How and why to strategically finance IT projects.

• Author: Voorhees, William R.
• Position: State of the Art - Information technology - Adapted article from the November 2001 issue of the PA Times, American Society for Public Administration - Brief Article

Editor's note: This article is adapted with permission from the November 2001 issue of PA Times, the monthly newspaper of the American Society for Public Administration, www.aspanet.org.

In today's technological environment, the strengths and weaknesses of an organization are, to a large extent, dependent upon the technological capacity of the organization. Organizations that are able to build and maintain technological capacity will have new and exciting opportunities open to them. By the same token, those that fail to develop technological capacity are likely to face substantial threats stemming from organizational inefficiencies and obsolescence.

Unfortunately, the desire of the administrator to achieve a high state of technological capacity is offset by the ability to fund projects at the desired level. In such an environment, it becomes imperative for the administrator to carefully orchestrate a strategic plan for technology financing. While financial strategies for technology are often similar to other financing strategies, there are some unique considerations that must be kept in mind.

Before embarking on specific financing strategies, it is important to understand the basic cost profile of information technology. Information technology costs are of two basic types, capital expenditures and operating expenditures. Strategic financing options for IT projects will generally result in the modification of either the operating cost structure or the capital cost structure. One of the most common strategies is to spread the large initial capital costs over the life of the project, resulting in capital costs that look and behave like operating costs.

IT life cycles tend to be substantially shorter than those of other large capital projects. Whereas buildings and bridges tend to have life spans of 30 to 40 years, information technology projects will seldom exceed five to 10 years. The proliferation of new and improved technologies quickly obsoletes existing technologies by providing equipment that is faster and smaller and that utilizes fewer operational resources. In such an environment, even though the existing technology is still functional, it becomes cost effective to replace the existing technology with the newer more efficient technology. This results in a short life span for most information technology. Because it is generally advisable to finance capital projects past the end of their life spans, some financial options, such as the 30-year long bond, may not be appropriate.

Financing Strategies

Several strategies exist for the administrator attempting to determine how a particular IT project should be financed. While many of these strategies are not new they often have...