The Nature of IT Spend is Changing
28.03.2002 - published by CW360.com

The nature of IT spend is changing It is time to stop treating IT spend as a capital outlay and instead regard it as a continuous cost. Seldom do we look at how we spend money. In the IT department, our budgets are growing - according to Gartner, in the next six years the amount we spend on technology in Europe is set to double.

IT spend currently accounts for 3.5% of revenue and this is set to rise to about 7% by 2007. US tycoon J Paul Getty once said, "If it appreciates, buy it - if it depreciates, rent it." He may have been talking about hard products, but the same goes for software and services. Spend on software and services is growing - IDC quotes a staggering £79bn spent in 2000 on IT services in western Europe. At present, most of this comes out of capital budgets. However, rather than budgeting for this on a yearly basis out of a capital budget, it is far more cost efficient to account for it in a way that reflects its continual nature. We are comfortable with this kind of spend when paying for the likes of photocopiers, why not for IT?

In all aspects of budgeting, companies should look at the dynamics of IT spend and decide whether finance can help them. For instance, spend on technology infrastructure, hardware and software is now constant too, rather than sporadic. Yet while these technologies are positioned as cost-cutting, most bring a return on investment that does not translate to the IT department - they drain IT budget with large, capital outlays. This, coupled with the continuing task of future-proofing a business, is an area where factoring your spend to a finance house makes economic sense.

It is also important to ensure that the figures on your budget sheets are transparent. However IT investment is funded, often IT budgets fail to factor in hidden costs such as upgrades, maintenance and time. It is this disparity between facts and figures that distorts an IT budget. Gartner's Nine Ways to Cut Costs and Save E-business Initiatives report, published in April 2001, states, "Most enterprises with $1bn to $5bn in revenue can reduce IT support by $4m to $6.5m using a total cost of ownership strategy."

So however you fund your IT investment, it is vital that for effective budgeting you calculate the total cost of ownership of the IT system. In the current economic climate, as businesses are in the process of looking at costs, they may well begin to look at finance too. The culture of using finance to fund IT investment has not been wholly embraced by senior level management as it has for many other business essentials. According to Gartner the IT supplier of the future will have to offer a full service, and it is in this mix of supplying products, services and general business consultancy that finance will have an important role to play. In a few years time, we'll look back in surprise at the way we currently budget for IT.