How much should we spend on IT?

The question of “how much should we spend on IT” is not only a perennial concern of organisations, but it seems to be one that remains unanswered. Many analysts have tried to answer the question, the most credible of which is Datamonitor, who analysed IT spend in financial institutions in Europe, and came up with the following: If you’re a financial institution the median IT cost to business operating cost is 17.5%. Ouch! That’s a lot of money… Or is it?

A little more thinking into this issue reveals that we have to be more precise in our definitions of IT spend, and IT costs because they’re very different sides to the same coin. Also we have to understand the concept of “IT Intensity”. IT Intensity is the sum of two factors: How much do you have to spend on IT just because of the industry you operate in – a case in point being that financial institutions have a high IT intensity, while retail (say) can have a lower intensity. The second IT intensity factor relates to how much your organisation chooses to use IT in its operations. For instance, while the median for IT cost in banks is 17.5% of operating costs, some are spending 13% while others are spending 20% of their operating cost on IT.

Already, I can see your eyes glazing over. I’m not surprised. This stuff gives me a headache as well. Especially when we come back to the definition of “IT spend”. Because IT spend is divided into three classes, which in turn have a total of nineteen categories of spend.
So let’s simplify (at the risk of over-simplifying): How much should your organisation spend on IT?

Consider two things to answer this question: What industry are you in, and what is your organisation’s strategic intent in using IT? And secondly, you need to understand that IT spend must be thought of in three ways: The cost of keeping the IT “lights on” – the minimum spend to keep your business going. Also there’s the spend you’re making to improve business operations, and finally the IT spend you commit to gaining strategic or competitive advantage. The first class of IT cost should be compared with your organisation’s operational cost, and the latter two classes of IT spend should be compared with the organisation’s revenue.

That didn’t simplify things much did it? But it does highlight two things – firstly, getting an answer to the simple question of how much you should spend on IT is not easy, and the answer is not just a case of xx%. And secondly, if you want to know the answer to the question, you’ll have to do some deeper thinking into how your organisation uses IT, and how your organisation spends its money on IT.

Getting to an answer which has some veracity is not difficult, but it takes time and effort, and above all thought (Henry Ford said: Thinking is difficult, that’s why so few people do it.) The answer will guide your business and financial strategy into the future, but such an answer should not be compromised by a facile disregard of the realities of the industry in which you operate, or the way in which you intend to make IT work for you.
Don’t fall prey to those who tell you that you should be spending more (or less) on IT, until you’ve given proper thought to the issue.