center consolidation, elimination of overlapping government websites and enterprisewide contract consolidation. It could also help increase funding for DME by giving CIOs additional resources for investments in new cloud computing capabilities. Finally, the act requires strengthened efforts for information exchange with industry to adopt best practices for IT acquisition and portfolio management.

Although the legislation might yield significant changes for CIOs, the good news is that CEB's review of agency IT spending data concluded that some agencies are already strategically allocating resources to the activities that generate the highest business value. In particular, those progressive IT organizations:

• Work with business partners to establish and consistently apply a set of standard portfolio prioritization criteria.
• Evaluate the life cycle costs of legacy systems to help business partners conduct cost/benefit analyses and identify candidates for retirement.
• Increase the value of existing systems through judicious investments in usability, process design, training and integration.

Progressive organizations have shown that effective IT portfolio management requires a disciplined approach to identifying, evaluating and prioritizing the proper mix of O&M and DME investments. Agencies can learn from those high performers by identifying their transferable best practices and sharing them across the federal government.