Why Defend This Metric?

There were many comments on the “Damaging Metric” posting a few weeks ago. Thanks. Many people defended the idea of measuring IT spending against total revenue by saying it is a starting point. I realize that old habits die hard, but saying it is a good starting point is like saying a transmission is a good starting point to building a car–by yourself, in your backyard. So much knowledge is required beyond that starting point to get to the goal–justifying your IT spend inside your company–that it hardly seems worth the space on the Powerpoint slide. It still seems to me that CIOs lose any advantage they might have in budget discussions by acknowledging it at all.

Let’s consider the one instance where it might seem advantageous for the CIO to mention it: When you spend less than the industry average on IT. Is it really valuable to be able to say, we should be spending more on IT because the rest of the industry spends more than we do? Or, we’re doing better than everyone else in our industry because we spend less than the average? I can’t see the CEO keeping a straight face through that presentation. And if you are spending more than the average, the discussion will inevitably become a defensive one–why are we spending more? Why aren’t we spending less? I know I’m a little dense, but the “good starting point” argument is completely lost on me.

To restate what I said a few weeks ago, the variability in spending beneath those averages is huge, according to CSC. In some industries, there was as much as 100 times (not a typo) difference in spending between companies–in other words, an average does not reveal the variability in the sample used to get to the number. How much time do you want to spend explaining that to the CEO and CFO when you could be selling them on something new?

The other defense of the metric I heard was that it gives clueless CEOs and CFOs some insight into the black box that is IT. What good is phony insight? CEOs and CFOs grasp at this number because they aren’t being well informed about how IT contributes to the goals of the company. They don’t have the information they need to determine whether the money they spend on IT is having any impact on the business performed better this year than last.

So what is the answer? What metric could be substituted instead? Portfolio management was one answer offered, but it doesn’t address the issue of whether IT spending is justified; it focuses on the risks, costs and rewards of individual investments. Others mentioned were IT spending per employee and the ratio of IT support personnel to total employees for an industry. But the per-employee numbers seem even more susceptible to incorrect interpretation than the revenue metric because the number of employees with access to information varies greatly between industries and even between companies in the same industry. If, for example, one manufacturing company has outsourced its operations to China and another still builds products here, the use of IT will be very different–especially if the outsourcing is outside the company. Then, you could have a lower expenditure per employee for the U.S.-based manufacturer (factory hands don’t get their own PCs, generally) but a much bigger overall IT budget–more money spent a really expensive IT like robotics.

 A more useful–if not much more accurate–interpretation of the revenue metric would be to slice it up into operations and new investment pots, as some people suggested. Forrester Research is beginning to track industry averages this way. But I’d still say skip the external benchmarks and look at how these two pots trend over time internally. It should take thunder away from the industry averages and allow CIOs to sell new investment tied to innovation. Better yet, compare the changing investment in innovation to changes in company revenues. Theoretically anyway, you’re doing ROI analysis to tie new investments to some new improvement in the business, so there is at least the possibility of tying the investment to revenue over time–though few IT organizations seem to do much post-project analysis. As one reader put it, somewhat indelicately: “If you can’t connect IT to stock price outcomes, you’re an idiot. Possibly an intelligent one. But an idiot nonetheless.”

 Another good suggestion came from Forrester analyst Laurie Orlov when I spoke to her recently. She identified five factors that drive IT spending and can help explain why you spend more or less than rivals:

Technology’s role in products and services–high concentration of IT in products (insurance and financial products, for example) means higher spending

Business volatility–How many companies have you bought lately?

Organizational structure–Centralized or decentralized?

Competitive pressure–How much is the industry focusing on IT investments to add new business capabilities (again, financial services has big pressure)

Geographic scope–Local or global?

Still, leading the discussions with CEOs and CFOs with these factors is going to be interpreted as whining if IT isn’t meeting expectations.

So we’re still left with the question, what metric could be better at helping to justify IT investment than some variation on the spending as a percent of revenue metric?