Beware Of Simple Benchmarks

Practical Insight
Companies regularly use percent of sales to benchmark their IT spending against the industry. It's a sensible starting point. But what if your company's profits are more sensitive to changes in market conditions than other firms'? Or, if your firm is less diversified, or more profitable, or has less debt, or more stable sales? In these cases, an industry benchmark will be too low, leading you to spend less than you should, possibly putting you at a competitive disadvantage.

This study suggests there are significant differences among industries, driven by differences in how IT is used and the level of competition. That validates the use of industry benchmarks in budgeting. But it also finds that differences among companies matter a lot, which provides a caution against trusting those benchmarks too much.

Actionable Advice
CIOs and CFOs should explicitly adjust baseline industry averages to account for firm and industry contextual factors that drive budgets, and use that to justify departures from the industry norm. They might even find that similar misalignment occurs in other areas--R&D, advertising, maintenance--and the same discipline could be used. However, don't expect this research model to spit out an ideal IT spending number, after which the returns start to decline. That's unclear, likely because more contingencies must be considered, factors such as whether a company has great IT talent, investments aligned with strategy, and business investments that complement IT spending.

Report Excerpt
"We find evidence that environmental complexity, resource availability, sales growth, and technological factors influence firm IT budget levels. ... IT budget levels are positively influenced by environmental uncertainty and industry concentration. Firms with greater related diversification have higher budget levels than firms with greater unrelated diversification. More profitable firms have higher IT budget levels, while firms with greater debt or higher growth have lower budget levels. Furthermore, IT budget levels vary with industry strategic IT role and the high tech or low tech nature of the industry."

"Determinants And Consequences Of Firm Information Technology Budgets,"
The Accounting Review, July 2008
Authors: Kevin W. Kobelsky, Vernon J. Richardson, Rodney E. Smith, Robert W. Zmud

Kevin Kobelsky is an assistant professor in the Department of Accounting and Business Law at Baylor's Hankamer School of Business, where he teaches accounting information systems and information systems security. The reports are available, for a fee, at the links below each section. Want to participate in this type of research? Contact him at [email protected].

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