One of the most damaging metrics in IT today is spending as a percent of revenue. It’s the only relatively easily obtainable benchmark on spending, yet it is hopelessly vague and compounds everything that’s wrong with the word average. According to a survey by consulting company CSC done in conjunction with Financial Executives International, a professional association of CFOs, companies that spend according to the average in their industry are the worst performers. That’s probably because those companies are somewhere in the middle of a spread that varies by a factor of about two–average spending generally hovers between two and four percent of revenues in most industries. But, as the report points out, that means that within industries, companies could be spending as much as 100 times what other companies are spending.
And the middle of the road probably means you aren’t spending on IT effectively, no matter what the percentage is. Forrester analyst Laurie Orlov pointed out recently that percentage of revenue does not account for the percentage of IT spend that is for keeping existing systems running, versus new stuff. Average may simply mean you are managing neither piece well. Being in the middle shouldn’t be a comfort.
Indeed, in its study, CSC found that companies that spend much less than the average are three times more successful than those in the middle. And companies that spend much more than the average are six times more successful.
The report identifies three broad ways to manage IT spending: resource management, work management and demand management. But those are basic principles of good governance in any IT organization–keep projects running well, keep infrastructure and people costs under control and have a good spending management process in place. They are necessary whether you are spending 25 percent of revenue on IT, as some financial services companies do, or less than two percent, as some retailers do.
What would really help is a better way of justifying the proper level of ambition of IT in the specific context of the company, its competition and its customers. For example, how information-intensive are the company’s products? How decentralized is the company? Are there obvious opportunities to create new products or business capabilities using IT that could justify being considered over and above the usual IT budget?
Starting with an average number and then trying to justify why internal spending should be higher or lower seems like a terrible way to determine your fate as an IT organization. How about starting with the business strategy of the company and proximity of customers to information products and services and working back to a number from there?
What factors do you use in determining how much your company should be spending on IT?