Returns on annual IT investment… the math isn’t pretty

Recent articles on The IT Value Challenge explored ways executives can reallocate, recapture or reduce non value-creating IT spending to increase available IT budget on the grounds that failing to do so could imperil the availability of funding for IT in the “new normal.”  The importance of increasing the return on annual IT spending becomes even more striking when two common, popular IT spending benchmarks (well known to business and IT executives alike) are combined into a single analysis.

$8 of every $10 spent on IT is “dead money”

This old chestnut, originally released by Gartner Group in late 2005, posits fairly credibly that the vast majority of IT spending does not make a direct (or material) contribution to business growth or profitability, and goes instead to “merely keeping the lights on.”  One analyst or another seeks to update this benchmark every year or so and usually gives up when they realize that the balance hasn’t really changed enough to be newsworthy.

Agree with this benchmark or not, it is one of the best known IT value benchmarks known to executives and often recalled whenever a request to increase IT spending (for whatever reason) is being considered.  This is the first of two inputs into the analysis that follows.

IT is most companies’ highest SG&A costs after salaries

Almost every executive immediately looks at Sales, General & Administrative (SG&A) expenses when times are tough and expenses need to be pared down. Virtually every IT spending benchmark out there puts IT expenses as the second largest one after salaries on the profit and loss statements of most companies, which becomes even more apparent when IT spending is stated as a percentage of company revenues as they are in most IT spending benchmark studies.

The above IT spending benchmark summary, from Gartner Group’s “Gartner IT Key Metrics Data 2009,” provides a quick view of what executives frequently see when they calculate their largest areas of SG&A spending where the greatest savings may be possible.  This benchmark forms the second input into the analysis that follows.

The math isn’t pretty

Using the IT spending benchmark for a $250M company from the above summary as an example, combining these two benchmarks produces the following analysis:

In the “new normal” environment where business survival techniques adopted by companies initially in response to an economic downturn and its associated challenges have become the norm for doing business despite a perceived or actual economic recovery, is it any wonder that an almost-$13 million IT budget might come under some scrutiny?

Business and IT executives alike must leverage the techniques discussed in previous articles and every other creative means at their disposal to change the inputs to this analysis or see IT budgets decline even further. While Gartner Group and most other analysts project an upturn in 2010 IT spending as compared to 2009, the continuation of this trend may depend on how much of that increase goes to value-creating activities instead of making up for the non-value creating activities curtailed in the last two years of economic downturn.

Stay tuned to the IT Value Challenge for more ideas on making this math a little less ugly.