How Much Should a Company Spend on IT?

Technology seems to occupy a bigger position in our lives and businesses with each passing year. Huge annual advancements in computers, phones, tablets, POS systems, cloud storage, data backup, software, and more create an ever-changing realm of IT possibilities. This can make it difficult to determine how to allocate your business' technology funds. Many owners make the mistake of using the same IT budgeting model every year, without considering changing company needs and technological advancements that could benefit them.

But deciding on a budget requires more than just entering numbers on a spreadsheet. "Businesses are confused and uncertain as to what an appropriate IT budget is, and they don't have a clear vision how these funds should be spent" (American Structurepoint).

Here we'll help answer some common IT budgeting questions, examine industry benchmarks, and share insight into where businesses today are investing their IT budgets.

Benefits of technology in business

Every business owner must decide where to allocate funds, and it can be difficult to reconcile spending a huge amount on IT without seeing immediate returns. But IT is an integral part of nearly all organizations, and can offer widespread and lasting benefits. Technology should be viewed as both a cost of doing business, and an opportunity to do more.

Some gains that come from well-invested IT dollars are:

  • The ability to reach more potential customers and develop a better business relationship with your consumer base
  • Providing better and unique service to customers
  • Supporting better relationships with key partners
  • Using customer demand to better guide the business
  • Streamlining operations, reducing costs, improving efficiency, maximizing profit, minimizing waste, devoting talent to core business instead of overhead
  • Rising above competitors to establish your business as the most progressive and forward-thinking in the industry

Customer expectations are rising quickly and the bar is always climbing; technology allows your business to compete and rise above in this digital world.

IT spend industry averages

CIO Magazine conducts an annual State of the CIO survey and gathers data to compile an average spending budget across numerous companies. For 2013, it found that the average IT spending as a percentage of revenue is 5.2%. This is a slight increase from the 2012 average, which was 4.7%. Overall, businesses seem to spend between 4-6% of their revenue on IT, and this range is recommended by CIO Magazine.

Company size generally has a large effect on budget size, and should be taken into consideration when planning your fund allocation. Small and medium businesses surprisingly often outspend larger ones when it comes to their IT budget (SearchCIO.techtarget.com):

  • The average small company (less than $50 million in revenue) spends 6.9% of their revenue on IT
  • Mid-sized (between $50 million - $2 billion) spend 4.1%
  • Larger companies (over $2 billion) spend a relatively tiny 3.2%

As technology becomes a greater part of business operations, budgets have been steadily growing. The 2017 survey found that enterprise organizations project a 4.8% increase in 2017 IT budgets, and SMBs predict a slightly larger increase of 8% from 2016.

It's important to note however that the companies that invest the most in IT aren't necessarily the best performers. On average, the most successful small and medium companies are more frugal when it comes to IT spending (as long as they do it judiciously). Regardless of amount of spending, if investments aren't made and used wisely, it will be reflected in that company's returns and productivity.

In order to produce a reliable technology budget, it’s critical that a company go through an assessment phase to review the network and its related systems from several angles (users, hardware, and current IT vendors). Finding a trusted IT consulting firm to guide this process is ideal, as it allows for an unbiased, all-inclusive assessment, along with sound budgeting advice that’s in line with the overall business objectives. The 4-6% average is a great guideline, but the final number will depend on your company's individual needs and goals.

IT budget planning questions

There are a few questions every business owner should consider when determining their IT budget to effectively implement technology decisions (McKinsey.com). A few crucial points are:

How will IT change the basis of competition in our industry?

"For incumbents in many sectors, technology is becoming an arms race. Companies are harnessing technologies such as social media and location-based services to reinvent the customer experience and capture market share." It is important to know who your emerging or existing competitors are, how they are taking advantage of technology, and how your IT is helping you win against them and even enter new markets.

What will it take to exceed our customers' expectations in a digital world?

Companies who are e-commerce leaders like Amazon and Apple are reeducating customers as to what the online business world can be. Ultra-convenient and personalized experiences are pushing customer expectations higher and upping demand for consumer-driven technology. You should understand how your customer experience compares with that of leaders in other sectors, what your customers expect and what it will take to delight them, and have clear plans for how to meet or exceed their expectations.

Do our business plans reflect the full potential of technology to improve our business?

"Technology expenses can be high, but they are relatively small compared with their potential to boost the operating performance of a business." Technology can drive revenues, reduce overall costs, and lower risk. By seizing opportunities and mitigating threats, companies can dramatically improve their performance in all sectors. Ultimately, the strategy that emerges from an assessment of opportunities and threats should be an integrated plan that shows how the business will beat the competition using information technology over many years to come, not simply a revised annual IT budget.

How will IT improve our operational and strategic agility?

Leading companies are continually using IT to improve business agility and streamline processes. IT agility can be increased by changing the systems landscape, improving data quality, optimizing IT delivery processes, and building flexibility into the company. To be a leader, your company must measure and manage both business and IT agility, ensuring that the organization can operate competitively and determining where improvements can be made.

Do we have the capabilities required to deliver value from IT?

It is one thing to have IT, and another thing entirely to use it effectively. "Technology alone delivers no value. It is the combination of a clear strategy, the right technology, high-quality data, appropriate skills, and lean processes that adds up to create value."  Leading organizations actively assess their capabilities in these dimensions and target any weak spots to ensure they will derive value from IT changes.

Are we comfortable with our level of IT risk?

"Cybersecurity is a significant and growing IT issue. Every large company's security has been breached, and most executives have a poor understanding of the risks." Companies need a comprehensive system for managing IT risk that assesses the full range of threats and addresses their root causes. It is important with any IT budget strategy to ensure you are mitigating risks and preventing security breaches as comprehensively as possible.

Where is the money going?

Every business is different, and the technology that your organization decides to use should fully meet the needs of individual departments while still being flexible enough to integrate new technologies as needed, without compromising daily business operations. This is where an assessment and strategic plan can pay huge dividends, helping your business determine where is best to spend your technology dollars.

Spending has moved into three key areas for most businesses:

The cloud

Cloud technology is still relatively new, and comes with its own set of risks - security, compliance, privacy. But the advantages are paying off as organizations from all different industries migrate away from the traditional IT model. Cloud computing allows you to set up what is essentially a virtual office to give you the flexibility of connecting to your company anywhere, any time. With the growing number of web-enabled devices used in today's business environments, access to your data is easier than ever. Cloud computing offers potential reduced overall IT costs, scalability, business continuity, collaboration efficiency, flexibility of work practices, access to automatic updates, and much more.

Mobile

It's hard to ignore the fact that tablets and smartphones are now serious players in enterprise computing. Gartner estimates that PC replacement rates will continue to fall through 2017 as tablets become the first-choice companion device for mobile phone users. Many organizations and their employees are spending IT dollars on more advanced, "premium" phones and it's estimated that these devices will represent more than 50% of total spending on all devices by 2017. Most cell phones and tablets have the capability of performing many tasks that a computer can. This allows for flexibility and availability, keeping employees and managers from being glued to a computer desk to perform their work.

Additionally, many consumers use their mobile devices to access business websites and make purchasing decisions. Spending IT dollars on mobile website optimization is an integral step in today's world to ensure customers have easy, streamlined access to your company's site and products. Without mobile optimization, most websites look and act unwieldy and make it a hassle for potential customers to use, potentially even driving them away from using your services altogether. Your website is the first impression of your business and its optimization is an invaluable and necessary investment.

Virtualization

Virtualization is technology that allows your organization to run multiple operating systems and applications from a single computer, consolidate hardware to get vastly higher productivity from fewer servers, save 50% or more on overall IT costs, plus speed up and simplify IT management and maintenance. Virtualization is the single most cost-effective way to reduce IT expenses while boosting efficiency and agility, and is certainly a worthwhile expenditure. Whether or not your business could currently benefit from this technology, it is essential to know options available for future needs.

The 2016 findings from the State of the CIO survey outline additional ways businesses are using IT funds:

With a growing focus on enterprise digital transformation, business initiatives will shape technology budgets, with additional dollars being spent on improving the customer experience (44%), increasing operational efficiency (43%), and increasing cybersecurity protections (41%). (Yahoo Finance)

In the end, it is important to look at your IT budget in a different light. Technology is an investment into the operations and flow of your organization, rather than a cost of doing business. With proper IT budgeting, your company's systems can be designed and implemented in a way that enhances your ability to respond to varying changes in the competitive business environment.

IT Budget Guide
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