AS A BUSINESS HOW MUCH SHOULD WE
BE SPENDING ON INFORMATION TECHNOLOGY
As a small business owner this is not a question you have probably considered. The correct answer is not too much and not too little. If you are a more established SME or a larger company then you are probably preparing annual budgets and you will have line items for information technology, and you can see how much you will be spending
Many times recently I have heard from business owners who have had technology issues. The types of issues I have heard about include:-
- Server hardware failing and there is no backup and all the data is lost
- The company has succumbed to a ransomware attack and all their data is locked and they need to either recover from backup to get data back or pay the ransom.
- An unhappy staff has deleted all the files on the server.
In many instances I hear that the IT provider is blamed for the incident and often that is where FunctionEight come in. We get contacted to help resolve these issues because the incumbent IT has, in the opinion of the client, failed in their duty to protect the client’s systems and data.\
One of the first questions I ask the client is how much they are paying the incumbent IT provider and 9 times out of 10 the answer I get indicates to me that it is not enough.
Any IT provider does what it gets paid to do and if you don’t pay them much, they won’t do much. If you pay more, they will do more. So, the question is how much should you be paying to ensure you don’t get issues like the ones I mentioned above?
Well the answer is not straightforward as it probably depends on two factors:-
- What industry you are in?
- How large an organization you are?
First the industry has an impact as if you are a regulated financial institution with a lot of personal data the cost to protect that and have it setup properly to meet regulations is considerably higher than if you were a manufacturing plant producing ball point pens.
Secondly in general the larger you are the more IT will cost you. You can equate this to effectively a cost per person to ensure you have appropriate systems. However, you should note that the calculation does not really start with 1 person. In reality the cost to setup and maintain IT systems for 1 user or for 10 users is about the same so if you are a MSME (Micro SME) with one or two employees you should be paying a disproportionate amount for your IT.
What you should be allowing for should include the following:-
- IT service provider fees, such as Function Eight IT Support
- License fees, such as subscriptions to Microsoft and other software
- Hosting fees for website, DNS, CRM etc
- Domain name cost and annual renewal
- Internet Service Provider fees for broadband in the office
- New or replacement hardware for employees. Don’t buy old models as they will be redundant quicker and ensure you buy hardware with long warranties.
So down to the nitty gritty of how much should you be spending? In general, you should be allowing between 3% – 7% of Revenue as the amount you budget to spend on all things IT. The range breaks down as follows:-
- 7% for a small Financial Institution or Insurance Company or other small company in and industry that is regulated.
- 5% if you are a non-regulated SME.
- 3% if you are a large company say over US$2Billion in revenue.
So lets put this in context. If you are a 10 person SME in a non-
regulated industry with a US$1m revenue you should be spending US$50,000 per year on your TOTAL IT needs. That probably means you would have an IT Support Contract with a service provider for about 50% of this (i.e. US$25K). Half of this should be on ongoing maintenance (about US$1K per month) the other half on new projects and developments. The remaining 50% of the budget should be on paying vendors for hardware, software, backup, security etc which would all be managed by the IT Service Provider as part of their contract.
I would like to add a clarification that if you want your IT Service Provider to also be your part time CTO and sit in on management meetings and give advice then you should be adding 1-2% of your turnover to the IT Budget. Do not expect to get this level of service unless you are paying for it. Not many companies do this, and it is a major failing where companies do not give sufficient importance to the technology needs of the business at the boardroom level.
As an SME if you are not paying your IT Vendor these amounts just for the support contract then you are not paying them enough:-
- Regulated Industry: 1.75% of your turnover (minimum)
- Non Regulated Industry: 1.25% of your turnover
As your business expands and your revenue increases your IT spend should be increasing also in line with this. If your IT Vendor is on the same contract as you were 5 years ago, and your business has doubled in size you should expect to have issues.
If you are a 5-person company and your IT Vendor only does something when you have a problem and you are paying them US$1K per year you should expect to have issues.
It is extremely important to right size your contract with your IT Vendor so that your company gets the focus it needs from the IT Vendor so that you avoid potentially business critical issues.
Please note that all the above figures are approximations and your specific needs may vary a little or dramatically from this depending the situation of your business.
If you are unsure what you should be doing or whether your existing IT Vendor is doing a good job please feel free to contact me for a open and frank discussion.
C.O.O. FunctionEight Limited