As usual, you'll look for IT budget surveys and statistics that you can use to support your requests. After all, your CFO will want to know what companies like yours are spending on IT as a percentage of their revenue. That's why consulting firms like Gartner Group, IDC, and Meta Group will start churning out estimated budget statistics for 2003 in a few months. They know you need this stuff, and they want to make a buck off your needs.
What I am about to tell you is news you may never hear from another IT consultant. It's based on 17 years of research I've conducted into the IT spending practices of mid-sized companies, a category into which your company probably falls. It's also based on firsthand experience of the way that mid-sized companies purchase IT solutions, something that few IT consultants have.
What is my dirty little secret? It's this: IT budget statistics about mid-sized companies aren't worth the paper they're printed on unless you know how inaccurate they are and can correct for the inaccuracies. If you don't, you're putting a loaded statistical gun to your head and pulling the trigger.
Why are IT budget statistics for mid-sized companies so inaccurate? It's because those statistics are averages, and averages mean little when they're derived from a population that deviates widely from the statistical norm. For example, give me a jar filled with a hundred pennies and a hundred nickels, and I can tell you that the average coin in the jar is worth three cents. However, I would challenge you to pull a three-cent piece out of the jar.
In many ways, mid-sized companies are like that jar of pennies and nickels. Here's why. In my studies of IT spending among AS/400 and iSeries customers, I've found that the typical company commits to a major IT project--such as the deployment of a new ERP or supply chain management (SCM) system--every five to seven years. During the years in which such projects take place, most mid-sized companies spend three to five times more on hardware, software, and outside services (like my company) than they do in "off" years. Since these spending categories make up roughly 40 to 50 percent of most IT budgets, increases of this magnitude cause wild deviations from those average IT budget figures that analysts pump out each year. Since companies that are experiencing those deviations--let's call them the "nickels" in the jar--are included in budget surveys, they also skew the averages to the upside.
As a result, the figures you typically see in budget surveys--IT spending as a percentage of revenue and planned increases in IT spending over the last year--rarely represent any single company. They are too low for the "nickel" companies that are embarking on a major IT project and too high for the "penny" companies that are just maintaining and tweaking the IT systems they already have.
So, how do you correct for these inaccuracies in IT budget surveys? It's not easy, but it is often possible. Check first to see what a survey says it is measuring and how it arrived at its averages. Is it measuring all IT spending, including typical "fixed costs" such as IT staff salaries, or is it only measuring expenditures for capital items such as hardware and software? Once you've determined what the survey is measuring, remember what I said about hardware, software, and services spending growing three to five times during the "investment years" that take place every five to seven years. If you take these numbers and apply them to the survey's statistics, you can (with a little math work) take a meaningless IT budget statistic and turn it into something that is much closer to the "real world" figure.
If doing the math on your own makes your head hurt or you just want a quick and dirty figure, here's a little trick of mine you can use. Please realize that this only works on surveys of mid-market IT spending that measure all IT spending (including IT staff salaries) then report average IT spending as a percentage of corporate revenue. This trick also assumes the following:
- The companies in the survey undertake a major IT project every five years.
- During years in which they undertake a major IT project, the companies in the survey spend four times more on hardware, software, and services than they do in "off" years.
- In the "off" years, the firms in the survey spend half of their total IT dollars on fixed costs such as IT salaries.
Under these assumptions, here's what you can do with the averages the survey offers for IT spending as a percentage of corporate revenue. If you're in an "off" year, take the average percentage and divide it by 1.3. This will give you a lower percentage. On the other hand, if you're about to embark on a major IT project, take the percentage of revenue figure and divide it by .52. This will give you a much higher figure.
Depending on your position, you may now rejoice or despair over the number before you. If you don't like what you see, hit the little "C" on your calculator and hide this article from the CFO. Just remember, however, that truth was spoken here. That's a lot more than you'll get from the analyst who sold you that budget study in the first place.
Now that my dirty little secret is out in the open, I have one more revelation to make...I'm taking a vacation, and this column is going with me. As such, you won't be hearing from me for the next two issues. However, I'll be back on July 1 with fresh observations on the IT issues you face.
Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology. You can reach him at
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