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What Percentage of Your Company’s Budget Should Be Allocated For IT?

If you run a business, how do you know if you’re spending the right percentage of your budget on IT? Find out what others in your industry are spending!

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.

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You can use these data points as a jumping-off point to see if your IT budget is lean or rich in terms of 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 economic challenges. That’s a successful approach. Until it’s not anymore. When companies don’t switch from a recession mindset to a growth mindset, they get left behind. Since IT problems truly 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 you’re constantly in survival mode.

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 budgets include everything from computers and servers to software, apps, cloud services, web hosting, maintenance, cybersecurity, telecommunications, audio visual equipment, outsourcing, consulting, travel, and of course, IT staff.

Difference between 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 industry are a prime example of an industry that needs to continually increase its IT budget.

Steps to get your IT budgeting on track:
1. Have an IT budget to begin with. As in, don’t starve your company. Feed it.
2. Don’t just increase spending. Spending more money without a strategy can be wasteful. Be strategic about where to spend by doing your homework, going to industry events, and analyzing your options.
3. Look at IT as an investment. While some of your IT budget is a straight-up business expense, a lot of it is not. Cybersecurity solutions and other upgrades that mitigate risks are an investment in your company’s ability to continue to operate.
4. Focus on productivity. Technology solutions that dramatically increase productivity are also good investments. Many can quickly pay for themselves.
5. Consider how IT can leverage your business. If your company has been operating in recession mode, you may not have been spending a lot of time thinking about how to use technology as a business tool.

Some companies spend more, some less. And sometimes it’s the businesses that are spending less that are able to better leverage their IT because they’re spending wisely — on economies of scale, standardization, automation, and other advanced processes and systems that actually reduce costs over time.

Leapfrog believes companies should spend wisely on their IT, which means spending enough to keep their IT ecosystems running smoothly and securely while allowing internal IT staff to focus on research, planning and other activities that help leverage IT to build the business (i.e., not troubleshooting). If your company doesn’t have internal IT staff or a CIO that can evaluate solutions, look for outside experts for help.

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