Allocating Budget Across the Zones: The CIO's Path to Funding AI

This is the third article in a series exploring the foundational question of how CIOs can find the budget to fund their AI strategies.

Let me start by stating the obvious: AI is a transformative technology that will be the key differentiator between companies that lead the next wave of innovation and those that fall behind.

To put this in historical perspective: In 1999, I attended a meeting at a Nokia R&D building in Tampere, Finland, where we discussed next-generation mobile phone technology. At the time, Nokia was the worldwide leader in mobile phones and had a strong history of bringing cutting-edge “phone” technologies to market. Confident in their position, they believed that adding cameras to mobile phones would disrupt camera industry leaders like Canon.

Fast forward to 2007, when Steve Jobs and Apple launched the iPhone—a device designed first as a “computer” and second as a “phone.” The disruptive smartphone technology created a new generation of winning and losing companies.

My point is that it’s clear to anyone familiar with AI—from developers to consumers—that we are now in the next wave of disruptive technology, and a company’s level of success will depend on how it adopts AI to achieve winning outcomes and experiences.

And a key stakeholder in this equation is the CIO.

Zone to Win Framework

In the first article of this series , I reminded readers of the insights in Geoffrey Moore’s book Zone to Win , which segments the budget into four categories:

• Productivity Zone: Focused on operational efficiency, this zone includes essential support functions like HR, IT, and finance. It ensures the smooth functioning of the Performance Zone and compliance with regulations but doesn’t directly generate revenue.
• Performance Zone: This is the revenue-generating core of the business, responsible for meeting financial targets and serving customers. It drives the income that supports current and future operations.
• Incubation Zone: A space for testing disruptive technologies and innovations before they’re ready to scale. Often likened to labs or venture start-ups, the Incubation Zone allows experimentation without the pressures of mature business operations.
• Transformation Zone: Where large-scale change happens, either because the company is driving market disruption or responding to it. This zone is essential for adopting and scaling new technologies—such as AI—that create new revenue streams or protect the company from competitors.

As discussed in the second article in this series , managing in the Productivity Zone aligns with the CIO’s role of managing cost structures and service levels in the “Necessary Focus Areas” (or as we often refer to it: “Keeping the lights on”).

Cost to Keep the Lights On

It’s been well-documented for decades that IT spends a significant portion of its budget on “keeping the lights on.” But with this come two foundational questions that CIOs grapple with daily, either directly or indirectly:

1. How much of the budget is spent on keeping the lights on?
2. Is this budget well spent?

In speaking to CIOs, a typical CIO's budget allocation for "keeping the lights on" is generally a very significant 60% to 80% of the total IT budget. One VP of IT I spoke with estimated it was closer to 90% of his total budget. This leaves very little budget available for the other three zones—including exploring a company’s AI strategy in the Transformation Zone.

But how little is too little?

Where is the Budget Being Spent?

Many CIOs I speak with don’t know exactly what percentage of their budget is spent across the four Zones. It's like trying to navigate a ship without a map—while they're moving forward, they lack a clear understanding of how their resources are truly allocated, making it difficult to steer the organization toward innovation and transformation.

That said, let’s do a rough, back-of-the-envelope calculation. One estimate suggests that CIOs allocate their overall budget as follows:

• Productivity Zone: 60-80%
• Performance Zone: 20-30%
• Incubation Zone: 0-5%
• Transformation Zone: 5-10%

Putting this into perspective, if a $100M company allocates 5% of its revenue to fund the CIO's budget, the IT budget might be roughly distributed as follows:

• Productivity Zone: $3.5M (70%)
• Performance Zone: $1.25M (25%)
• Incubation Zone: $0 (0%)
• Transformation Zone: $250K (5%)

Looking at these numbers, an obvious point emerges: How is a CIO expected to fund an AI strategy—along with other disruptive programs like cloud migration, IoT, and digital transformation—on a $250K budget?

The short answer is: The current CIO likely can't.

We are at a point in the disruptive innovation timeline where AI has emerged as a technology as disruptive as smartphones and cloud computing when they first appeared. Yet, CIOs are starved for the budget needed to make these disruptive technology investments.

So, what does ‘The Next CIO’ do?

We’ll continue the journey to answer this question in the next article. Subscribe to The Next CIO Linkedin newsletter ETM Insights to Autonomous IT to be notified when it articles publish.

Also spoiler alert: This will be the topic of the second edition of The Next CIO.

?

?