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How Much Should A Company Invest In Information Technology?
The rapid increase in technology use in businesses has affected every industry. Across all businesses, the need to keep up with the competition means paying attention to what technologies are available and incorporating the right tech tools as they become viable. Whatever your business, you know that you need to invest in information technology to excel in your industry. But how much should you invest, exactly? To determine your IT budget, you need to look carefully at your industry, your business goals and most importantly, what you can reasonably expect information technology to do for you on your path towards those goals.
Putting Technology Investment in Context
Depending on what stats you read, it appears that businesses spend anywhere from 3% to 6% of their budget on IT. The average spend on tech is expected to go up in the coming years, but no one is quite sure how much it will increase. It makes sense to expect an increase, of course, given the drastic increase in tech adoption across all facets of daily life and business. But the amount of increase is hard to be certain of because no one is sure exactly what the future holds.
What is clear is that an IT budget is necessary for building and maintaining a business. However, the size of that budget can vary considerably depending on the business and the industry that business is part of. In a study conducted by Deloitte, it was found that banking and securities spent 7.16% of their budget on IT—the most of any industry—while construction spent the least at 1.51%. Other industries spent somewhere in between. Such a large difference in spending is indicative of a spectrum of need for IT that differs significantly depending on the business. Those differences make it impossible to define a one-size-fits-all budget percentage for IT for all businesses. There are simply too many variables to consider.
How to Determine How Much Your Company Should Spend on IT
Guidelines on how to determine your own IT budget can be much more useful than a blanket statement about how much you should spend. By knowing what questions to ask, you can get the answers you need to form your own ideas about what your company needs as far as IT goes.
Some questions you can ask include:
Do we need an IT budget?
The answer to this is an obvious “YES”, but it is worth coming up with your own reasons for having a budget to begin with. The closer you look at your circumstances, the more apparent it will be that IT is simply a part of doing business and an area that you will always have to navigate as a company. And it is not enough to put off IT decisions until you make a split-second purchasing decision financed by extra cash you have lying around—not if you want IT to generate reliable results. For long-term success, you need a specific budget.
What is the budget for?
IT investments should serve to further your business objectives. Pulling a random number out of the air is not going to achieve optimal outcomes. The budget should be set to ensure that you can use the technology you need to achieve the outcomes you desire. Of course, to answer this question, you may need to clarify your business objectives and your IT needs. The CIO, CMO and other business leaders can work together to set guidelines for what needs to be accomplished and the budget can be built from there.
Are we spending more just because?
Knowing that business spending on IT is increasing in many industries is useful, but just because others are doing it does not mean that you need to do it. Increasing spending on IT is not enough on its own to improve your business. That increased spending needs to have a purpose. Maybe you are upgrading important infrastructure. Or, perhaps you know of a new tech tool that is virtually guaranteed to make you more competitive. Just make sure that an increased budget has a purpose.
Is the budget based on current economic conditions?
Some businesses are still stuck in a recession mindset. They try to avoid any extra spending because they think it is a necessity for survival. But if the economy has picked up, it is vital to take advantage of increased revenue to bolster your technology while you can. The better you equip your company to move into the new age now, while you have the resources, the more capable your company will be of weathering any storms to come.
The reality of IT budgets is that they need to be customized to the business using them. Fortunately, the process of determining the IT budget can greatly improve your company’s understanding of where it is, where it is going and how technology will help it get there.