(UPDATED) If you run a business, how do you know if you’re spending the right percentage of your budget on IT operations? Find out what others in your industry are spending is a great place to start.
Budget studies by Gartner and others can point you in the right direction for general guidelines. IT budgets cover everything from hardware to staff to apps and can vary greatly by sector, the persuasiveness of CIOs, and other factors. Here’s what you need to know to help determine if your IT spending is too much, not enough, or just right.
First, some data:
In a recent study, Deloitte Insights found that companies spend on average 3.28% of their revenue on IT. Banking and securities firms spend the most (7.16%) and the construction industry spends the least (1.51%). The study found that of high-performing companies (those that consistently outperformed the S&P), 57% increased their IT budgets from 2016 to 2017.
It’s important to keep in mind that enterprises spend less of their budget on IT due to economies of scale.
You can use these data points as a jumping-off point to see if your IT budget is lean or rich in terms of its cost structure. If you’re not spending enough, you may be starving the business and not being as productive or profitable as you could be. If you’re spending too much, you could be wasting opportunities for efficiency and growth in other areas.
Companies with big IT teams for a comparatively small number of employees tend to be the overspenders. But there are a lot more companies that underspend than overspend.
Why are so many companies under budget?
A lot of companies have learned to operate as lean, mean, cost-cutting machines to survive various economic or business challenges. That’s a successful approach until it’s not. When companies don’t switch from a cost-cutting mindset to a growth mindset, they often get left behind. Since IT problems are business problems, affecting everything from productivity to employee morale, lagging behind in IT impacts the entire company. It’s also hard to keep employees happy if your technology makes their jobs harder when compared to the competition.
Other times being consistently under budget is due to inertia or a pro forma approach to funding IT — if you spent X this year then X is good enough for next year. Recycling the same budget each year is one of the most common reasons organizations fail to allocate enough to spending on IT and, in the case of responding to the ever-changing cybersecurity landscape, it can be the riskiest.
Still other times, companies are under budget because CIOs are simply outmuscled. If a CIO has a tough time making the case for a bigger IT budget, the money will go elsewhere.
What’s covered in the IT budget?
IT operations include everything from cybersecurity to computers and servers to software, apps, cloud services, web hosting, maintenance, telecommunications, and audiovisual equipment. It also includes IT outsourcing, consulting, travel, and of course, your organization’s internal IT staff.
For guidance in developing your IT budget, download our IT Budgeting Guide for 2020.
Differences between IT operational budget and strategic IT innovation
A common misconception among many of our clients, and organizations in general, is that a new, innovative business strategy that involves technology is inherently part of the IT budget. But strategic innovation is different — it’s part of your business strategy. Tech-based initiatives such as companywide digital transformation or developing a mobile app to improve customer interaction and reach new markets are investments that are expected to generate returns. These activities are not part of the IT operational budget, although managing them after launch is.
Differences between industry sectors
The 3.28% of total budget percentage for IT is an average, based on industry. Some of those companies will have IT departments that play an important role in the business while for others the IT department only plays a supporting role. If a business relies on technology to execute its business plan, for example, then that business will need to spend a larger percentage of its overall budget on IT. The key to success isn’t an actual percentage as much as it is the right percentage for your unique business within your unique industry.
And the percentage may also change over time. If it’s likely that your business will become more and more technology-driven, you should plan for your IT budget to become a bigger and bigger piece of the pie. Companies in the healthcare and transportation/logistics industries are prime examples of those that need to continually increase their IT operational budgets to keep up.
7 Steps to get your IT budgeting on track:
After you have a grasp of the percentage that others in your industry are spending on IT operations, follow these steps each year to determine how you should spend your IT budget:
1. Follow an IT roadmap that defines your broader IT strategy over the next few years.
2. Involve all the key players in decision-making.
3. Discuss these 10 questions with your team.
4. Look at IT operations from the perspective of lifecycle management, risk management, and business transformation.
5. Cover your assets — don’t skimp on cybersecurity.
6. Avoid common IT budgeting mistakes.
7. Compensate your IT staff appropriately.
Your IT budget sweet spot:
Keep in mind that spending more on IT doesn’t necessarily translate to having better IT operations. Sometimes it’s the businesses that are spending less that can better leverage their IT because they’re spending wisely — on economies of scale, standardization, automation, outsourcing, and other processes and systems that reduce costs the same year or over time.
The percentage of your budget allocated to IT operations should be enough to keep your IT running smoothly, reflect your business priorities, secure your data and network, and keep your employees productive.
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