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The cost of IT in your business (published in Western Sydney Business Access)

By Dexter Duncan

How much should you spend in IT?   You have computers, servers, internet, document management, voice mail and other types of IT spend, but how do you tell if you are paying too little or too much.  Whether you are a large enterprise or a small business, the cost of IT is either a necessary evil or a necessary advantage.     IT spend is strategic when you have a unique advantage in delivering solutions through software or better KPI information through IT integration.  Regardless of whether your IT spend is strategic or not, we recommend all business owners or GM’s to review their IT spend.

How do you know if you are paying too little or too much?    One way is to compare your IT spend against similar organisations in your industry.   The below is some indicative data from technology research firm, Gartner Group, which looks across a broad section of companies.

According to Gartner Group, IT spend is related to your business choices around products, processes, organization and service levels.       There are multiple ways of looking at IT spend.   Depending on changes in your business, growth, volume of work, repetition in tasks, competition, number of employees, regulation and legislation you could spend a heap more or a heap less than the folks with the same revenue and office size across the street.

The below figures are quoted from the 2009 report from Gartner on “IT key metrics data”.    First we look at IT headcount versus total employees, then IT spend as a percent of revenue, both are reporting cross-industry averages based on size of revenue.

IT headcount versus total employees:

  • For businesses under $50 million in revenue, IT employees is 8.7% of all employees in a cross-industry average.
  • For businesses between $50 million and $250 million, IT employees represent 7.9% of all staff
  • If you are over $250 million, IT staff represents 7.3% of staff

You do $10 million in revenue and have 40 staff,  3.5 Full-Time Equivalent staff are working in IT.   You do $2 million and have 15 staff, then 1.3 of them are doing IT related work.

IT spend as a percent of revenue:

  • Between 6-7% of revenue is being spent towards IT each year on average for companies  under $50 million and upto $250 million.   Most businesses in Australia would fall in this category.
  • 5% and lower is typical spend for anyone above $250 million in revenue, with the number getting lower the higher the revenue.  In other words, only around 3.3% of revenue is spent on IT if revenue is greater than $1 Billion but under $10 Billion.

You do $10 million in revenue; your peers could be spending $600K.   Of course this could be higher for banks and lower for engineering companies.    A company doing $2 million should spend $140,000 per year (on average) on IT.

Before you congratulate yourself on how efficient you are as CFO or CIO, think about the competitive disadvantage you may have by not investing in technology.

Perhaps a better measure of IT health (according to Gartner) is “IT headcount” to free cash-flow.   Because “IT systems can integrate processes and information flows which improve end-to-end performance and cash flows”, you may not be spending enough in IT to guarantee the long-term success of your business.   Give your local technology partner a call for more information.

See our websites for more:

www.EmpowerIT.com.au

www.EmpowerCS.com.au

About the author: Dexter Duncan provides marketing advice and is a Division Manager at Empower IT Solutions. Contact Dexter at dd@EmpowerIT.com.au

References:

IT Key Metrics Data from Gartner Group.

http://www.gartner.com/technology/consulting/key_metrics_data.jsp

IT headcount versus free cash-flow

http://blogs.gartner.com/mark_mcdonald/2010/04/06/it-spend-as-a-percent-of-revenue-%E2%80%93-a-dubious-metric-at-best/

One thought on “How much should I spend on IT?

  1. Pingback: How much should you spend on IT? (updated 2014) | Cloud Nerve Network

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