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SmartAdvice: A Checklist For Determining IT Spending

The days of deciding IT spending as a percentage of overall revenue are gone, The Advisory Council says. Also, tips for managing processes after adopting RFID.

Editor's Note: Welcome to SmartAdvice, a weekly column by The Advisory Council (TAC), an advisory service firm. The feature answers two questions of core interest to you, ranging from leadership advice to enterprise strategies to how to deal with vendors. Submit questions directly to

Question A: How should we determine the appropriate level of IT spending as a percentage of overall company revenue?

Our advice: This was a good question back when all IT did was batch-process transactions for the accounting department and print out some reports; there was only so much worth spending on that kind of overhead. But those simple times are long gone. Since then:

  • IT has at last fulfilled its promise of becoming strategic, and not just in businesses like Amazon and eBay that wouldn't exist without it. Even the mundane bed-and-breakfast has been transformed as guests choose, reserve, and pay for their rooms over the Internet.
  • Organizations differ in their strategic use of IT. Wal-Mart exploits its leverage with suppliers to get them to cooperate in using IT to drive cost out of the supply chain, while Lands' End focuses on being exceptionally easy to buy from. Neither is "right" or "wrong."
  • Strategies change. Management may decide that it's time to catch up with competitors who use IT aggressively.
  • The range of nonstrategic uses for IT has increased as well. It's the total cost of a process that matters, not just the IT component.

  • Related Links

    SmartAdvice: Reducing Wasteful Behaviors

    SmartAdvice: Demonstrate IT's Business Value At Budget Time

    SmartAdvice: There's More Than Cost Benefits To Consider When Analyzing IT ROI

    So the stereotypical consultant's answer to the question -- it depends -- also is the correct answer. But executives still need to know if they're spending an appropriate amount, so here are some ideas from this consultant's toolkit:

  • What are recent spending trends? If there's an increase, can it be traced to IT doing new and different things, or to growing business volume? Or is it just cost creep?
  • If IT has been expanding its scope, do business managers at least perceive reasonable value even if it can't be measured reliably in terms of hard dollars on the bottom line?
  • If IT's scope has been stable, are competitors doing things with IT that your organization isn't? Maybe they're wasting money, but it could be they're gaining market share or increasing margins.
  • If general managers don't understand the rationales for major IT investments, those investments may not be well aligned with business strategy.
  • Poor IT spending management leaves clues: cancelled and dramatically scaled-down projects, frustrated and cynical users, chargeback mechanisms for IT services that don't help business units manage their costs, homegrown applications where packages could be used, haphazard project life-cycle-management, complex hardware configurations, significant spending on obsolete applications, stretched-out implementation cycles, no consideration of outsourcing…
  • Plain old mismanagement also leaves tracks: organizational complexity and turf battles, sloppy expense control…
  • So executives can still find out if the organization is spending too much, too little, or just about right, regardless of the IT spending as percentage of revenue. Even a big percentage, if it's well targeted, well managed, and line executives are willing to fund it, is likely to be appropriate. And no matter how small the percentage, if it's poorly targeted and poorly managed, it's too much for what you get.

    --Paul Clermont

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