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IT Funding Options: Where to go when your budget is limited

November 27, 2008

Having evolved to the point of getting their budgets under control through systematic cost reduction, the credibility that an IT organization gains through demonstrating systematic cost reduction can be leveraged to find alternative sources to increase the level of IT funding available. Innovative IT organizations will shift their focus at this stage to expanding their options for obtaining funding to increase the business value they deliver to the firm.
Some advanced IT organizations are discussing the creation of capital markets within their firms to provide financing for information technology investments. At the same time, a number of tried and trusted alternative funding mechanisms already exist.

Model Description

Internal

Corporate funding The traditional source of funding from the corporate budget
Business unit funding Funds from the business unit that will benefit from the investment
Pay-per-view funding Short-term funding from the business with a usage-based fee system (i.e., pay-per-view)
IT funding Short-term funding from the IT departments using funds on hand
Venture funding A loan from the finance organization for new investments dependent on level of risk

External

Vendor or external service provider funding Cost-sharing or discounts from a contractor motivated by experience gained for future projects
Government grants and incentives Funds from local jurisdictions that promote job creation and are to be invested in a local economy
Consortium The pooling of funds with possibly private and public partners to develop a common, shared solution
Revenue creation Selling IT services or solutions on the market with a margin to create revenue and profit
Leasing Avoiding capital expenditures by renting equipment
Borrowing Borrowing externally to finance a risk-based IT investment

Internal Funding Options
Corporate funding is the primary model that exists in most enterprises and it is often tied to an annual budgeting cycle. It is unfortunate, however, that the best ideas often don’t occur at the critical periods for annual budgeting; important opportunities might be missed if they have to wait for the next annual cycle for funding.
Funding from the unit that will benefit from the development of the solution can be a more flexible option, whether the project is a significant development or a simple solution. At Intel, we refer to it as pay-per-view when a business unit funds IT on an ongoing basis for the duration of development and operation of a particular solution. Another option is for the IT organization to collect a margin on services it delivers to internal customers. The IT organization taps into the accumulated margin to fund new products/services that can then be charged out at a price that covers the development and operating costs as well as a margin for further funds accumulation.
Finally, a venture capital model can be used within the firm to fund risky propositions. An internal venture fund can be created for projects with high potential benefits and high risk. The venture capital model ordinarily provides for funding to be shut off quickly if the promised return is not being delivered

External Funding Options
The first option for external funding is to have an outsource, vendor, or external service provider make an investment in providing a solution in return for a regular payment to provide IT services in support of the solution. During the Internet boom, many vendor finance deals were cut by communication equipment providers to help businesses adopt their technologies earlier and faster. This type of funding can be appropriate when no other source of funding is available for the vendor’s solution, but because the obligations associated with the deal are often quite onerous, it is important that the firm and the IT organization are comfortable with the arrangement before proceeding.

Many countries and states offer grants and incentives to support local job creation and local investment, and such opportunities may exist in your area. Another mechanism for funding is through joining consortia that are either self-funded by member firms or funded through a mechanism such as the European Commission. Intel IT has been part of a number of consortia that have been funded by the European Commission to research a particular area of interest to consortia partners.

Some firms’ IT organizations choose to provide services on the outside market. The success of this will likely be determined by the maturity of the IT organization, its business prowess, and the type of market served. With this model there are both success stories and spectacular failures.
Leasing is a form of funding that helps avoid up-front capital investment and allows the expenditure for an IT investment or solution to be more evenly spread over a period of time.

Finally, there is the possibility of actually borrowing the funds for an IT investment from an external source such as a bank. While this option may not be available today, I believe that some banks with a lot of experience in IT projects may actually begin offering such products.
The type of funding that is most appropriate for a particular scenario depends on a number of factors—the scale of the project, the time frame of the investment and the associated benefits realization period, the level of risk, the importance and criticality of the investment, and so on. These factors should all be considered and weighed when firms look to expand funding options beyond the traditional corporate funding model.

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