Have you Asked the Right Question?

Do you know how much you spend on information technology each year? Giving some allowances for the debates and uncertainties in the classification of what constitute information technology expenditures, the answer is easily derived. But what does this figure mean? "Is it enough for my business?" or "Have I overspent on IT?". Over the years, I am frequently asked by CEOs, CFOs and CIOs, "What is right amount of expenditure for information technology?" "What is the right percentage of IT expenditure over revenues?". Management wants to spend enough on IT to ensure competitiveness. A typical consultant answer, especially from the quality management people, will be benchmarking. Everyone wants to follow the leaders, so average spending is not the answer. They want to know what the successful companies spend on IT? The answer is a range 0.5%-10%. That is too broad. What about only the leaders in their sector of business. The answer is also a range, albeit a narrower range. Over the years, academics have been trying hard to find a correlation between IT expenditure and the profitability of business. Despite various ways of classifying expenditures and valuation of businesses, there do not seem to be a definitive pattern. Some losers spend much more than the leaders on IT expenditures (percentage wise). I think we have asked the wrong question and hence get never get the right answer.

The Right Question

It may seems like common sense, how much should we spend will depend on how much value the expenditure is going to bring. I should not spend more than the value that I expect to get. We could put in the time dimension into the equation. The present value of IT expenditure should be less than than the present value of all future business values that the expenditure is expected to bring. If there are alternatives, such as in-sourcing or outsourcing, then we choose the one that give us the maximum net present value. The right question we need to ask is "How much business value does IT bring?"

Getting the Answer is Tough

While we know the right question, getting the answer is tough. What is the Business Value? How much business value does an expenditure on a PC bring? What about the expenditure for the network infrastructure? For majority of IT expenditures that are in the support roles, the associated business value cannot be directly computed. How can we find the proxies indicators and measurements?

We Will Help You

We will never know the value of any project unless we know the business we are in. We need to know the strategic plan. Once we have a sufficient detailed strategic plan of our business, we will be able to evaluate the contribution of any IT expenditure. 

What we have been trying to establish it to know the right things to do first. This is a good start but is only half of the work. We need to have the management and the processes to ensure that those right things are consistently being done right. "Doing the Right IT and keeping IT right" completes the cycle.

The "Right things" change as the external environment changes. As business changes, new IT projects and expenditures have to be made. But an equally important thing to do is to retire those IT projects that are no longer contributing to the new business plan. The constant review of "Doing Right IT and keeping IT right"  optimises the business value with information technology.

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