How much are your competitors spending on IT?
The probable reason to ask this question is that you want to understand what your own organisation should be spending on IT. If you have a successful competitor, or indeed know of a business in a related industry, such as a supplier or customer that you aspire to be like, then understanding what they do and how they do it is a great starting point to be like them.
Of course there are a number of reasons why businesses are successful – it might be the marketing, the product, the quality, the service (and indeed all of these) that contribute to their position. You may argue that the IT that a particular business uses might not even be obvious or game changing – such as a great website or a fully integrated business system. It might just be that their use of IT allows them to concentrate on the things that make them good. For instance, proper and efficient use of a CRM (Customer Relationship Management) system can lead to very efficient marketing campaigns where the whole marketing process is planned, executed, managed and adjusted to get great results.
Making as many transactions as possible electronically, not necessarily by complex system integration, but perhaps by email can lead to efficiencies in accounts, for example, that means there is less data entry from paper bills or stuffing invoices into envelopes and a greater concentration on keeping debtor days low or negotiating better deals with suppliers.
Having a number of different systems that don’t integrate very well, if at all, can also impact on the efficiency of a business – it takes time to input the same data into many systems. Fewer software systems (by extending the use of present functionality in what you have) or a single integrated business system such as ERP (Enterprise Resources Planning) can reduce input and save money not only in the effort required to use it, but also, potentially (but not always), reducing the different software packages and hardware and related maintenance costs.
In summary you don’t need shiny new technologies and whizzy web-sites to be as good as your competitors – it may just be making proper use of modern, proven software that is in general everyday use.
So how much should you spend?
Of course, it rather depends on your attitude to IT, what condition your current infrastructure is in, and what your plans are for the future.
We’ll deal with the first element in terms of your attitude to IT – do you see it as an inconvenient necessity, core to the way you do business or full of possibilities that can differentiate your business from your competitors?
A broad classification for attitude is as follows – and, by the way, we offer no judgement as to which is right for you or your business.
Attitude to IT – what’s yours?
|Bleeding edge||Very early adoption of typically unproven technologies that may offer competitive advantage if successful but accept the risk of failure (and consequent cost).||A high percentage above the average.|
|Leading edge||Takes the very latest proven technologies at the point they become mainstream.||A moderate percentage above the average.|
|Me too||Uses proven technologies which are in widespread use.||At around the average.|
|Laggard||Often reluctantly adopts technologies due to a identified need or withdrawal of previous technologies||Below the average|
|Super laggard||Only uses IT as a last resort||Significantly below the average.|
This is not necessarily a constant state – a company may decide to renew its business systems to meet new challenges, a strategy for growth, or even a particular one off project – and this may result in the percentage of turnover being spent on IT for a period indicating a ‘Leading Edge’ mentality. However, in subsequent periods it may demonstrate ‘Me too’ or even ‘Laggard’ as the investment, having been made, pays back with lower on-going costs.
IT Spend as a percentage of turnover
Once you know what your attitude to IT is you can then benchmark your spend against industry in general.
Sometimes it is possible to find published figures for particular sectors – for instance, banking and finance have industry benchmarks (whose spend is way above manufacturing and service businesses).
Manufacturing and Service companies may find it difficult to obtain benchmark spending data for their particular sector as direct competitors do not publish such information freely, unless as part of industry association studies. In the event such information is not available then then you will have to rely on the figures for ‘general’ business, or you could always ask the direct question of the competitor or business you aspire to.
So, in the absence of such easily available data we can look to research from Gartner which found that the average ratio for companies was 3.5%, but for technology intensive industries such as financial services and software services, the ratio can range as high as 6%.
CIO Magazine from a survey carried out early in 2016 also noted that the smallest enterprises spent more as a percentage of turnover, than medium and large enterprises.
Gartner has also found variations in this ratio depending on geography. In EMEA (Europe, Middle East and Africa), IT spending as a percentage of revenue is 4.4%. In North America, the figure drops to 3.5% and in Asia, the ratio is the lowest in the world at 2.9%. In Gartner’s view, these regional variations can be explained in several ways. The lower ratio in Asia may be partially due to lower labour costs. However, long term economic growth in China, inflation and increased real wages may erode the price difference between Asia and other regions in the future.
There has been an increase in spending in very recent times, often unplanned and spent in an emergency situation, on preventing cyber-crime. New threats have developed which require counter measures which are difficult to plan for given the emergence of new forms of cyber criminality by the day.
It’s all relative…
Of course your stance towards IT will very much depend upon the market you operate in – if all your competitors are ‘Laggard’ and spend a very small percentage of their turnover on IT, it may be possible to be perceived as ‘Bleeding Edge’ by your market place by only spending a few percentage points more of your turnover on IT than your competitors – you may still be perceived generally as ‘Laggard’ but who are you competing against?
For instance – you may be in a market where there is a ‘Best of Breed’ application that is the de-facto way of doing business. By electing to choose another application such as ERP (Enterprise Resources Planning) you may be able to differentiate yourself by being able to use different business processes.
A few words about BOB v ERP
BOB – Best of Breed software is typically designed for a particular industry, and for a particular subset of processes. It may be estimating or order processing and it will likely have standard interfaces to a more general package for finance (Sage, for instance).
ERP – Enterprise Resources Planning is software that is designed to be extremely flexible and can, by the setting of certain parameters, be made to work in a different manner for many different organisations (and sometimes within organisations). For example an order system can have certain steps to satisfy a particular type of transaction. It is possible to gain templates for some industries to make the configuration process easier.
If you are at a juncture in your business development that is making you question your existing systems, then we are able to help you work through the complexities and contribute to you making a decision that is right for your business – we have many years of experience at Neuways of implementing and managing ERP and BOB systems for our customers.
Depending on your attitude and particularly depending on how much you think you spend right now, you will say ‘How much?!’
This much… (based on a £10,000,000 turnover business)
|Attitude/Orientation||Percentage of Turnover||As little as||As much as|
|Bleeding edge||6% plus||£600,000||When you run out of money|
|Leading edge||3.5 to 6%||£350,000||£600,000|
|Me too||2 to 3.5%||£200,000||£350,000|
|Laggard||0.5 to 2%||£50,000||£200,000|
|Super laggard||Less than 0.5%||Connectivity….||£50,000|
If you are saying that because the indicated amount is way beyond what you spend right now then you should take comfort that you are either very efficient with your use of IT – and you are very good at what you do, or that by making investments in line with your competitors you can match them or, by spending a slightly greater percentage, you can beat them.
Way too much!
If the exclamation is because you are spending beyond these indices yet are still not a market leader, or even competitive, then your IT needs close examination and potentially the way you run your IT. There are proven, and relatively quick, ways of reducing cost – renegotiating your contracts, outsourcing some or all of your support, or replacing inefficient systems which better fit for purpose business software.
Either way, we can help
With the recent coming together of Neustro and Smarterways, becoming Neuways, we can offer strategic insight and planning that will help your business get the very best value from your IT spend, whatever your attitude. We have a history of making local and global businesses more efficient and cost effective (and more effective generally) by looking for the best solutions to the business challenges and needs of business IT.
We don’t just consider point solutions anymore – a new server, some software licences – we are keen to have a conversation about all of your IT and processes to ensure you get the right solution for you. Whether you’re moving premises or thinking about a new project, consider how this may impact on your IT and call us for a discussion before you proceed. We’ll explain the options and associated risks, in plain English, so you can make an informed decision.