Talking Metrics with the Boss
The downside of these more precise accountings of IT spending is that they get away from the simplicity of the percentage-of-revenue benchmark that appeals to business executives. This is yet another reason why CIOs need to report to the CEO - or at least have a seat at the executive table. Springing these more nuanced metrics on the executive committee at budget time once a year just won't work. This kind of discussion needs to take place over time and, more importantly, in the context of the business's current strategy. For example, when Polinter went on an acquisition binge during the 90s, Novo added a per-acquisition breakdown to his spending metrics and began tracking how long it took to absorb a new business. He says that he was able to cut that time from 12 months to three months over four years. With regular access to the CEO (to whom Novo reported directly), Novo was able to align his IT spending - and cost cutting - to the company's acquisition strategy and justify the investments that helped facilitate it.
The more disconnected the CEO is from IT, the more likely he or she is to grasp at arbitrary averages to place the IT budget in context. And no CIO wants to be wholly judged by averages because that tends to make them and their departments average. For example, according to CSC's survey, companies that spend much less on IT than the average for their industry are three times more successful than those in the middle.
But companies that spend much more than the average are six times more successful.
A survey by Aberdeen Group found a correlation between poorly performing IT groups and their reliance on spending as a percentage of revenue as their primary benchmark: 62 percent of the poor performers used it, while only 5 percent of top performers did. Furthermore, IT departments that are better connected with the CEO, the company strategy and the business have a greater ability to cut costs and enforce standards, according to Hackett's Holland. Without that connection, and without enforced standards, companies will have needlessly complex IT infrastructures, thanks to rogue spending on IT by the business units. "The companies with the complexity are the ones where the CIO is an order-taker," Holland says, "because those companies can't control purchasing decisions."
Part of the reason that spending as a percentage of revenue survives is because it describes IT spending in simple, familiar business terms. And for CEOs and CFOs, business terms, even overly simplified ones, are the way they think about and run the business.
"IT executives aren't good at describing IT work in business terms," says Forrester's Orlov. "They describe it in terms of technologies they are supporting. IT spending should be described in terms of growing revenue, lowering cost and improving the time it takes to do something. If all you talk about is uptime, you are a cost centre, not a strategic partner."
"In the end, the real metric is not IT, it is business performance," says Dow's Kepler. "What is the output per employee? How efficient are we as a business per employee?
"If you're looking for a metric to justify IT spending, that's not the right mind-set," he adds. "The right mind-set is to understand how processes, systems and people tie together to get business results."
SIDEBAR: Your Guide to Popular IT Spending Metrics
AS A PERCENTAGE OF REVENUE
Pros: Easy to calculate; provides some basic insight into spending levels in specific industries. Widely used.
Cons: Averages can often mislead, masking wild variability in the sample. Fluctuating revenue can affect percentages. Doesn't distinguish between strategic and nonstrategic spending; doesn't describe impact, only costs.
LIGHTS-ON OPERATIONS AS A PERCENTAGE OF REVENUE
Pros: Distinguishes between strategic and nonstrategic spending; can show trends in improved IT efficiency over time, even if overall spending doesn't change.
Cons: More difficult to calculate. Definitions of strategic and nonstrategic IT vary across companies and industries. Not widely used.
Pros: Easy to calculate and widely used. Maps IT spending directly to those consuming IT services. Can be used with percentage of revenue to gauge the true similarity of companies in an industry.
Cons: Outsourcing can skew numbers. Numbers can be unnaturally high in capital-intensive industries. Does not describe IT effectiveness, only costs.
Pros: Can be useful for benchmarking the cost of well-understood categories of products and services, such as PCs or enterprise applications. Can be extrapolated into "unit cost" of automated services, such as ATMs in banking.
Cons: Does not differentiate between strategic and nonstrategic spending.
INDUSTRY STANDARD METRICS
Pros: Many industries have a favourite benchmark (such as "cost-per-ton" in the chemical industry) that is accurate and widely understood. Puts IT into a business context.
Cons: IT is generally one of the highest-cost services in a business. May make IT look egregiously expensive.
SIDEBAR: Why You're Spending More
If your business benchmarks IT spending as a percentage of revenue, these 12 variables may be making you look bad
1.Your product A high IT element in products (insurance and financial products, for example) usually means higher IT costs.
2.Business volatility If you are absorbing another company in an acquisition, your spending will be higher than normal.
3.Organizational structure A decentralized IT structure is more expensive to operate than a centralized one.
4.Competitive pressure If your company focuses on using IT to add new business capabilities, your spending will be higher.
5.Geography A global enterprise's IT is more expensive than that of a local or regional company.
6.Size Smaller companies tend to spend more on IT as a percentage of revenue than larger companies in their industry. (Big companies tend to spend more per employee because they tend to be more complex.)
7.Complexity Highly complex IT infrastructures (many different systems, many older systems) cost up to 50 percent more to maintain than low-complexity infrastructures (standardized, few applications).
8.Appetite for risk Aggressive adopters of new technology may outspend mainstream adopters by 30 percent and risk-averse companies by 50 percent.
9.Service levels High service levels (for mission-critical IT) cost more to maintain than low service levels.
10.Blip spending Upgrading a system or refreshing all the old PCs across the company can raise costs temporarily.
11.Rogue spending Companies where IT is decentralized and business functions have the power to buy their own IT will spend more.
12.Revenue per employee Companies with high revenue per employee will tend to have more knowledge workers who use IT intensively, thus pushing up IT spending levels per employee.
Sources: Aberdeen Group, Forrester, Gartner
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