SBA

What Should IT Cost?

Speak to almost any Head of IT and they will claim they’re under pressure to reduce IT costs. Many Finance Directors think that IT costs too much, as evidenced by the common Finance-led drive to outsource IT to exploit lower labour costs.

As an aside, the majority of attempts to outsource IT don’t work well in practice, studies show that around two-thirds of IT outsourcing attempts fail, usually because the customer has failed to grasp the complexity of outsourcing something so integral to the business.

So what should the business expect IT to cost? You might think there should be a reliable benchmark, but as with most things to do with IT it’s not that easy. CIONET Europe and the Business & IT Trends Institute have released their latest research, which mirrors other studies over recent years, showing that the answer is that IT costs somewhere between 1% and 10% of turnover, depending on which business sector you’re in. The Finance and Insurance industries are at the top of the tree as the big spenders, close to 10% of revenues. National Governments pay out about 8% of taxpayers money on IT. Professional Services firms spend around 5.5%, Aerospace is a more modest 4%, Construction comes in at just over 3%, and the margin-conscious retail industry is down at the 1% - 1.5% level.

Those of us in the Isle of Man should treat these figures with caution, the research is drawn from large companies which have significant economies of scale - medium sized companies can expect to be looking at IT spending 50% higher for similar IT sophistication and small companies typical of the Isle of Man economy may be paying out twice as much. Previous surveys I have seen for IT in mid-sized business support this, so it would not be unreasonable for the “larger” Professional Services firms around Atholl Street to be paying out 7% - 8% of revenues on IT, and some of our boutique Finance businesses may be looking at 15% or more; IT is a big deal.

Where does all this money go? Typically most of the IT budget does not get spent on what people recognise as IT. Hardware and systems are not very expensive, but helping people use them, and keeping them running, is. Typically 70% to 75% of IT budgets goes on support. Support falls into several pots, the biggest technology spend is usually the software and hardware maintenance contracts with external suppliers, but the bulk of IT support spending is on people who support the systems and staff in the business.

Helping staff to exploit the power of IT is a labour intensive burden, whether that is helping users who have difficulties such as how to format a document or presentation, arranging for software bugs to be fixed, making changes in IT systems to enable business change, producing Management Information / Business Intelligence reports, arranging moves and changes when staff are reorganised, protecting the business by making backups and contingency arrangements, and so on. This labour is a major part of the IT cost in most organisations whether they have a dedicated internal IT team or they outsource some or all of their IT support needs.

The good news for the Finance Director is that reducing the cost of IT in business is usually possible without outsourcing or other ways of seeking cheap labour. Simply by reducing its dependency on IT help an organisation can reduce the IT cost burden substantially. How varies by organisation, but there are several common themes.

Ensure that the staff who use IT are properly trained. Assuming that people know how to use IT because they have used it at school or in a previous job is a fallacy, typically they have learned a little and as is commonly said “a little knowledge is a dangerous thing”. Supporting staff through formal IT training such as ECDL (the European Computer Driving License) will ensure that they really know what they’re doing, and their need to ask IT for help will be massively reduced.

Have a proper process for planning and implementing business change which includes both business and IT leadership. This makes a big difference because it helps to avoid the business devising new ways of working which require intensive IT support, and enables IT to contribute expertise in how technology may help the business to work most efficiently and effectively.

Ensure that systems / software packages are fit for purpose - just because they are widely used does not mean that any particular system is actually suitable for your business. Many businesses fall into the trap of buying popular, widely used software and then find that it doesn’t really suit them. Anyone with a big hammer can tell you that a round peg will go into a square hole, but it’s messy and labour intensive.

Ensure that computers are up to date and standardised. Computers get old and when they do they fail more often; ensuring that they are recent reduces the probability of failure and standardisation reduces the effort needed to maintain them.

And finally, question the benefits of change. All organisations need to change and evolve, but often we decide to change how we do things on an emotional basis and rush in without rational analysis of the pros and cons - one of which is cost. A business process change can seem very attractive when it would seem to deliver £100K per annum additional profit, but it looks a bit different when the IT systems change work will cost £150K, and it looks very different when the new method doesn’t work and we have to abandon it to return to the old ways or to devise a different new method.

Controlling these themes is the biggest influence on IT cost. A simple matter of training, collaborating with IT, investing in reliability and thinking very hard before changing systems or processes will knock out a third of the IT support cost in most organisations. In the industries which spend most on IT that can easily represent a 10% to 20% increase in net profits.