What Drives Funding for Service Providers’ New Initiatives?

So often, clients tell their providers, “If you help us save money, we will spend that money on your services in other areas.” But what often happens when the service provider saves the money is that no funding for new initiatives is forthcoming. Instead, they are asked to do more initiatives to achieve more savings, and the savings is spent with other service providers’ initiatives in other areas. Occasionally providers are awarded funding for new initiatives from some of the savings, but over time that money is taken back to the business. So service providers face a dilemma: how to fund new initiatives.

Cutting costs to have more money for new initiatives happens in some companies, but it really only works in a world in which a CIO has a zero-sum game. I think this is a Hobson’s choice – one in which really only one option is offered.

I’m not saying providers shouldn’t reduce the run cost as much as possible. But I’m not sure that there is a direct correlation between how much they reduce run costs over the long run and how much capital is available for new initiatives.

New initiatives get funded by the business, not the CIO’s budget. I blogged before about the reality of today’s Golden Rule in business – they who make the gold make the rules. The provider might get a one-year reprieve on that cost savings but won’t get a permanent allocation of that money.

Here’s what drives funding for new interesting, impactful initiatives more than anything else: If the client can see clear, unambiguous value generation for the business from the initiative, it will get funded. The more the value, the more money is available to fund the initiative. Providers need to build a strong business case with an unambiguous and high confidence that the proposed initiative will drive value.

I don’t want to discourage service providers from cutting costs or finding saved money. But if you want to be brought into the conversations around new initiatives, you must make the case and explain that the initiatives that you’re suggesting will drive clear and quick returns. This is what allows you to capture the development budget much more than your ability or your willingness to squeeze out more savings in the existing issue.

The innovation dollars that help clients generate new value clearly and unambiguously are much more likely to yield a higher return for the service provider than initiatives to cut costs. But the provider still may need to cut costs to keep the client. Reducing the run rate might mean keeping the client, but it doesn’t necessarily mean the provider will get new opportunities to serve the client in other ways. Service providers must be able to link new initiatives to business value to assure a consistent buy of new developments.