Having a plan of action for what needs to be done and when to keep your IT in line with your business pans, and that you have the budget in place to carry it out, will ensure that your systems stay fit for purpose and are an advantage to your organisation rather than a liability to be reactively addressed.
When we first start working with our clients, most don’t have any form of strategy or plan for their IT or any form of budget or allocated expense to invest and manage their infrastructure. IT costs are usually seen as being purely reactive and a necessary evil, where items were replaced as they broke or where systems were invested in when users complained loudly enough. Or when the loss of productivity was too great to ignore.
Companies were usually more receptive to a more considered or planned way of working after some disaster with their systems. Often by then it was too late, and the true cost of whatever had occurred vastly outweighed whatever outlay it would have taken to manage their systems properly in the first place.
Basic IT planning
Even at its simplest level, you should have a three- to five-year plan for your IT. Discuss with senior management the short, medium and long term business objectives and discuss how IT is affected by, or how IT can affect, these plans. IT can act as either an enabler, or if you have the right backing and advice, as a strategic advantage.
You need to plan for capacity in terms of the changing head count and growth of the business as well as equipment renewal, whereby users’ machines and companywide infrastructure are replaced when it is out of its support contract or warranty period - and before it breaks.
Software licencing should be treated as a closely related issue. You must ensure you give your users the correct tools to do their jobs and ensure they are correctly licensed.
You might also choose to identify and invest in projects above and beyond ensuring that “the lights stay on” and choose to implement systems that provide additional strategic advantage to your business. These may be purely for internal use, such as bespoke software to model and enhance business processes and workflows, improved reporting mechanisms or enabling remote working for your team. You could also invest in more externally facing initiatives, such as an extranet to improve collaboration with clients and partners, better online marketing or an improved website.
IT planning and budgeting needs everyone’s input
IT planning shouldn't be done in isolation from the other departments. All senior managers ideally should be involved to express their needs and have a forum to keep abreast of the developments in the infrastructure that supports their activities. Finance and accounting personnel in particular should be involved for several reasons - often they are quite IT-savvy and can contribute to the overall thinking and direction of the IT strategy, and they are some of the most intensive consumers of IT. Their role also requires they are kept informed of the current and future costs of doing business for both accounting and insurance purposes.
Finance and accounting are also often heavily involved in compliance within an organisation and everyone’s life is made a lot easier if they are already up to speed with the issues, supporting policies and plans when it comes to auditing compliance and self-regulation and reporting. In many organisations we have worked with it is usually someone from the accounting or finance team who is the contact for managing the day to day interface with the support provider, and in some cases, they were the original in-house support resource themselves.
Involving the marketing or sales team, or at least their senior management, is essential here to ensure that you aren't working at cross purposes or at the very minimum are aware of each other’s activities. One organisation we support had developed serious acrimony within its management team when it came to light the marketing department had retained a design and web agency, and several developers, to develop the company website and a branded app as well as some simple e-commerce integrations with a key business partner without discussing this with other senior managers within the company.
They took serious umbrage at this fact, and the fact that this initiative required several new systems to interface with existing data - their data - about which they had not been consulted. There were several heated exchanges and eventually the project stalled for several months, adding cost and losing ground on what was actually a very good initiative.
Setting IT budgets
Past expenditure isn't always the best indicator of future expense, however, make sure you can aggregate and track all IT expenditure from previous years. It will serve as a useful baseline from which to launch your next budget, and provide a sensible starting point for assembling it. Upcoming costs depend heavily on many factors, not least rising head counts, rising prices and how the landscape of equipment renewals looks.
Many companies try to eke out the lifespan of equipment until it just can’t take the strain anymore, or fails, and never plan for renewal or expansion. These companies also seem to be the ones who never seem to thrive. Head count doesn't always dictate cost either - strategic investment in IT or IT related services can be part of longer-term business goals, and not directly attributable to what has gone before or how many staff you have.
We often get asked how much companies should be spending on IT. There is no hard and fast answer unfortunately, with routine spending ultimately tied to ongoing expenses such as software subscriptions and hardware replacement costs as well as communications costs and general support. Other more easily identified costs are the renewal of IT equipment – beyond this it becomes harder as costs are linked to company growth, strategic objectives such as training or investment initiatives and other more nebulous factors.
We've seen quite a range when it comes to how much companies choose to spend:
- Some spend as little as possible, only investing when equipment breaks or software no longer runs, and little to none to support their staff
- Other organisations earmark between 2.5% and 8% of their revenue to maintain their IT at peak condition
- Some explicitly set around 80% of this budget on routine business-running costs and 20% on 'transformational' expenditure to give them an increased competitive edge.
As a very rough average, successful professional services firms tend to spend:
- between 4% and 6% of turnover on comprehensive IT running costs
- some further spend between 1% and 2% on non-routine expenditure such as projects to enhance productivity or give some form of differentiation or competitive advantage
- Some spend more again, up to 10%-12% in total across running and transformational expenditur
There appears to be a strong correlation between a higher spend on IT and organisations with a higher proportion of fee-earning professional service staff, or where a high proportion of users are in technical client facing roles such as architects or analysts.
Choose a consistent accounting approach
Choosing between cloud based services and investing in on-premise infrastructure, reviewing what strategic investments need to be made, reviewing your asset sheet for upcoming necessary replacements, being aware of general business plans and head count and involving the accounts and finance functions will allow you to manage your expenditure, categorising it into Operational (OpEx) or Capital (CapEx) expenditure and depending on your treatment of these expenses it can make a significant difference to your end of year tax bill.
Depreciation, amortisation and software subscriptions all need to be correctly and consistently managed and may have a significant impact on how IT expenditure is accounted for, and as such IT budgets really need to be developed in partnership with the accounting team. Research and Development allowances, capital grants and allowances and developing or exploiting “know how” or intellectual property within your business not only can give you competitive advantage, it can also reduce your tax liability.
The approach for setting budgets generally applies equally well to IT budgets. Examine previous years’ spending, decide what routine and exceptional items to include, and define the scope of your budget. Ensure items such as IT security, IT training and software licencing are given their own space to breathe in the budget to ensure they aren’t overlooked. Develop and maintain your IT budget in a tool like Excel, reporting on variances and feeding this back into the budget review and setting process.
Most importantly, make sure the IT budget and IT plans reflect, and are included in, the overall business plan. Most items in IT have a three to five-year lifespan, which is also a practical and manageable cycle to plan with. And finally, review and audit your budget regularly to ensure it remains up to date and relevant as your business grows.