Have you ever been stuck deciding why IT budgeting is necessary and how to successfully plan for it?
As the vCIO at MotherG I play an important consultative role for our customers. I found myself asking “what’s in it for my clients” when they decide to spend that money on a project or investment. After all, if this was an easy question to answer then they wouldn't need me, right?
Nowadays, IT systems are an essential component of every business and technology investments are almost mandatory to every company in order to compete in this globalized economy. Technology is both a cost of doing business, and an opportunity to do more business. Most business owners or executives will recognize the necessity of having computers, email services, web presence and line of business applications, but they still look at the upfront cost more than other issues. They still tend to miss the big picture, the reason why they should be doing this project or proceeding with that investment. It’s time to take a step back and look at those strategic aspects of technology and better understand how they will drive business growth. Budgeting for those consists of best practices to follow that ensures proper funding over a given timeline. Piece of cake? Not quite...
Ask yourself the fundamental questions
What are the benefits of technology for a business? Here are the key categories:
- Reach more potential customers while developing a business relationship with them.
- Streamline operations, reduce costs, improve efficiency, maximize profit, minimize waste and devote talent to the core business.
- Provide excellent service to customers.
- Support better relationships with key partners.
“Why am I doing this?” is the very first question businesses should ask before spending any money or time on technology. If there is not a core business benefit to be gained, why do it in the first place?
Established businesses outside the technology industry typically spend between 0.5 and 10% of their annual revenue on technology spending, depending mostly on the industry. Manufacturing and retail are typically at the low end of this range, while finance and health care are at the higher end of the spectrum.
if you are in the lower end of this range you may be missing out on some key benefits technology can provide. On the flip-side, if your IT spending is higher than 5%, you may be spending more than you should on inadequate solutions or expensive support contracts related to an overly complex environment.
What costs do you need to consider when putting together your technology budget?
- Initial costs: hardware assets, software solutions, implementation. (project fees)
- Ongoing costs: licenses renewals for proprietary software, warranties, hosting and support contracts, recurring fees for cloud based services.
- Upgrade costs: cost of upgrades based on expected lifespan of systems. (ROI/TCO)
- Value proposition: how much new business could the new system generate? What is an objective number in terms of productivity gain for your employees? (Time=$$$)
- Opportunity cost: how much potential revenue is lost by not implementing a system? What are your competitors doing in this area? Be realistic.
- Risks: what are the risks of a particular system? What does it cost to mitigate those risks?
What should you spend the majority of your technology budget on?
The answer to this question depends a lot on your industry but generally, most businesses spend half of their technology budget on infrastructure—computers, networking equipment, and Internet Service Providers (ISPs). As the world moves towards the cloud and subscription based pricing models there are great opportunities for savings in these areas, for businesses that can take advantage of them.
There's a fine line between too much and not enough. Spend too little and your competition may improve their business to the point where you can't compete with them. Spending too much on technology could consume your time, budget and possibly your ability to focus on what is “core” to your business. You need to implement enough technology to be able to appreciate a real benefit, prevent the worst disasters, and not miss out on any major opportunities, while not spending more than you can handle. Life is all about balance and the same is true for business.
Small, incremental and ongoing improvements are often a better way to bring technology into your business and enjoy measurable returns. Super ambitious implementations and/or huge technology catch-ups due to a lack of regular investments can be very disruptive before being seen as an improvement by your employees.
Think about technology strategically
Too often we see businesses that are stuck at the tactical level, trying to stay ahead on cash flow and payroll. They don't have enough time to think about technology in a strategic way. A strong plan for technology should be a part of every business plan, and re-evaluated when taking a strategic look at a business. The key drivers to sound budgeting practices have been used by MotherG for many years as our strategic guidelines. Probably also why customers call us their “trusted advisor”.