How much should I spend on IT

Wondering if you spend too much or too little on IT? Getting it wrong could be costing more than you think.

We often get asked to justify my recommendations for IT hardware software and services, and justifiably so. As a business owner or manager, every penny saved is a penny extra profit. Or so you thought! But, the point of this article is to put the cost of information technology into a context you can justify yourself. We’ll help you avoid those mistakes that cost the company more in the long run.

Technology is an investment, not an expense!

Let us give you an example. Imagine an architect; they spend all day preparing drawings or rendering 3D visualisations of a building. You would think that the following would hold:

• A fast computer will render and display complex information faster and save the architect time.
• Multiple large displays will allow the architect to multitask and spend less time panning, zooming, or switching between applications. The architect is more efficient.

It would seem crazy for the architect to not invest in the right tools for the job. After all, the cost of the CAD software alone far outweighs the minimal cost of the fast computer and large displays. But this is what happens. Short-term savings often affect long-term profitability. But not only that, the employee with the superfast computer and Ultra HD display screens feels that you are investing in them too.

Your employees are your most expensive asset. You don’t have to be an architect for a faster, more reliable computer to make a difference to your or your employee’s productivity. A fast computer, second or third monitor? Yes, please! Of course, this is true for IT support and IT training too. Your employees need to be skilled in using the tools of their trade, whether it's Windows 11, MS Office, Adobe InDesign or Autodesk Revit. Likewise, when their IT breaks, they need someone to call, to help them get back to full productivity as fast as possible. 

Budgeting for IT spend

Based on 25 years of experience as an IT consultant for small and medium businesses across multiple sectors, we recognise that there is a tendency to underspend when it comes to IT purchasing. This is not a surprise given that many SMB’s don’t set a budget each year, and generally see IT spend as a cost to the business. But it doesn’t have to be that way. Every penny spent on IT should enable your business to thrive. 

To demonstrate, follow along with this exercise:

1. On a scale of 1 to 10, how reliant is your business on information and technology? Where 1, is not reliant, and 10, is fully reliant (i.e. your business would not function without IT, email, website, social media, payroll, accounts, booking systems, parcel tracking, etc.). I’m guessing you will have scored your business somewhere in the region of 8-10, your IT is crucial to your business success.
2. Now have a look at your management accounts. Look at the total overheads for the business (rent, rates, salaries, utilities and associated costs but excluding IT support, licenses, etc.). Work out the average annual cost per employee. E.g. if total overhead costs are £300,000 and you have ten employees, your average is £30,000 each, or £120 per day per person (assuming 250 weekdays per year). 
3. Now add up your IT expenses (Hardware purchases, software licenses, and IT support) and divide that by the same number of employees. E.g. if your IT expenses total £10,000 per year then the cost per employee is £1000 each which is about £4 a day, excluding weekends.
4. Your figures will be different, but in this example, we just worked out a spend of £4 per day on IT against total employee costs of £120 per day. In this case, that equates to only 3.33%.

Now, that surely does not make any business sense! Let's recap: IT is very important (step 1), and therefore 97% of employee costs are unproductive (step 2) if the 3.33% (step 3) we spend on IT doesn’t work as required. The point here is that we need to budget effectively to make our employees as productive as possible.

Budget Actions:

• Identify your business costs and how much you currently spend on IT services and licenses.
• Create an asset list of all the IT equipment that you have (PCs laptops, phones, etc.)
• Estimate a replacement value including labour and a lifespan of 3-5 years for each. Your IT support provider will gladly help with this. Don’t confuse working life with an asset's productive life. The two are different, and for support and security purposes, we consider 5 years is the max.
• Divide the replacement value by the lifespan to get the estimated annual cost for each asset.
• Add your recurring IT costs for the year and your asset costs to get your total estimated annual budget.

Total Cost of Ownership

In the IT industry, we talk about the total cost of ownership (TCO). That’s the cost of buying, setting up, using, training, supporting and decommissioning IT systems. Typically TCO is evaluated over 3-5 years as the technology becomes outdated quickly causing a drop in productivity and correlating increases in maintenance and support costs.

Let’s look at another example. Imagine an employee who would benefit from a new laptop. You already have the CRM, Microsoft 365, PBX, and associated licenses. You already have IT support, and the employee has training in the systems they use and your company processes. We are just looking at the cost of the laptop. Your IT supplier gives you a price of £1000 fully installed, but you see a deal online for a similar laptop (they all look the same don’t they) for just £600 and you let your IT supplier know. In the ensuing process you back and forward with your supplier and in the end just decided to buy the cheaper one. But this is what happened.

1. You wasted time that you could have spent winning work and growing your business.
2. You ignored your trusted advisors and their expertise, wasting their time in the process.
3. You most likely bought the wrong device, (lower spec, 1-year return to the manufacturer warranty, not optimised for business, etc.)
4. You expect the IT support provider to install, configure and support a device that they didn’t recommend.
5. The device needs upgrades such as memory or storage, which costs extra for parts and labour.
6. The device is different to other staff members so they can’t share power supplies, and it doesn’t get drivers or hardware security updates as often.
7. The employee using the device has a suboptimal experience and isn’t as productive as they might have been with the original solution, e.g. the camera is low quality and its slow during video calls.
8. You end up replacing the device sooner than expected.

The difference in cost for there two devices might only have been a few hundred pounds at the outset, but the long-term cost (total cost of ownership) is much more. If we assume that the average notebook PC lasts 4 years, then a £1000 initial spend equates to just £1 per day over its useful life (ignoring weekends). Or, an extra 20 pence per day compared to the cheaper option.

Remember before that we worked out that the cost per day for our fictitious employee was £120. Every hour that the employee is unproductive costs the business £15. If a laptop lasts 4 years and the employee loses an hour a week that’s a loss of £3,000. Not a very good return on investment. Would you worry about saving that £200 up-front next time round?

Maximising Return on Investment 

Hopefully, it’s already clear that underspending on your IT is bad for business, but conversely, overspending has no benefit either. To maximise the return on your IT investment, you need to balance all the factors that influence success. The following radar plot shows an example with typical success factors and an optimum balance. In your business, you may determine other success factors that apply too.

Look at these factors and estimate how your business would score. Do your employees have adequate training on Microsoft Teams? Does your IT support company provide the cover that you need? Are employees able to work flexibly/remotely? Do you worry about IT security or data loss?

When you know where your weaknesses are you can focus your resources effectively to maximise your return on investment.

Conclusion, how much should my IT cost?

In case you jumped straight here and bypassed the detail in the middle, the short answer is that how much you spend on IT will depend on your business, the sector you work in, the ability of your employees, and the investments in IT that you have already made. But, if you follow these simple steps, you should be able to create a strategy that works for you:

1. Understand your business and its needs. Are your IT systems fit for purpose, is your IT empowering the business or holding it back?
2. Decide how important IT is for your business. How long can you operate and at what cost without your IT systems?
3. Evaluate the total cost of ownership of your IT so that you understand how much you currently spend and can budget effectively for replacements, upgrades and enhancements.
4. Maximise your return on investment by making sure your employees use IT efficiently, that it meets their needs, is supported and secure.

We hope this article was of benefit to you and your business. IT Foundations provide a range of IT support, consultancy and development services designed specifically for small and medium businesses. We focus on Edinburgh businesses but have customers throughout the UK. We have a pricing calculator on our website so that you can calculate the cost of support from us without having to speak to a salesperson.

If you would like to find out more about IT Foundations contact us for a free introductory call.