Every CEO wants to know that they are allocating the proper amount of resources to IT (Information Technology) but at times the metrics that companies use can be misleading. A popular metric used today compares the percentage of IT expenditures to the percentage of company revenue. This sounds good in theory, but how do you measure the effectiveness of the spending? A company that spends 4% of their annual revenue on IT could spend the money in all the wrong ways. A different, but similar company that spends 4% of their annual revenue on IT could spend their money in all the right ways. How is upper management to know what is right or wrong based on this number? The answer is that they won’t! You need additional metrics to determine this. The below steps will help every CEO to have a clearer understanding of the importance in knowing the truth behind the numbers. It isn’t the only metric you’ll need, but it will definitely get you on the right track.

Step 1 Determine your industry's benchmark for annual IT expenditures as a percentage of your company’s annual revenue: There are 5 popular IT spending metrics used. For the purpose of this article, I will use the “As a Percent of Revenue” metric as it is one of the most widely used. *****IMPORTANT TIMESAVER******Use this Forrester research study cheat sheet to determine your benchmark numbers.

Step 2 Define how much of your annual IT expenditures as a percentage of your company’s annual revenue is spent for ongoing IT operations and maintenance: Measuring how much your company spends on technology to support its current business activities is a good benchmark. In general, lower is better because a business that spends less on existing technology to support a given level of business activity will have better profit margins than a company that spends more to support a comparable level of activity.

Step 3 Define how much of your annual IT expenditures as a percentage of your company’s annual revenue is spent for new IT initiatives: This measure identifies how much a company is spending on new technology to support new business strategies or achieve key business goals (e.g., upgraded security, improved disaster recovery capabilities, regulatory compliance).

Step 4 Study the outcome: All things being equal, a company that spends less of their overall IT budget toward ongoing IT operations and maintenance than the peer group average will have better business results than one that spends more — even if both companies spend the same proportion of their revenues on IT goods, services, and staffing. This statement assumes that the spending on new initiatives is done prudently and is focused on projects that can deliver real, positive ROI. See the example in the below picture (Andrew Bartels, Vice President, Forrester Industry Economics & Data research team).

New IT Initiatives + Ongoing IT operations and maintenance = 100% of IT budget (total)

Step 5- Put a plan in place: Use the outcome of the above steps to work as a company starting point to balance your current processes. This will prove as a checks and balances to keep information technology expenses in check.