No one wants to overspend on anything, especially IT. In fact, one of the first questions most organizations ask when they begin working with us is how much they should be spending on IT. Frustratingly, the simple answer is, “It depends.”

We typically see organizations spend between 2.5% and 6.5% of their operating budget on IT. While this may not seem like a wide range, when you consider that most SMBs operate at less than 10% EBITDA, every dollar spent has to count.

So how do you know if your organization is spending the right amount? Below are some examples to help put those numbers in context.

First, Let’s Talk About Underspending

Underspending on IT is just as big a problem (if not bigger) than overspending. When an organization underspends, you can count on two things happening:

1. Risk goes up. The type and depth of that risk depend on how and where the spend is made. We often see a shortfall in three areas: security, business continuity and user productivity. Very few small businesses have the necessary tools and training in place to protect their business properly. They are usually shocked to find out their backups are not solid, take days to recover, or are not structured in a way to protect against all the likely scenarios that could occur in today’s world.
2. It is common for organizations to mistakenly assume that their security spend is sufficient because they have anti-virus software and a firewall. Unfortunately, most businesses cannot survive a complete loss of data due to a disaster or security issue where the data cannot be recovered. Conversely, when organizations understand why and in which areas IT funds should be spent, the investments decrease risk and support growth.
3. Morale goes down. Production in any organization is performed and facilitated by people. Good people want to be able to do good work. When they have poor or underperforming IT, your best talent will consider other organizations to produce the value they desire to create.
4. Businesses often try to prolong the life of computers and systems, thinking they are saving money when they are actually lowering production and increasing frustration, leading people to find excuses not to work because working on outdated equipment is more frustrating than rewarding. In contrast, when an environment is designed to ensure users can do their work without concern for the “system” being a hindrance, everything shifts.

Gaining Perspective

IT costs in the 2.5% – 6.5% range typically cover the following:

• Server infrastructure
• Network infrastructure, including LAN (local area network) and WAN (wide-area network)
• Software
• Workstations
• Power management
• Security
• Vulnerability management
• IT compliance
• Business continuity, disaster recovery and backup
• IT management, both internal and outsourced

IT costs do not typically cover training or phone systems.

The more regulated and complex a business, the higher the IT percentage. For example, most financial institutions in the SMB space (i.e., banks with sub-$1B in assets under management) will be in the 5% range. The more locations, the higher the costs.

Also, the larger the organization, the higher the costs. A false assumption is that there is an efficiency of scale to be gained as you grow, so the cost per user or percent of the budget will go down. For the most part, this is simply not true. Why? Because the larger your organization, the higher the number of applications necessary for it to function. Sometimes it is not an increase in the number of applications but their complexity, resulting in the same outcome. For sure, there are times in the lifecycle of a business where, as an example, you can go from 4% to 3% because you’ve gained some efficiency. However, as the business grows, investments in new technology will occur.

As revenue goes up year over year, the operating budget percentage reduces over time. However, the IT spend as a percentage of the operating budget adjusts as IT investments are required. The goal is that those investments drive organizational efficiencies, which improves the overall operating budget and bottom-line performance.

Can I Save Money with software as a service (SaaS)?

Many organizations assume that because they move to “the cloud,” their costs will go down. By and large, this is not true. The infrastructure required to run a SaaS application or a data center to provide 99.999% uptime is very costly to operate, manage, backup, and plan for lifecycle. Most organizations rely on the provider to facilitate a much better outcome than they could build themselves, which comes with a cost.

Next Steps

While the circumstances and needs of your business may vary from the examples above, having a general idea of how much is appropriate to spend on IT and why is key to setting up your business for success.