Mark McDonald

Just about everybody can tell you the relationship between the IT budget and company sales.  Percentage of sales is a common and quick metric for benchmarking and describing your IT organization,  CIOs see it as handy because in most cases the number is rather small.  IT spend as less than 1% or even 5% of revenue seems small and certainly not the cause for major concern.

Unfortunately IT as a percent of revenue, beads being a misleading and week metric is not the right way to. Look at the issue, particularly skeptical the way skeptical business executives hunk about it.

Executives who are skeptical about IT or are simply bottom line oriented think of business operations in terms of their relationship to margin.  They measure the value of something based on these terms -  what does it mean in terms of margin,

Applying that way of thinking to IT’s makes IT’s budget in relationship to margin a more salient metric for business decision making.  You can see this from the illustration below that shows the IT budget relative to sales and company margin.

So, a CIO who thinks that the IT budget is a relatively small part of the overall operation because it’s only 1% of sales can easily run into a buzz-saw.  The CIO dies not see the size of the IT budget as a major issue. They become puzzled by the degree of push back they get from business unit and line managers.

The reason is pretty simple.  What is your company’s average margin?

Lets say its 3% of sales.

From the perspective of the IT skeptic  at least one third of the company’s profits!

While IT as a percentage of sales is interesting, the relation of IT budget to margin is more important – particularly when the IT percentage is larger than company profit margin.

Size is relative.

Importance is relative as well.

Expand your view of IT relative to the company’s margin as margin is the metric business executives are measured and bonused against.

An IT budget that is a significant in relation to the margin highlights that there is a part of their performance that they do not control.

This is a dramatically different perspective from the CIO who compares themselves to sales.  It can also be behind business skeptics who measure IT against a different yardstick.

Consider this view when you report IT performance, strategies and plans.

Submit a Comment »

Category: CFO Leadership     Tags: CFO, IT Value, Metrics, Value of IT

Share

Tweet