Moving away from IT spend as a percentage of revenue

Traditional metrics, such as IT spend as a percentage of revenue, don't always work. Find out why in our latest CIO Matters column.

At the Gartner CIO Leadership Forum in Scottsdale, Ariz., this spring, the conversation at my workshop table about IT spending metrics reflected just how difficult it is for CIOs to get away from IT spend as a percentage of revenue. That's the albatross around the CIO's neck, dictating -- based on comparative industry standards -- just how much IT should cost as a percentage of the company's revenue.

One CIO at a global company, for example, said his IT spend for Mexico operations was 5.4% of his company's revenue.

"I'm very expensive. My spend should be 3.4% when compared to the industry average," he said. "It's something I need to address, and it's very important." So important that bringing that percentage down is something that he talks about "at every single meeting."

The problem is that IT spend as a percentage of revenue doesn't work in many large companies with varied business units and goals. And it certainly doesn't reflect the ever-evolving and growing importance of IT investments in relation to a company's ability to grow and compete. One business unit might be in fast-growth mode and require more tech spending; another unit might be mature and held to a lower IT spend; and yet another unit might be going through a transformation project that requires a different spend. Picking a standard IT spend as a percentage of revenue for all those units isn't going to cut it.

IT spend as a percentage of revenue is also often biased by the heritage of the organization. Your history may be in manufacturing, and that line of business gets along just fine with an IT spend of 2% of revenue, but the professional services arm may need 4%, said Richard Hunter, a vice president and fellow at Stamford, Conn.-based consultancy Gartner Inc., who was running the workshop. "But the CFO is going to force your arm to spend 2% anyway, because that's the standard," he said.

The CIOs at my table represented several industries: a large accounting firm, a large bank, a global manufacturer, a health care provider and a professional industry organization. Most of them measured IT spend as a percentage of revenue, or cost of IT per employee. Few of the CIOs in the room, about 22% (based on a quick and informal hand-raising poll), used the Run, Grow, Transform (RGT) model. This framework, as Hunter explained, divvies up IT spending based on the IT costs that run the business, grow the business and transform the business. The model has its pitfalls, but it's one that CIOs are finding helpful in terms of figuring out how IT spend can be allocated and adjusted.

In some cases, most of IT spend is devoted to protecting revenue. Show that number to the board.

According to Gartner, companies spend 66% of their IT budgets to run IT (do what it takes to keep IT systems chugging along), and spend the rest on business growth projects or transformation projects (those that help the company increase revenue, enter new markets or try something new). The ideal is a 50/50 split, but achieving it isn't easy. Part of the problem is defining what IT projects fall into which RGT buckets. That exercise will vary widely depending on the industry CIOs are in -- regulatory projects may be considered a transformation project by one company and a run project by another, or a project initially targeted for growth can turn into a run cost.

At my table, the conversation on how to categorize different IT functions in RGT buckets -- from app dev and IT infrastructure to software like CRM and BI -- went like this:

Topic: Is quality management run, grow or transform?

CIO 1: "For me, its run."

CIO 2: "Yes, but the implementation and deployment of quality management could be all three: run, grow, transform."

Topic: What about business intelligence?

CIO 1: "BI [business intelligence] was a transform project for us, but not anymore. I think the point in time of the project, where you are in the lifecycle, determines the category of RGT."

CIO 2: "For us, CRM was a transform project, but it became part of daily operations after a while. The same with BI and ERP. HR was always a run."

The conclusion? This stuff is hard to categorize and, once you do categorize it, it will probably have to change. And IT spend as a percentage of revenue, or any other standard metric applied to the entire business, doesn't always work. The CIO of the professional industry organization was struggling with just that -- one part of her business is in fast-growth mode and the other membership business is mature. "By not splitting out how we measure IT spend for the different businesses, it makes the high-growth business look very expensive to support," she said. Yet this cost is justifiable, considering that 70% of the organization's revenue comes from the fast-growth business.

Another conclusion? A shift away from IT spend as a percentage of revenue to RTG or other IT investment metrics is a moot point if business leaders aren't leading the charge. The best bet for the CIO is to use that good old standby: align IT project investments to the business goals.

A simple exercise, said Hunter, is to look at your company's annual report to determine how IT investments  should be made and justified. "I can look at any annual report and take out six or seven business value metrics that should be in your [IT] project business case templates. The key is to know what those business value metrics are and measure [your spend] against those."

Some forward-looking companies he's worked with are using new metrics that are aligned with "the strategic pillars" of the enterprise. In such cases, RGT is divided up by such metrics as what IT projects help grow revenue, protect revenue, reduce cost and avoid risk.

"In some cases, most of IT spend is devoted to protecting revenue," Hunter said. "Show that number to the board."

Let us know what you think about the column; email Christina Torode, News Director.

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