No one wants to overspend on anything, especially IT.

In fact, one of the first questions most organizations ask when they begin working with us is how much they should be spending on IT. Frustratingly, the simple answer is, “It depends.”

We typically see organizations spend between 2.5% and 6.5% of their operating budget on IT. While this may not seem like a wide range, when you consider that most SMBs operate at less than 10% EBITDA, every dollar spent has to count.

So how do you know if your organization is spending the right amount? Below are some examples to help put those numbers in context.

First, let's talk about underspending.

Underspending on IT is just as big a problem (if not bigger) than overspending. When an organization underspends, you can count on two things happening:

1. Risk Goes Up

The type and depth of that risk depends on how and where the spend is made. Most often, we see a shortfall in three areas: security, business continuity, and user productivity. Very few small businesses actually have the necessary tools and training in place to properly protect their business. They are usually shocked to find out their backups are solid, take days to recover, or are not structured in a way to protect against all the likely scenarios that could occur in today’s world.

It’s common for organizations to mistakenly assume that because they have anti-virus software and a firewall, their security spend is sufficient. Unfortunately, most businesses can’t survive a full loss of data due to a disaster or security issue where the data cannot be recovered. Conversely, when organizations understand why and in which areas IT funds should be spent, the investments not only decrease risk but actually support growth.

2. Morale Goes Down

Production in any organization is performed and facilitated by people. Good people simply want to be able to do good work. When they have poor or underperforming IT, your best talent will consider other organizations where they can actually produce the value they desire to create.

Businesses often try to prolong the life of computers and systems, thinking they are saving money when they are actually lowering production and increasing frustration, leading people to find excuses not to work because working on outdated equipment is more frustrating than rewarding. In contrast, when an environment is designed to ensure users can do their work without concern for the “system” being a hindrance, everything shifts.

Gaining Perspective:

IT costs in the 2.5%-6.5% range typically cover the following:

• Server infrastructure
• Network infrastructure, including LAN (local area network) and WAN (wide-area network)
• Software
• Workstations
• Power management
• Security
• Vulnerability management
• IT compliance
• Business continuity, disaster recovery, and backup
• IT management, both internal and outsourced

IT costs do not typically cover training or phone systems.

The more regulated and/or complex a business, the higher the IT percentage. As an example, most financial institutions in the SMB space (i.e., banks with sub-$1B in assets under management) will be in the 5% range. The more locations, the higher the costs.

Also, the larger the organization, the higher the costs. A false assumption is that as you grow, there is an efficiency of scale to be gained, so the cost per user or percent of the budget will go down. For the most part, this is simply not true. Why? Because the larger your organization, the higher the number of applications necessary for it to function. Sometimes it is not an increase in the number of applications but in their complexity, resulting in the same outcome. For sure, there are times in the lifecycle of a business where, as an example, you can go from 4% to 3% because you’ve gained some efficiency. However, as the business grows, investments in new technology will occur. The plotline often looks something like this (in purple):

In the chart above, as revenue goes up year over year, the operating budget percentage reduces over time. However, the IT spend as a percentage of the operating budget adjusts as IT investments are required. The goal is that those investments drive organizational efficiencies, which improves the overall operating budget and bottom-line performance.

Professional Service Organizations

Attorneys, CPAs, and other professional service organizations whose users produce their value from the IT system will spend between 3.5% and 5%. Again, this depends on size, number of locations, and complexity. These organizations’ confidentiality and security needs, along with quite complex applications, drive costs higher.

Manufacturing Organizations

Manufacturing companies can expect to spend less, because there is normally a lower ratio of computers to employees. Typically, costs fall between 2.5% and 3.5%, depending on the complexity of their production lines. The IT spend does not include manufacturing equipment.

Can I save money with software as a service (SAAS)?

Many organizations assume that because they move to “the cloud,” their costs will go down. By and large, this is not true. The infrastructure required to run a SaaS application or a data center to provide 99.999% uptime is very costly to operate, manage, backup, and plan for lifecycle. Most organizations rely on the provider to facilitate a much better outcome than they could build themselves, which comes with a cost.

Next Steps

While the circumstances and needs of your business may vary from the examples above, having a general idea of how much is appropriate to spend on IT, and why, is key to setting up your business for success.

If you’d like to know more about setting the right technology budget for your organization, including how to plan for upgrades and equipment refreshes, visit our blog.