IT Spending Benchmarks Are Only An Imperfect First Step

I’ve been seeing a mushrooming of requests from Forrester’s CIO clients for IT spending benchmarks. These CIOs attempt to defend their budgets against repeated requests to cut, cut, cut. Their hope is that a spending benchmark will show that their budgets are reasonable given their size and industry – giving them ammo to fend off perceptions that “our IT spending must be too high.”

What I tell these CIOs is that spending benchmarks are only a first step in determining the appropriateness of IT budgets – and not a simple one at that. The reality is that a benchmark tells you only what you are spending in relation to the average of a group of ‘similar’ companies. (see Forrester’s “US IT Spending Benchmarks For 2008”). It really tells you nothing about whether it is the right or wrong amount, whether it’s being spent on the right things, or what benefits you are getting from this investment. And what constitutes a ‘similar’ company is not straight-forward: is it just same size/same industry? Same georgraphy? Same business operating model or strategy? Same prospects for growth or contraction? These are all business characteristics, but what about IT characteristics like the degree of automation, use of packaged versus custom software, outsourcing or history of past M&As?

While to a CFO, industry, geography, and company size may look like appropriate criteria for determining peers, when it comes to IT I think that the most important criteria is business strategy as it impacts IT intensity (how important is IT to the business) or IT archetype. For example, a company pursuing a strategy of competitive differentiation through product innovation versus one that focuses on having the lowest prices would have different requirements for IT, so while they may be in the same industry they might not necessarily be peers when it comes to IT spending. This was made powerfully clear to me in a recent consulting engagement where the client’s non-profit status did not correlate with its IT intensity. In other non-profits they compared themselves to, IT was a support function, but in this one it was at the core of their mission.

Forrester helps our clients by assembling benchmark peers that are as similar as we can find while still providing a reasonable number (more than 10) of firms to compare against. We wrap this analysis with an examination of how they are different – adding color to the numbers in a fashion that a CFO can understand. But then we tell them that to make sound decisions about their IT spending, they have to go to a step further and answer more difficult questions about whether they are spending on the right things and getting the expected benefits – questions that only the business, not IT, can answer. CIOs should work with their CFOs to help this analysis by:

1. Understanding IT costs at the service, not the budget line level
2. Implementing portfolio analysis to measure alignment
3. Implementing a benefits realization process to measure actual vs. expected benefits from IT investments

CIOs that can satisfactorily complete step two, i.e. consistently demonstrate tight alignment with the business and deliver expected benefits, will ultimately make the benchmarking step irrelevant.

What pressures are you getting from your CFO to benchmark your spending? What are you telling them?

By Craig Symons