The 80/20 Law of IT Spending

Guest blog by Greg Fell, excerpted from his book, Decoding the IT Value Problem.

Many years ago, Arthur C. Clarke famously observed that, “Any sufficiently advanced technology is indistinguishable from magic.”

Sir Arthur’s comment is, of course, brilliant. But it should not be applied to IT, and it should especially not be applied to decisions about IT spending.

Sure, it might be easier to see IT as some form of magic, but it would also be financially irresponsible. Remember, as a CIO or other corporate executive, you have a fiduciary responsibility to the corporation and its owners. You have a legal, moral and ethical responsibility to invest the corporation’s money wisely.

IT Is Not Magic

So let’s just say it out loud: IT isn’t magic.

IT is often complicated and difficult to understand, but it’s not magic. And unlike magic, IT isn’t free. In fact, IT can be extremely expensive. IT investments have consequences, and it’s crucial to make the right judgments when you’re spending the company’s money.

That’s why it’s imperative to understand the 80/20 Law of IT Spending. Put another way: Not understanding the 80/20 law inevitably leads to a fundamental disconnect between IT and the business.

The 80/20 law arises from the difference between the perceived value and the true cost of IT investments. Basically, the value perceived by the user represents only 20 percent of the true cost. The impact of this discrepancy is significant: Every 5-percent boost in perceived value doubles the cost of an IT project!

Those incremental boosts in perceived value will no doubt make some individuals in the company happy. Over the long term, however, they can blow large holes in the company’s budget. Understanding the 80/20 law will help you manage those risks. 

The User Interface is Not the Project

Despite its importance and its simplicity, the 80/20 law is widely ignored. That’s because the 80/20 law is counterintuitive. People are accustomed to believing their eyes, and when they look at a user interface, they tend to see the user interface as “the project.”

There are lots of analogies we could apply here: Don’t judge a book by its cover. Beauty is only skin deep. Appearances can be deceiving.

You get the picture. The user interface is not the iceberg – it’s only the tip! The real costs are invariably behind the interface. Let’s look at some specific instances.

For example, imagine that a unit of the company needs a new web site. When internal users look at the web site, they judge its value to them by looking at the user interface. What they do not see, however, is everything that’s behind the interface, such as the servers, the network, the databases, the load balancers and all the other technologies and services enabling the web site to perform its intended business function.

Now let’s say that someone looks at the interface and says, “Hey, wouldn’t it be cool if you could click on an image on the screen and it would spin around so you could see all 360 degrees of it? That shouldn’t be too hard, right?”

Well, maybe it’s hard and maybe it’s not. That’s not the issue. The real issue is how much extra is it going to cost and can that extra cost be justified. That one “little tweak” can have a huge impact on the project’s cost. Remember, every 5 percent gain in perceived value translates out to a doubling of cost. That’s why it’s critical to understand the 80/20 law.

Let’s take another common example: server costs. You buy an application, and then you need a server to run it. If the application will be used by a workgroup within a business unit, you can run it on a server that costs $20,000.

If, however, you want the application to be available to everyone in the company, you will need an enterprise-level server, a database, a cooling system and some form of RAID (redundant array of independent disks) technology in case the hard drive crashes. Now you’re talking about spending $200,000.

Let’s say that you also want the application to interact with your external customers, which means that it has to be available all the time. Now you’ve got a whole additional set of variables. You will need redundant networks on the back end to make sure that if, for instance, Sprint goes down, AT&T can pick up the network traffic. And you’ll need a disaster recovery plan with secondary locations, in case your primary location is knocked out by a flood or a hurricane. Now you’re talking about spending $2 million.

All the while, the application looks exactly the same to everyone who uses it. You’ve gone quickly from spending $20,000 to spending $2 million – and nobody outside of IT can perceive the difference. The users see an application on a screen, which is fine. But the C-suite needs to know the hidden costs.

If you’re running an application for 20 people in a non-critical area of the business, then it’s probably okay to spend $20,000 on a server. If you’re Jeff Bezos at Amazon, then you will probably feel okay about spending tens of millions on servers and backup technologies because your entire business model depends on 24/7 availability.

Just Like Buying a Car

Basing an IT spending decision on the user experience is like trying to buy a car without understanding anything more than the brake, the accelerator and the steering wheel.

Here’s what I mean: You can go into an automobile showroom, look at cars and have a perfectly pleasant experience even if the only parts of the car that you are familiar with are the most obvious components. But that superficial knowledge will not enable you to make an intelligent buying decision.

At some point, the salesperson will ask you what kind of vehicle you need. Will you be using the vehicle for commuting to work or for traveling with the family to your favorite vacation destinations? Will you be using it to haul a trailer? Are you looking for a car that’s fun to drive, or one that feels comfortable and luxurious? Do you need a big engine? How big an engine do you need?

Most consumers can answer those questions easily. But you would be surprised at how few corporate executives can answer similar questions about their IT needs. The key to making competent IT spending decisions is a thorough understanding of what you really need.