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| IT Spending: Its History and Future |
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This article provides an overview of the history and future of IT spending. For many enterprises, year 2000 is under control and IT spending is lower, but new demands on IS organizations will mean higher budgets. By 2005, Gartner forecasts that investments in e-business applications and infrastructure will drive average IT spending in North America beyond 10 percent of revenue (see Figure 1). However, this percentage means very little to some types of enterprises (e.g., a process manufacturer, insurance enterprise or hospital). Each vertical industry has a different spending profile and understanding of the reality of IT spending throughout an enterprise. Gartner's survey results highlight major vertical industry segments; this provides IT managers with a comparison of their position relative to others and aids them in their budget planning and justification process.
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Figure 1. |
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It is important to examine how spending will change during the next five years for each vertical market segment. The results of Gartner's survey show that an enterprise in 2000 should assume that its IS budget will continue to grow, even with improved efficiencies in the back office. In addition to dramatic changes and improvement in business processes, e-business investments will demand continuous upgrades to the technological infrastructure. For many industries, the Gartner survey results show that participants plan on lower IT spending in 2000; but rapidly changing business requirements seldom leave IT managers with a distinct picture of next year's spending requirements.
Gartner research shows huge variations in the amount of reported IT spending vs. total enterprise spending. Figures reported often represent less than 50 percent of total IT spending (see Figure 2). Furthermore, IT managers held to task for their IS budget levels should not look at published IS budget figures as the cure for their budget anxiety. The source of this conflict originates from enterprise goals, which often include controlling and cutting overhead budgets. These figures sometimes do a disservice to an IS organization that is highly centralized and efficient enough to discover total IT spending in its enterprise. These enterprises show higher spending figures when compared to public figures - much to the chagrin of business leaders. |
Figure 2. |
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Subsequently, IT managers may resort to other justification methods if survey results have changed during the past year and reflect unfavorably on an IS organization's current spending level. IT managers will be forced to manage to less-than-scientific and less-than-normalized publicly available IT spending information. The relationship a CIO has with the business unit leaders dictates the extent to which noncomparative justification models dominate justification discussions. Consequently, by 2003, 60 percent of IS organizations will use external benchmarking - not IT spending statistics - as vehicles for spending-level justification. Ultimately, IT spending should be justified based on whether an IS organization's goals are aligned with those of the enterprise and whether those objectives are met.
Furthermore, major trends affect each resource line item differently. No direct relationship exists between the rate of change in one area and the percentage of resources that line item will consume. Specifically, four elements deserve significant notice.
Analysis of the IS budget distribution by resource category is useful for accountants but is less useful for IT managers devising three-year plans (see Figure 3). Analyzing the IS budget distribution by activity or function better enables IT managers to analyze the IT baseline. |
Figure 3. |
| During the past four years, a significant trend in IS budgets has occurred - end-user support and help desk, as function line items, have moved from just 4 percent of the IS budget to 18 percent. This signifies that IS organizations now officially support their distributed computing environments instead of leaving end users to their own devices. This increase in the IT baseline validates the establishment of total cost of ownership theory to the benefit of all enterprise constituencies. The rush to implement packages for mature business processes for the typical large enterprise temporarily has reduced the IT baseline from the usual 74 percent to 69 percent - now 31 percent of the IS budget is devoted to new application development and major enhancements (see Figure 4). |
Figure 4. |
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Thus, for every $1 of discretionary spending (i.e., new projects and major enhancements), up to $5 is spent on support, maintenance and infrastructure during the life of an application. IT managers should set a goal of reducing this $5 to $4 during the three-year planning horizon. Therefore, creating new functionality generates new standstill (i.e., IT baseline) costs. The level varies depending on the type of development, but usually successful development generates standstill costs of approximately 60 percent of the previous year's development costs until the system is retired. In an average IS department highly committed to internally developed applications, 70 percent to 80 percent of staff costs are dedicated to new development and maintenance functions, which usually are assumed by external service providers (ESPs). In post-enterprise resource planning (ERP) system implementation organizations, administration and the operations environment are simplified, and staff requirements may drop as much as 50 percent to 70 percent.
In addition, the U.S. Department of Commerce now reports that IT-related capital expenditure consumes 50 percent of an enterprise capital budget (see Figure 5). However, when plant and equipment items that include some form of IT are excluded, and national communication infrastructure is excluded, a figure of 30 percent emerges as more sensible. Gartner research shows a steady increase in IT's share of an enterprise capital budget. This indicates that IT investment, which is often approved with "soft" justification business cases, is a permanent part of the enterprise planning process. Viewed alternatively, the 1999 Gartner survey showed that 32 percent of IT spending is for capital spending. |
Figure 5 |
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Furthermore, high levels of capital spending translate into higher depreciation levels for the IS budget, and it is not unusual for IT managers to report that 50 percent of the IS budget is devoted to hardware depreciation and software depreciation. This occurs especially when transitioning from major enterprise package implementations accompanied by a major upgrade in IT infrastructure. For the typical enterprise, 50 percent of the hardware budget line item is devoted to hardware depreciation, and 20 percent to 30 percent of the software line item is devoted to software amortization. Because IT has become a critical component of competitive performance, IT managers must build consensus with business managers to ensure that a steady stream of future capital funds are earmarked for infrastructure upgrade and maintenance.
The Impact of E-Business Through 2005, 30 percent to 50 percent of an IS budget will be devoted to e-business initiatives (see Figure 6). During peak implementation years, e-business will consume 50 percent of an IS budget, which includes infrastructure and development activities. However, e-business is not just another project - IT managers must ensure that business managers and enterprise leaders understand multiyear funding commitments. As with other major new business process initiatives, a general guideline is that for every dollar of new investment, expect the life cycle costs to be four to five times as much as the investment. Thus, for every $1 of e-commerce investment, expect to pay $.60 (60 cents) every year thereafter for the life of the system. |
Figure 6. |
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Consequently, the initiatives are not inexpensive. E-business skills are in high demand, which means higher salaries and higher rates by ESPs. When and if time-to-market panic sets in, enterprises pay a premium for the value of introducing a new business process to meet or beat competitors. Of course, a predominant concern of business and IT managers involves the source of funding for e-commerce initiatives. As with ERP implementation, the hype cycle starts with senior business leaders, and budget increases will be less painless than normal. Funds dedicated to ERP and year 2000 may be redeployed to e-business initiatives. Enterprises that state they are finished with e-business initiatives will be surprised to discover that competitive spending speculation will drive additional spending.
Determining and justifying a budget depends on multiple factors. To this end, benchmarking is a tool that will be used increasingly to establish a baseline of comparison of IT spending with other enterprises and to justify that spending. As part of the evaluation process, it is important to focus on the IS budget distribution by activity or function; reduce support, maintenance and infrastructure costs while allowing for infrastructure upgrades and maintenance as well as anticipate expenditures to achieve e-business competitiveness. Ultimately, IT spending should be the result of, and justified by, aligning an IS organization's goals with those of the enterprise. Source: Kurt Potter, Gartner Writer: Carolyn LeVasseur Contact Information: For more information about Gartner Measurement services please e-mail measurement.info@gartner.com |
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