STRATEGY

Spending Too Much or Too Little on Tech?

Benchmarking IT costs can help you find the right level of spending on information technology. Data on spending in 27 industries may help.
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You know how much your company spends on its technology. But how much should it be spending? Too much, and you jeopardize profitability. Too little, and you risk missing opportunities, or worse, being left behind by your more up-to-date competition. Like Goldilocks, you need to find the spending level that is just right.

It would help to know what your competitors are spending, but they're not likely to tell. Your next best bet may be looking at benchmarking data, such as that recently released by Gartner, Inc., which examines average annual IT spending in dollars-per-employee, by percentage of revenue and by expected growth in 27 different industry sectors. If you own a construction company, you may not be able to find out what the other construction companies in your town are spending on technology. But if you know how many people work there, this data can help you make an educated guess.

The averages are surprisingly varied, from the hospitality and travel industry, which spends less than $2,000 a year per employee, to financial services, which spends more than $20,000 per employee. Here are some facts to keep in mind as you use this data to benchmark your own company's IT spending:

The bigger the crowd, the lower the spend per employee

"Different industries have different densities," notes Howard Rubin, senior advisor at Gartner and co-author of the benchmarking study. Financial services companies tend to be compact, and have many fewer employees in relation to revenue than the retail sector, for example. Because costs are spread over smaller numbers, spending per employee can be very high in this sector, as high as $120,000 or more for some specialized finance firms.

You'll spend more if knowledge is part of the product

The more it is, and the more technology is part of delivering that product, the higher the technology spend should be, Rubin says. This is one reason why media, historically around the middle of the list, recently rose to the number two spot (below financial services and above government) for IT spending is as a percentage of revenue.

 You'll spend more per employee if your company is small

The Gartner research focuses on larger companies, which benefit from economies of scale, Rubin says. But that doesn't mean that small and mid-size companies can't apply the data to their own businesses. Small businesses may lack the economies of scale so expect the spending per employee to be a bit higher than those examples in the study.

The data is only a starting point

 "Most benchmarking is very young, and you catalog the big species first," Rubin explains. "There isn't a high level of detail."

So to get a more precise view, build on the benchmarking data by collecting as much information as you can from industry groups. He also suggests seeking more detailed data from national benchmarking groups, such as APQC, previously the American Productivity and Quality Center.

Paul Strassmann, professor of Information Services at George Mason University recommends narrowing the field even further. "Look at your competitors," he advises. "Figure out who is actually taking your business away. There are usually only a handful of them, even for a small company."

How do you get information about competitors IT expenses? Gathering this kind of business intelligence takes patience, he says, but you can get there by networking among peers, and asking carefully chosen questions when interviewing their former or current employees. Though you probably won't find out what they're actually spending, you might learn how their costs are structured, he says. "Are they outsourcing? How many programmers do they have? That can give you a better analysis than benchmarking against the whole industry."

Last updated: Aug 1, 2007

MINDA ZETLIN | Columnist | Co-author, The Geek Gap

Minda Zetlin is a business technology writer and speaker, co-author of The Geek Gap, and president of the American Society of Journalists and Authors. Like this post? Sign up here for my once-a-week email and you'll never miss my columns.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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