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How Do You Know If Your IT Spend Is Too High?

How Do You Know If Your
IT Spend Is Too High?

March 4, 2020 Steven Middeldorp

One of the more common discussions in your CFO & CIO’s strategy meeting certainly revolves around IT spending. They will be searching for ways to know what is the ideal level of spending on technology while looking for better ways to collaborate with other departments to ensure a wiser IT spend.

The answer to the questions “How do I know if my IT spend is too high?” and perhaps the more significant question, “What is the ROI on my IT investment?” are dependent on determining that location where technology and finance intersect — across the entire business, not just inside the IT and finance departments.

The common practice to measure the relative level of IT spend has been to use IT financial metrics including IT Spend as a % of Revenue and then relate that to IT Spend per Employee. Both of these metrics vary significantly by industry and do not factor in the current explosion in technology fueled by the data economy.

Always there is pressure from the Board and the CEO to cut costs and for the IT team to produce clear evidence that the business is receiving proper value for its IT investment. They are likely to have the view that that “we continue to spend too much on IT.” Clearly, if this type of question is being asked the current metrics aren’t providing the insights senior leadership needs to understand the ROI they are receiving for the IT investment.

 

 

The traditional methods of macro-level benchmarks, such as IT as a Percentage of Revenue, provide minimal assistance in calculating what an organisation should spend. As you can see, according to Flexera 2020 State of Tech Report, the average IT spend across organisations was 8.2%, yet software companies spent 24.7%.

Digital transformation initiatives are being implemented at a rate not seen before as businesses become more tech-dependent to keep ahead in a hyper-competitive digital world. Because of the massive increase in the use of software as a service model (SaaS), this spend would likely be missed in the usual benchmarks, however, it has a significant impact on the value gained from technology. The traditional metrics also don’t answer the wider question, “Am I spending on the right things?” This is incredibly important as from the diagram below you can see that most CIO’s are reporting at least a slight increase in IT spend.

 

 

Your CFO and CIO are aligned in their desire to understand the value of technology investments, though many enterprises may not the insights or IT Financial Management tools to make sound technology investment decisions. The biggest impediment to effectively managing an IT portfolio is lack of transparency. Most organisations simply do not have effective analytics to manage IT spending. To overcome that challenge, your CIO will apply a discipline known as Technology Business Management or TBM.

TBM is a financial discipline that creates a culture through which understanding costs and maximizing returns on IT spend become possible. Through TBM, your IT leaders speak the same language, gaining a greater communal understanding of how technology spend and speed-to-market create value for the business. A well-defined TBM methodology creates the right balance between smart IT investment and smart cost control — moving IT from being a cost centre to a driver of value creation.

TBM is all about transparency. TBM diminishes the mystery in IT spend and budgets while providing analytics to commence a relevant conversation around technology investment. This transparency boosts intelligent decision-making by enabling IT leaders to plan and forecast the effect of technology decisions and make appropriate adjustments to find and then reinvest potential savings.

As enterprises step up the migration to cloud computing and SaaS, (which permit them to buy services as they need them, without large upfront investments) your CFO still needs to understand the total cost of ownership (TCO) (click here for ClearCost’s TCO Datasheet) for applications and other technology implementations, and what the business cost and value will be to the non-IT consumers of technology.

The TBM framework enhances the “big picture” visibility needed to understand whether your IT investments are aligned with business operations and goals. TBM is needed to meet the challenges of “shadow IT,” whereby other departments within the organisation buy their own technology to meet a business need, often without the input or knowledge of IT.

TBM is, in a sense, “shadow finance,” and the CFO who has the courage and determination to embrace TBM can lead an intelligent, agile technology finance team creating solutions and eliminating challenges. The “TBM enhanced” team can deliver more accurate budgets and provide more informed forecasting using TBM analytic tools and IT financial metrics. However, it is important that they use that information is used to justify IT investments which deliver cost savings, generate new revenue streams, or enhance customer experience, then they are not practising TBM.

Would you like to know more about TBM and TCO? ClearCost can offer you a live demonstration of their state-of-the-art intelligent IT Financial Management software – speak to our team.

CategoriesBlog

TagsIT financial metrics, Technology Business Management, TBM, total cost of ownership, TCO, IT Financial Management software, ITFM, ITFM software, IT Financial Management tool, CIO, CFO, IT Financial Management, TBM, Technology Business Management

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