IT expense as a percent of revenue

Measuring IT expense as a percentage of revenue is a key measurement many senior executives use to evaluate what it is costing the company for technology support.

The calculation is simple:   Take your IT organization’s total expense and divide it by the revenue of your company.

If you only support a division of your company, use the revenue for just that division to keep from skewing your number and to make it an appropriate measurement.

I have looked for industry standards but haven’t found any that I thought were reliable, , , and there is often a real problem with so called standards anyway.

Here’s why. You can take two almost identical companies in the same industry with roughly the same revenue base, similar number of clients, etc., and the cost to support their technology may be vastly different for valid reasons.

If one company is highly automated with a single primary business application while the second company has very little automation and multiple technologies due to recent acquisitions, the needs are totally different, , , even though they may be roughly the same size. The point is: their issues are totally different so they have different support requirements.

On the surface they can look similar in many respects such as revenue, # of clients, same industry and mission, etc.

Closer inspection shows that the two companies are so different that from a technology needs standpoint, they barely resemble one another.

The automated company may be spending half as much in an IT expense as a percent of revenue measurement as the other company and they could both be spending at an appropriate level. In fact, the company with little automation and many systems from their acquisition activities might need to even be spending more to support their technology situation.

What this means is that you have to be careful with “industry standards”. If you don’t look at the underlying issues, industry averages or “standards” can get you in trouble.

The real issue boils down to spending at a level that is appropriate for the business at any given time based upon the circumstances you have and what you are trying to do.

That’s why I place so much emphasis on conducting a thorough IT assessment. It is the key piece that tells you what you need to know in order to make a positive impact for your company in your IT Manager role by addressing the needs and issues of the business.

If you are interested in learning how to conduct an effective IT assessment, take a look at IT Due Diligence. It contains a complete process and tools that walk you through it.

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