A simple benchmark like "budget as a percent of revenue" may look attractive but like flypaper, getting stuck on numbers can be deadly. Unfortunately, senior decision makers are often most attracted to benchmark flypaper. Use a range of internal and external measures and avoid being stuck on a single "magic number."

Trends and Broad Directions

Research of IT budgeting practices has shown that building budgets around a single external benchmark does not work. Internal priorities and targets (as well as external best practices) are more meaningful to budget setting than external peer average benchmarks.

Some researchers have even found a correlation between poor performance by the IT department and reliance on a single external benchmark, such as IT budget spend as a percent of revenue. When using peer benchmarks it is critical to consider the following:

• There is wide variability among IT departments within a given average.
• Peer averages don't tell how technology is being used for strategic advantage.

Regardless of how statistically solid the numbers, peer benchmarks should not be used prescriptively in budget planning. They are best used as a contextual stalking horse and high-level overview of budget and staffing priorities.

The Variability Factor

Can somebody do the breast stroke in a puddle that averages one inch in depth? The answer is yes, if the puddle is very wide and one is in the part that is five feet deep. Statistical averages can include wide variation.

The relatively modest size of many IT staffs and budgets in the small- to mid-sized enterprise (SME) space leads to a great deal of variation in budget profile from one IT department to the next. According to a recent survey conducted by Info-Tech, three-quarters of IT departments have budgets of $1 million or less and 25% have budgets of $100,000 or less. Fully 52% of respondents have IT departments of 10 people or less and 38% have departments of five people or less.

Significant in-year investment in one area can substantially change the budget allocations for a given SME. A major infrastructure purchase, such as a Storage Area Network (SAN), could significantly increase a small IT budget or at least significantly re-cast the purchasing allocations for that year. For a small IT department, the addition of a couple of programmers could significantly increase the overall staff complement.

Innovation and the Strategic Layer

IT departments should strive to balance operational efficiencies with strategic effectiveness. Peer averages largely focus on proportion of spend and which technologies are being bought, but offer little insight into how enterprises are using technology to enable the business, align strategic goals, or streamline processes.

Think of the IT management cake as having two layers: an operational layer and a strategic layer. The strategic layer includes goals such as enabling innovative business processes and aligning IT to business/strategy goals. However, budget and staffing benchmarks (e.g. locations by operational areas and technology purchases) largely relate to the operational layer.

IT departments that want to be viewed as more than a cost center need to look beyond benchmarks that measure peer spending and allocations within the operational layer. A particular danger is being pegged to such a number as it severely limits future action. Trying to subsequently shift the focus to another measure - such as the impact of IT on efficiency or enabling new business - is likely to be seen as sleight-of-hand to avoid being held to the established measure.

Key Takeaways

1.Benchmark data is contextual, not prescriptive. IT decision makers should avoid the use of a single IT staffing or spending benchmark as the "magic number" on which to build their budgets. Treating a benchmark as a prescription is just bad practice. Although top executives are often attracted to the single "magic number" benchmark, such a metric simply does not exist.

2.Use multiple benchmarks and the most specific peer benchmarks possible. Instead of focusing on one benchmark, IT decision makers should look at a range of internal and external measures. Mitigate variability in peer averages by limiting to peers closest to the enterprise's own size, industry, and competitive situation context.

• See Info-Tech's In-Depth Research Report, "Designing an IT Metrics Program" for best practice advice on what measures to employ.
• Info-Tech's "2006 IT Budget and Staffing" reports parse seven peer-average benchmarks by 11 size and situation variables. Though very detailed and industry-specific, Info-Tech still recommends that great care be taken to avoid making blanket assumptions based solely on these numbers.

3.Resist the benchmark flypaper. At all costs, IT decision makers should avoid being pegged to a specific benchmark in annual budgeting. This is true even if current internal numbers compare well with an industry average. Avoiding benchmark flypaper can be particularly difficult when the head office applies pressure, stating "just give me a number."

Bottom Line

Peer spending benchmarks should be treated as relative averages in a budget process focused on growing revenue, lowering cost, and improving operational efficiency. Treating any benchmark average as a prescriptive absolute is a losing game.

Info-Tech's Budget & Staffing Benchmarks

Info-Tech Research Group publishes detailed and highly specific annual budget and staffing reports. They analyze the key variables found below across nine industry sectors:

• IT spend as a percent of revenue.
• IT spend per employee.
• IT spend as a percent of total staff.
• New purchases versus ongoing spend.
• Budget allocation by purchase area.
• Budget allocation by operational area.
• Staff time allocation.

These reports are drawn from a large and statistically valid sample of over 1,600 survey respondents.

Loser's Game: Budgeting on a Single Peer Benchmark

In a study titled "The Institutionalization of IT Budgeting: Empirical Evidence from the Financial Sector," Professors Qing Hu of Florida Atlantic University and Jing "Jim" Quan of Salisbury University in Maryland found that among financial sector firms, peer averages of IT budget as a percentage of revenue of firms in the same market have no significant effect on current IT budgets.

Internal measures of past budgets as well as external information on budgets of "perceived industry leaders" both had a positive impact. This finding is echoed in a range of studies by IT management analysts who have found no correlation with IT management success and the use of peer IT spend as a percent of revenue.