What is the true discretionary spend in insurance companies?
Ideally discretionary spending should include only the money that you are spending on projects where you have a choice to make. These choices need to be tied to the business objectives. If you found that to be competitive, you would like to improve your customer experience and so, you invest in Web 2.0 that is discretionary. If you realized that you want to improve the product introduction timelines and either automating some processes or re-engineering the underlying systems to achieve this objective, that should be considered discretionary.
While organizations can take pride in improving the % of discretionary spend, it would help to revisit what is being classified as discretionary vs. non-discretionary. That’s when benchmarking with other companies would give a meaningful picture.
Comments
All too often, expenses categorized as "non-discretionary" or necessary to "keep the lights on" are not subject to the same rigourous debate/review/approval process as "discretionary" items. That said, believe CIOs bear responsibility to manage every dollar of "non-discretionary" expense with a degree of ruthessness. Often once classified as "non-disretionary" debate focused on level of increase. Wonder when every dollar currently in that expense category was subject to rejustification?
Posted by: Walt Wojcik | November 18, 2009 01:13 PM
You made a very valid point. CIOs are reporting a reduction in % of non-discretionary spend over the last few years. This could be a result of pro-active efforts or they are left with no choice but to reduce spend due to pressures from business leaders. However, when the metrics are reported, one could show improvement in the % of non-discretionary spend by changing the criteria for measurement.
Just like the way companies are able to adjust their balance sheets due to changes in the FASB accounting standards recently during recession. If the improvement comes without any change of measurement guidelines, that’s a good sign. So, the key issues to be tackled are:
1) How do I truly reduce the non-discretionary spend ? Where are the opportunities to prioritize?
2) How do I prioritize the limited discretionary spend to deliver maximum ROI to business.
Posted by: Siva Nandiwada | November 23, 2009 06:39 AM
The conversation needs to shift from reduction to management of spend (whether discretionary or non-discretionary). Reduction in discretionary may or may not be a good thing. The good part, obviously, is that you are lowering spend. However, if the reduction is coming through fewer projects to support or enable business growth, then while you are putting less things into production (and avoiding an increase in non-discretionary), you are doing less to sustain or grow the business. As a net result the value of IT will go down.
The key question then is what is the optimum level of spending? And in my view, the answer varies by company and is a function of ROI expectations and the risk appetite of the organization. The efficient frontier of risk-reward is applicable here as well!
Posted by: Sanjay Mohan | November 25, 2009 09:27 AM