Managing IT expense as a percentage of company revenue
I received a question yesterday that I get a lot. I've written about this topic before and thought it would be worth visiting again, especially with information from a web site I've recently discovered.  New industry metrics site discussed below.

The question:  "I'm currently working in a company that I believe is spending far too little on IT and I'm looking for industry statistics of what typical companies spend."

My response: 
Managing IT as a percent of revenue is something I look at in every CIO role or IT assessment consulting engagement I enter. You have to be careful in simply using numbers from an industry average you find somewhere.

More depends upon what's going on and how much technology issues there are to deal with than simply looking at the average expense as a percent of revenue for an industry.

For example, if you are in a "Maytag repairman" environment where there really isn't much to do even though the company is producing $100 million in revenue, a few people may be all you need.

On the other hand, you may be in a small $10 million company and need ten or more people based upon what the company does and needs from IT.

At a minimum, I would consider adding at least one to two people to your staff since you stated there was an "army of one" technology resource in place at your company.

Having only one person on board to support all of the technology in your company is a big risk if something were to happen to you. Plus, you need to take some vacation, be off when sick, or go to a class now and then. Putting all the company's technology insight into the hands of one person is very risky.

Go to web site http://www.itmweb.com/bench.htm . Scroll down and you will find several links that are called Scoreboard Index Selections. The second link is IT expense as a percent of revenue by industry. In the Manufacturing Industry, you will see that companies spend on average 3.3% of revenue on IT. That's significantly more than what your company is spending at 0.25%.

You should also find the other indexes interesting as well.

Other IT metrics and benchmarks available from this site which was updated in March 2003 include:

  • IT staffing
  • IT budget
  • IT budget allocation
  • IT capital spending
  • IT salary
  • IT spending

Just because the average spending is 3.3% of revenue for your industry does not mean your company should spend that much. Again, it depends on what's going on and what your company needs from the technology organization to meet its objectives.

It's also possible that your business does not resemble a typical manufacturing company. What I mean by this is that you may have a company that's highly automated and requires minimal number of employees to generate $100 million in revenue. The lower the number of people you have to support  the lower your IT costs should be.

It's also possible that you need to spend twice the industry average for a period of time to repair issues that exist and to position your company for significant growth.

What I usually try to do is to assess the need of the company and make a determination from the technology support requirements I gather as to what level of support is actually needed. If I hear lots of pain, we either need to add resources or adjust expectations. If there is no pain being expressed, we may already be about right even though we are considerably below the industry average.

Industry averages and "numbers" can be helpful in validating some things but they can be dangerous when used without using logical analysis and rational business perspective.

One thing I would recommend is to keep a log for 60-90 days to see what you are spending time on. If it's day to day issues that keep you in react mode and prevent you from getting the time to implement major enhancements or initiatives that the company wants, you are probably understaffed.

It's important, though, to understand how you are spending time and also how responsive your Users feel about your services. If you feel pressed but the Users think support is great, you don't need to add much more capacity. If however, they feel as though you are not  responsive, there is potentially a capacity problem. It could also just be a process problem.

There are questionnaires you can use to assess how well you are providing technology support in my IT Management-101 publication. Information on all the publications and education programs I offer are available at www.mde.net/cio and www.mde.net/schedule .

Another thing to look for is the company's growth plans. Plans that call for significant growth which means more technology to support and capacity issues to address require time and effort to put into place. It's not a good idea to wait until the growth occurs to start ramping up. You want to try to stay "just ahead" of the growth curve.

I would take a close look at adding at least one person if for no other reason than to begin cross training and provide a higher level of backup support. At $100 million in revenue and 50 or more PC users that you stated, you are definitely running thin with only one person, but I would have to take a closer look to give you much more than that.

One last comment. You can take two very similar companies in revenue, number of clients, etc. in the same industry and find that they have significantly different IT spending needs to support their company objectives. It's not so much about what the industry average is or even comparing your company to another company that looks like your twin.

It's about understanding your specific company situation, its needs, and identifying the costs associated with an appropriate IT support plan to help "your" company meet its goals and objectives.

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