Simon Hurst has a comprehensive analysis of IT investment approaches for professionals. For me the most interesting section comes when Simon includes thoughts from Mark Ryan:
He suggested a typical range of 3-5% of turnover amongst his own clients. However, Mark was quick to point out that he tends only to work with firms who consider their IT systems to be strategic, so are likely to be spending more than less pro-active firms. He added: “Is it a coincidence that my three most profitable clients are the three spending most on technology and training?”
Studies have consistently shown those firms that invest comparatively heavily in IT reap significant competitive advantage. Late last year I visited a sole practitioner who has around 100 staff and 8,000 clients. He has automated the practice to the point where it resembles a production line. Client churn is very low. He drives a Bentley. Go figure.
Simon also provides some useful background on how you can use outsourcing as a way of mitigating investment costs:
In addition to spreading the costs over the life of the service contract thereby avoiding a substantial upfront cost, Bhimjiyani pointed out that if the user chooses to rent, rather than buy the equipment, there may well also be a tax benefit. Perhaps more important than the question of initial finance, he went on to emphasise how using an external service provider could save an organisation from having to invest in additional IT expertise of their own, and ensure that existing staff were able to concentrate on their ‘real’ jobs rather than being dragged in to deal with IT problems.
It’s a reasonable proposition but where I think Simon’s analysis is weak is in the breakdown of costs compared to the benefits across direct (buy) versus indirect (rent/on-demand) investment. Outsourcing seeks to deal with a range of cost issues such as hardware investment, maintenance and management along with commodity processes. It is more wide ranging than replacing say and old accounting system or ERP package. Each form of investment needs to be examined separately but compared over the life cycle of the project, and not simply from the initial investment.
Also, Simon’s analysis of cost: 60/40 hardware, software is wrong. Software costs have collapsed or can be negotiated down. They need to with the ever rising cost of telecommunications. In on-demand models, the hardware element is reduced to zero in many cases – or close to zero – subject to networking infrastructure to support internet computing. It’s a different form of investment so I’d caution against making direct comparisons.
Despite my differences of opinion, Simon’s piece is a good introduction to the topic and one that is worth studying.
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