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IT Spending Benchmarks: Too Much, Too Little, Or Just Right

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How Much Should You Spend on IT?

Some organizations overspend and get frustrated by a lack of return. Others sink into technical debt by underspending and incur efficiency losses. But how do you know if you’re overspending or underspending?

A recent study found that 44% of organizations planned to increase IT spending for 2020, up from 38% in 2019. But how do you allocate your technology dollars and build a technology budget that aligns with your organization’s strategy, goals, and drives value? In some ways, it is like the story of “Goldilocks and the Three Bears.” IT spending needs to be just right.

But what does ‘just right’ look like? While it can be different for every organization and industry, here are three common starting points.

IT Spending by Industry and Percent of Revenue

One approach to IT spending is to look at the average IT spending by industry as a percent of revenue. This approach does two things:

  • Provides a guide based on similar organizations
  • Normalizes it by looking at it as a percent of revenue

While this can be a good gauge to see what others are spending, there are some industry-specific factors you should consider. If you are in a highly regulated industry with complex compliance requirements, your IT spending will likely be higher.

Across all industries, the average IT spend is 8.2% of revenue. Financial services, which have complex regulatory and compliance requirements, were above average at 10% of revenue. Below are a few other notable industries:

Chart illustrating the IT Spend by Industry as a percent of revenue
Image Source: Flexera

Should you worry if your organization’s IT spending is higher or lower the averages listed above? Not necessarily. Your spending may be in line with the needs of your organization. However, it may be time to look at the numbers and how the money is being spent. You may find some areas where you can reduce spending. Or, there may be areas where you need to spend more.

Related Reading: Four Keys to a Smarter IT Budget

IT Spending by Number of Users

Another benchmark you can use is IT spending by the number of users. You may be thinking to yourself; shouldn’t that be IT spending by the number of employees? The challenge becomes that not every employee is a user. So the user metric tends to give a more accurate reflection of true IT spending. The number of users will also determine your IT staffing and equipment needs.

A study in early 2020 by market research firm Computer Economics found that annual IT spending by user has been declining since 2018. The study found that annual IT spending by user averaged $7,569, down from $8,183. This trend is not due to fewer employees. Moving to the cloud, increasing automation, and other similiar initiatives result in organizations gaining those operation efficiencies.

Allocation of Funds

Many organizations look at IT spending in two buckets – capital expenses and operations expenses. While there is nothing wrong with this approach, it can be difficult to align IT spending with your organization’s goals and strategy.

Instead, consider breaking it down into these three areas:

  • Business Operations
  • Incremental Change
  • Innovation

A survey of CIOs by Deloitte found that organizations identifying themselves as more digitally advanced spend a larger percentage of their budget on innovation, around 26%. While this is not surprising, those same organizations plan to increase their innovation budget to 33% in the next three to five years.

A chart illustrating the allocation of IT budget by industry within business operations, incremental business change, and business innovation
Image Source: Deloitte

When you start looking at the percentage of IT spending in these three areas, you can spot some possible areas of opportunity. Your organization may be able to shift some dollars to incremental change and take on a transformational technology initiative like a new ERP system.

The Big Picture

Gaining visibility on your entire IT spending can sometimes be a little more challenging than it seems. Many organizations experience IT spending outside of the IT department, commonly known as ‘shadow IT.’ While not inherently a bad idea, when you don’t centralize IT spending you lose visibility and, often, efficiency.

Departments may duplicate IT spending on fractionally used servers, pay more per license for shared software, or not realize a purchase has already been made that can be shared.

To fully understand your position with IT spending, it’s important to view the big picture and make decisions with all the information.

Next Steps

Technology touches every aspect of your organization. It must align with your organization’s strategy and goals to maximize its value. It is possible to view your technology spending as an investment in efficiency instead of a necessary cost. Sometimes the answer is to spend more. In other cases, it’s a prioritization game. Many different angles must be considered to maximize the potential value of IT. That’s why a strategic technology partner, who can provide guidance and oversight, is so vital.

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Struggling to build a technology budget that supports your users and drives value creation? Complete the form below, and we will schedule a short call to learn more about your organization and IT needs.

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