Discussion on:

Manage IT as a percent of revenue to relate to your CEO

Good article and I think a good tool for relating to CFO's and CEO's. Not only that, but in the company I am currently at, large amounts of IT spending is done at the divisional level. That means I have to convince division managers to spend sometimes to. They are even more tight fisted because they see every dollar they spend as coming out of their yearly bonus.

I do have one question though. When you speak of revenue, are you talking about net or gross? I assume net, but I want to make sure.

Thanks

Generally metrics based on revenue conform to the classic definition of revenue, which is gross sales. The principal behind this metric is interesting; however I am sure it varies considerably by industry segment. Does anyone have any benchmarks by specific industry segment e.g. manufacturing, financial services, hospitality etc.?

Infoworld used to publish references by
industry sector both for US and Europe. I have
general statistics for the period 95-2000 for
my sector, (chemical - process industry).
From 99 onwards they sell an annual report
tha gives a good deal of additional detail. The
statistics are based on a comprehensive
statistical census they take of large to
mid-size companies.
Has anyone heard of other industry wide
references?

This has some good free stuff.

That's the key question that I am always asked when calculating expenditures as a percent of revenues. It seems that IT salaries are certainly much higher than they used to be, mostly as a result of the education and training that must be "repaid" to the employee to keep them happy in the IT field. Otherwise, having more education than a neurosurgeon (which most of us do) is just not worth the effort to keep up.
So, I guess when they say "does this include labor?", that's the million dollar question. And what can be done about it?
Ken
CIO/Datacomm

What is (or where can I find) the average % of Sales/Revenue that is typical for a $300million dollar company that manufactures, distributes, and sells their product in their own retail stores?

From what I've seen and dealt with over the years ... figure on somewhere between 1% and 1.5% of sales. Much depends on your rapor with senior management and their view of the value of I/T.

This metric had been around so long, it not only has whiskers, they've gone grey! Unfortunately, it has not improved with age; rather it has deteriorated. It may hve been some help back in the 70s when IT spending was easy to measure because it was all in the glass house, and, since it was used pretty nonstrategically, you knew it had better not be too big. But that was several eras ago.

Now, it's a major project to to figure out what an enterprise is spending on IT, since it shows up in every budget. But even if you do measure it accurately, what do you do with the ratio? The fact that you spend a greater % of revenue than a competitor may be good if you're spending smarter--and vice versa. Reengineering and strategic IT make us need to focus on the WHOLE cost of a process or function, not just the IT cost. And in industries with volatile revenue, IT spending can't and shouldn't track every variation.

But beyond these technical and conceptual difficulties, the worst aspect of this ratio is how it diverts the focus of the CEO conversation from what you want it to be (ie, what IT does for the business) to what you don't want (ie, what IT costs).

I've had three different consulting firms analyze my IT budget as a percent of revenue over the past few years. They also looked at IT staff as a percent of total staff and IT capital spending as a percent of total capital. These were consultants hired by our CEO or CFO. The consultants then pick totally irrelevant benchmarks to compare us to and used this information to convince our CEO and CFO that our IT spending was too high. I work for a $250 million professional association. I was getting compared to a $21 billion telecommunications company, a multi-billion financial services firm, etc. I can't win that game. Unfortunately, there are no descent benchmarks for my organization. Even if there are benchmarks for your industry, becareful. Do the benchmark companies have the same strategies, product mixes, workforce, level fo technology, etc.

IT as a percent of revenue can be a useful measure, but when you put the number out there, be careful how you frame it and what will be done with it. Check Gartner or others for comparative numbers first to see if you're high, low or just right before you share the info. Depending on your CEO, being above average may be a signal that you're making strategic investments in IT to out whit your competitors, or it may mean that your spending too much without anything to show for it. Below average could be taken many ways as well.

Kevin

I agree with your article in principle, mainly because we base our IT Matrix on those figures, but you need to understand more:

Labour Profile of the country (compare Romania and Sweden)

Your Business (for us, below 1 Percent is an okay performance- for a bank 5 might be okay)

IT Strategy and status (did you postpone IT cost, or did you just modernize the infrastructure)

Are you primarily discussing Infrastructure improvements or Improvements (Services) directly related to the Business ?

How clear are the figures in collection (also local abilities to "hide" cost the data ?

Are you sure the CEO will not focus on using "his" language too much (only discussions on the R&P Rating)

And of course the 10 issues that cont come to mind when I need them

Wolfgang, Heidelberg

I have successfully convinced many an IT Manager on the idea of taking ownership for the service of the internal hardware as well as the companies current product install base. Rather than paying a large service company a per unit monthly fee. By running an MTBF (Mean Time Between Failure) analysis it will usually show you are paying for a service that is not being utilized. If the IT manager is willing to hire and minimally train staff for deinstall and reinstall of the failed component they can use a 3rd party maintainer. This will allow billing your install base the original service fee while reducing the actual cost of service 60%. The 60% savings is now a profit center to be used in other areas of IT management and upgrades.

I agree it may be difficult to determine all the IT spending within an organization, but it is necessary to know the total IT budget using a common definition (operating expenses plus hardware depreciation plus software amortization) if you manage IT.

A good source of metrics or KPIs is Gartner, who sell an annual survey for about 20 industies. The metrics they provide include IT spending as a percent of revenue, IT spending per EFT, IT spending per PC, IT spending per end user, IT EFT/Enterprise EFT. They define the different terms which allows them to collect about the same IT information from about 500 companies world-wide that particpate each year. Go to www.gartner.com and search on "IT Spending and Staffing Survey" for the latest survey and price ($US 5,000).

The metric I prefer is IT spending per end user as end users and the applications they use are the major driver of an IT budget and effectiveness.

article was good, but industry comparatives is critical. anyone know where to find them?

How do I down load the spreadsheet. I cannot figure this out.

Jim
jim.wilkes@ibsus.com

I am looking to find out CAPEX and OPEX Expenditure as a % of revenues for Oil and Gas Companies. Are there any sources of information on IT spend and issues for the following:

-Major Integrated Oil & Gas,
-Oil & Gas Equipment & Services ( Oilfield Services ),
-Oil & Gas Pipelines,
-Independent Oil & Gas, And
-Oil & Gas Refining & Marketing

Hi,

Good ideal, pls try to keep posting. I like this topic very much and I will digged this one. Tks again.