US IT Spending Benchmarks for 2006

Helping Business Thrive On Technology Change

November 20, 2006

US IT Spending Benchmarks For 2006by Andrew Bartels

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© 2006, Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, WholeView 2, Technographics, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each figure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to www.forrester.com. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. To purchase reprints of this document, please email [email protected].

BEST PRAC TICES Includes Business Technographics® data

EXECUTIVE SUMMARYEvery year, CIOs and their finance people get prepared for the following question from their CEOs:

“How does our IT spending compare with our competitors?” To help them respond, Forrester is providing 2005 and 2006 IT spending benchmarks, including IT spending as a percentage of revenues by industry and size of company, IT spending per employee, and IT staff as a percentage of total staff. Our recommended IT spending benchmark, though, is spending to maintain and operate the IT organization, systems, and equipment (MOOSE) as a percentage of revenues. Our 2006 estimates for this benchmark metric are included in this report. We also recommend that CIOs should measure and track IT MOOSE over time and against business results, not simply against peer companies.

TABLE OF CONTENTSIT Benchmarks: Turning the CIO’s Bane Into An Effective Tool

Issues In Measuring IT MOOSE Over Time

Issues In IT MOOSE Peer Benchmarking

Putting IT MOOSE In The Context Of Business Process Benchmarking

RECOMMENDATIONS

CIOS: Focus On IT MOOSE Relative To Revenues, And Benchmark Three Ways

NOTES & RESOURCESForrester analyzed data on IT spending as a percentage of revenues from Forrester Business Technographics® surveys and from InformationWeek 500 surveys, as well as from Bureau of Labor Statistics data on IT staff.

Related Research Documents“Defining The MOOSE In The IT Room”October 18, 2005, Best Practices

“US IT Spending Benchmarks for 2005” May 24, 2005, Best Practices

November 20, 2006

US IT Spending Benchmarks For 2006How To Turn The CIO’s Bane Into An Effective Tool For IT Budgetingby Andrew Bartelswith Ellen Daley, Laurie M. Orlov, and Heidi Lo

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http://www.forrester.com/go?docid=37961&src=40453pdf


Best Practices | US IT Spending Benchmarks For 2006

© 2006, Forrester Research, Inc. Reproduction ProhibitedNovember 20, 2006

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TARGET AUDIENCE

Chief information officer, business process and applications professional

IT BENCHMARKS: TURNING THE CIO’S BANE INTO AN EFFECTIVE TOOL

Every year, Forrester receives calls from CIOs looking for IT spending benchmarks to prove that they are not spending too much on information technology to management or, less commonly, that they are not spending enough. CIOs are looking for these benchmarks mostly for defensive purposes, a sacrificial lamb that they need to offer to appease the management gods. They breathe a sigh of relief if they can demonstrate that their own IT metrics are lower than industry peers, or they sweat through the exculpatory explanations if their metrics are higher than peers.

To help CIOs and those contributing to the benchmark process, we provide Forrester’s calculations of appropriate IT spending benchmarks by industry and by company size. Before we present the data, we provide a framework for making IT spending benchmarks, a vehicle for having a constructive dialog with management about the role and value of technology in business success.

Focus On The Right IT Benchmark: IT MOOSE As A Percentage Of Revenues

The most frequently requested benchmarks are IT spending as a percentage of company revenues for a specific industry, followed by IT spending per employee or IT staff as a percentage of total employees. As we have argued in the past, Forrester believes that these benchmarks are not very useful and can be counterproductive.1 Total IT spending as a percentage of company revenues combines spending on new initiatives — more is generally better — and spending on ongoing operations and maintenance — less is generally better.2 Therefore, an aggregate metric provides little insight into whether a given level of spending is too high or too low. Staff metrics are flawed because outsourcing (or lack thereof) at either the IT or the enterprise level makes comparisons meaningless.

Instead, we recommend that companies focus on the metric of IT MOOSE as a percentage of revenues. IT MOOSE is the acronym that we use as a substitute for the much more cumbersome description of spending on Maintaining and Operating the [IT] Organization, Systems, and Equipment. MOOSE has the additional benefit of conjuring up the image of the large, ugly animal of North America and Europe that can often be found knee-deep in marshes and lakes, which is a pretty accurate metaphor for this part of the IT budget.3

Using IT MOOSE as the main benchmark does not mean ignoring total IT spending as a percentage of revenues. The difference between IT MOOSE and total IT spending is spending on new initiatives that can create new business value. It’s important to know and show how much room there is in the IT budget for new initiatives at a given level of total IT spending to revenues. However, benchmarking spending on new initiatives either against time or against peers is generally not useful. Business requirements (support for a new customer strategy, meeting new regulatory requirements, or an upgrade in disaster recovery or security capabilities, for example) will require


© 2006, Forrester Research, Inc. Reproduction Prohibited November 20, 2006

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an increase in new initiatives in one year at one company, but those same requirements may not be relevant the next year or for another company. Lastly, new initiatives are almost always subject to rigorous business case and return on investment justifications; there is little need for benchmarks to see whether too much or too little is being spent.

IT MOOSE in most cases includes the following items of IT spending (see Figure 1):4

1. Depreciation on previously purchased computers and network equipment and also for software licenses or development costs if these are treated as capital investments.

2. Maintenance fees for purchased software.

3. Salaries and benefits for IT staff members who maintain and operate existing IT systems but not staff members dedicated to managing new projects.

4. Existing outsourcing agreements.

5. Ongoing IT consulting and integration payments for IT projects carried over from the prior year.

6. CIO and core IT senior staff as well as security, enterprise architecture, and vendor management positions that would continue even if there are no new projects.

7. Any other expenses that would be ongoing even if there were no new IT projects.

Figure 1 What’s In IT Moose?

Source: Forrester Research, Inc.40453

Typical distribution of IT MOOSE by item Percentage of CIOs including item in MOOSE

IT operations staff

Software maintenance fees

CIO and core IT staff

Existing IT outsourcing agreements

Depreciation on computers, etc.

Depreciation of capitalized software

Continuing IT services engagements

98%

98%

90%

88%

79%

64%

64%

Base: 42 CIOs from the Forrester Leadership Boards CIO Group

25%

20%

5%10%

20%

10%

10%



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IT MOOSE as a percentage of revenues has several advantages as a benchmark metric.

· Relative stability. It has less year-to-year variability than total IT spending as a percentage of revenues, which are affected by the yearly ebbs and flows of new initiatives and new investments to meet business needs and requirements.

· Large part of IT budget. Because it typically represents the largest proportion of the IT budget, benchmarking and controlling IT MOOSE means focusing on where most of the money is being spent. Using Forrester’s three IT organization archetypes, IT MOOSE can range from 50% to 70% for IT departments that are Partner Players, 70% to 80% for Trusted Suppliers, and up to 95% or more for Solid Utilities.5

· Symbolism. It is a measure of IT management effectiveness because it consists of expenses that are directly under the control of the CIO.

Benchmark IT MOOSE Against Time And Business Results, Not Just Peers

Once CIOs see the advantages of using IT MOOSE as a percentage of revenues as a benchmark, their first instinct is to measure their own IT MOOSE ratio against available published data from Forrester or other sources on IT MOOSE ratios for comparable companies in similar industries. However, this exercise has hazards of its own, including 1) finding ratios for truly comparable companies that measures IT MOOSE the same way and 2) being able to trust that these ratios are accurate and reliable. For reasons that we will discuss, it is very hard to overcome these hazards. We recommend that CIOs take a three-step process to benchmarking (see Figure 2):

· Step one: Benchmark internally. A CIO should benchmark his or her company’s IT MOOSE ratio in a given budget year to the comparable ratios in past years. This internal comparison is advantageous because it measures IT MOOSE the same way, and that data can be considered to be trustworthy. It also shows trends in IT MOOSE spending that the CIO can use to demonstrate the competence of the IT management team or to identify opportunities to improve IT operational management.

Figure 2 Three Benchmarks for IT MOOSE


IT MOOSE as a percentage of revenues

this year versus past years

Time metrics Peer metrics Business metrics

IT MOOSE as a percentage of revenues at

comparable companies

Unit prices and process costssupported by IT MOOSE

versus comparable companies



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· Step two: Benchmark against peer companies. A CIO should measure his or her company’s IT MOOSE ratio against best available data for peer companies. We want to emphasize the words

“best available.” It’s difficult to get fully accurate and trustworthy data on peer companies because 1) few companies have exactly comparable peers, 2) it is very hard to get data from comparable peers, and 3) the data that is available will generally be subject to measurement errors and differences of definition. Still, these peer benchmarks can give an indication of whether a company’s IT MOOSE spending levels are higher, lower, or similar to those of competitors.

· Step three: Compare IT MOOSE in the context of business cost and performance metrics. If a company is spending more on IT MOOSE relative to revenues, that could be because it has not done a good job of managing MOOSE expenses, or it could be because it has invested more heavily in technology than competitors, with benefits that show up in lower total process costs or unit costs. The results of the first benchmarking of IT MOOSE over time can help to answer if the first explanation is valid. But the only way to determine whether the second is true is to look at total process or unit costs, including technology costs, to see whether past investments in technology have actually led to better business processes.

ISSUES IN MEASURING IT MOOSE OVER TIME

In our discussions about IT MOOSE ratios with CIOs over the past year, most CIOs agreed that measuring these ratios over time is a good practice. However, several of these CIOs have correctly noted that the ratio is as much affected by what happens on the revenue side as it is by what happens on the IT MOOSE side. If company revenues are growing rapidly year to year, IT MOOSE ratios can easily fall, even without a lot of IT MOOSE control efforts. Alternatively, a rapid drop in company revenues can cause IT MOOSE ratios to rise, even with aggressive MOOSE control efforts.

To help CIOs navigate the revenue impacts on the IT MOOSE ratios, we have constructed three models for company revenue growth and identified the good and bad ways to manage IT MOOSE in each case.

· Model 1: Steady growth in revenues dictates proactive IT MOOSE control. This is the most common situation for companies and, thus, the most common IT MOOSE management approach. Because a growing company will have both the need and the cash flow resources for new IT initiatives and investments, each year’s new initiatives will add to IT MOOSE in subsequent years. A CIO who is not proactively managing IT MOOSE will find that IT MOOSE is growing as rapidly, or even more rapidly than, its revenues. The result is a flat or even rising IT MOOSE to revenue ratio (see Figure 3). Not good. Instead, the CIO should focus on keeping IT MOOSE growth below the growth rate in revenues, thus causing the IT MOOSE ratio to decline. If possible, the CIO should strive to keep IT MOOSE flat or lower in dollar terms so that the IT MOOSE ratio falls more dramatically. Doing so creates more room for spending on new IT initiatives while making sure that the ratio of total IT spending to revenues is the same as or lower than in earlier years.



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Figure 3 Different IT MOOSE Control Strategies Fit Different Company Growth Profiles


2.50%2.75%3.00%3.25%3.50%

2.50%2.75%3.00%3.25%3.50%

Company revenues(percentage growthfrom prior year)

IT MOOSE(percentage growthfrom prior year)

IT MOOSE aspercentage of revenues

Company AModerate growth with proper IT MOOSE control

5%5% 5% 5% 3%6% 8% 7%7% 7%

Year 1Base Year 2 Year 3 Year 4

5%5% 5% 5% 3%6% 4% 3%

7%2%


Company B

Fast growth with proactive IT MOOSE support

Company C

Volatile revenues with variable-cost IT MOOSEcontrol

Moderate growth without appropriate IT MOOSE control

Fast growth with lagging IT MOOSE support

5%5%

15%18% 17%

25%

18% 17%20%

16%


5%5%

25%

18% 17%

25%20%

15%20%

10%


2.50%2.75%3.00%3.25%3.50%

2.50%2.75%3.00%3.25%3.50%

Volatile revenues with the wrong kind of IT MOOSEcontrol

2.50%2.75%3.00%3.25%3.50%

Year 1Base

Year 2 Year 3

Year 4 Year 1Base

Year 2 Year 3

Year 4

5%5% 5%

-2%

8%

-5%

4% 3%

15%

2%5%5%

8%

-2%

8%

-5% -4%

15%

3%

2.50%2.75%3.00%3.25%3.50%



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· Model 2: Rapid growth in revenues can drive rapid IT MOOSE growth. A company that has been experiencing a surge in revenues, such as oil companies or a fast-growing tech company like Google, will naturally see IT MOOSE ratios decline as the revenue growth runs ahead of the cautious IT MOOSE growth of prior years. It is certainly tempting for a CIO to let this happen, because the rapid and sharp drop in the ratio of IT MOOSE to revenues makes the CIO look like a cost-containment hero. However, that may not be the right strategy for the health of the company. Rapid revenue growth may well be straining existing systems and equipment, leaving the IT department scrambling to keep up. Rapid revenue growth correlated with rapid profit growth can also present an opportunity to make long-deferred investments in technology to improve business processes and capabilities.

In either case, a smart CIO should push for rapid and large increases in IT investment commensurate with revenue and profit increases — with full knowledge that this is going to shift IT MOOSE up in subsequent years. However, after the IT MOOSE ratio shifts, the CIO should return to a proactive IT MOOSE management practice and bring the IT MOOSE back down over time.

· Model 3: Highly variable revenues may require highly variable IT MOOSE. For a CIO in this volatile situation, a practice of steady IT MOOSE control and reduction may not be sufficient. The decline in revenues in a given year is likely to be greater than the ability to cut IT MOOSE, causing the IT MOOSE ratio to rise. If management is aware of this fluctuation and is willing to focus on the absolute level of IT MOOSE spending, then the fluctuations in the IT MOOSE ratios year by year may not be a problem.

Unfortunately, many management teams will not be so forgiving. If overall revenues have dropped by 15% in one year, they will want to cut IT MOOSE a lot, not a little. That is hard to do without affecting the long-term health of the IT organization by making cuts in IT staff, reducing capacity, or cancelling software licenses — all of which they will have to reverse when business picks up. Still, for a CIO who knows that company revenues will be volatile and who has management that insists that IT MOOSE vary with revenues, the only option is to do extensive outsourcing with contracts that tie the fees paid to the outsource vendor to growth in company revenues.6 The tradeoff is that what you gain in lower IT MOOSE costs in a down revenue year, you lose in higher IT MOOSE costs in up years. There are also other downsides, including reduced IT flexibility to respond to changing business requirements.

ISSUES IN IT MOOSE PEER BENCHMARKING

The second step in IT MOOSE benchmarking is comparing your IT MOOSE ratio with those of competitors. There are two general sources of IT spending benchmark data: 1) simple survey-based benchmarks and 2) adjusted survey benchmark data. The first is the most common, but issues of sample size at an industry level, representativeness of survey respondents, and accuracy of responses can make the benchmark data unreliable. The second approach introduces other variables that adjust the survey results in various ways to correct for the issues previously identified.



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Two examples of the first category are Forrester’s Business Technographics data on IT spending as a percentage of revenues, and similar data from the InformationWeek 500 (see Figure 4). In the case of the Forrester Business Technographics data, we have provided both the average for the industry and the median (or central tendency). In most industries in either survey, the sample size of responses for the industry is less than the 30 responses generally considered to be the minimum for statistically valid results.

Because of the unreliability of IT benchmark data for simple surveys of IT spending, Forrester made adjustments to the 2005 and 2006 IT benchmark data from both the Forrester Business Technographics and InformationWeek 500 surveys. Specifically, our estimates include adjustments to correct for the distortions to averages from outliers with very low or very high ratios of IT spending to revenues, to provide consistency with ratios for past years, to reconcile for company size differences, and to ensure that the totals for IT spending summed up across all industries and that all sizes of companies add up to our estimates for total IT spending. We then calculated IT MOOSE benchmark data using the Forrester data on IT MOOSE as a percentage of revenues by industry.

Forrester estimated 2006 IT MOOSE ratios for 17 industries and six different sizes of companies (see Figure 5). A CIO can look at the row for his or her company’s industry, find the appropriate company size column, and locate the number that is the central point for IT MOOSE as a percentage of revenues for a similar company.

CIOS reading this data will either heave a sigh of relief or break into a cold sweat. But, in the absence of, and sometimes even with, clear cut conditions of understanding, neither response is warranted. First, these benchmarks drastically simplify the messy reality of a wide range of individual company deviations from the average or median. Second, there are many legitimate reasons for a company to have an IT MOOSE ratio that is below or above the median.



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Figure 4 2006 US IT Spending As A Percentage Of Revenues: Forrester Versus IW 500


US enterprises’ 2006 IT spending as a percentage of revenues: Forrester versus IW 5004-1

US SMB 2004 IT spending as a percentage of revenues: Forrester Business Technographics4-2

ManufacturingPrimary production

Public sector

Finance & insurance

Utilities & telecommunicationsMedia, entertainment, & leisure

Business services

Retail & wholesale tradeRetailWholesale trade

Total

Manufacturing

Public sectorFinance & insuranceUtilities & telecommunicationsMedia, entertainment, & leisureBusiness servicesRetail & wholesale trade

Total

Consumer productsChemicals & petroleumHigh-tech productsIndustrial products

Transportation & logisticsProfessional servicesConstruction & engineering

UtilitiesTelecommunications

Financial servicesInsurance

Public servicesGovernment

Average2.5%1.9%2.1%2.4%3.3%2.2%3.0%3.5%2.3%4.3%2.8%5.6%2.4%3.2%3.3%2.6%4.6%7.0%9.5%4.4%4.7%4.4%5.3%4.1%

n971918142818563620721142192116115603129805228

402

Percentage2.2%1.0%2.2%1.8%3.1%2.0%1.4%1.6%1.1%2.8%2.0%3.9%0.8%3.7%3.4%2.1%5.4%5.1%6.0%3.4%3.5%3.5%— 3.1%

n184

84113437939241575234012323219139966333939—

500

Forrester’s Business Technographics®

Average8.7%

10.5%13.2%13.2%15.0%11.3%10.8%8.0%

Median5.0%5.0%5.0%

10.0%7.5%

10.0%7.0%4.8%

n104

763434124178

512

2.0%1.0%2.0%1.5%3.0%2.0%1.8%2.0%1.5%3.8%2.0%5.0%2.0%2.0%2.6%2.0%4.0%4.6%6.0%3.0%3.2%3.0%3.5%2.9%

Median

InformationWeek500*

Source: Business Technographics® July 2006 North American And European Enterprise Governance AndSourcing Survey

*Source: “2006 InformationWeek 500,” InformationWeek, September 12, 2006

Source: Business Technographics® December 2005 North American And European SMB IT Budgets AndSpending Survey

Base: 402 IT executives at North American enterprises*Base: 500 US companies that are innovative users of technology, as determined by InformationWeek

Industry

Industry



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Figure 5 2006 IT MOOSE As A Percentage Of Revenues By Industry And Company Size

The Messy Reality Behind Published IT Spending Benchmarks

Published IT spending benchmarks provide the impression that there is a single number that is the typical ratio of IT spending or IT MOOSE as a percentage of revenues in an industry. The reality is that there is a wide range of individual company ratios in a given industry because of the wide variety of circumstances that individual companies operate in.

To provide a sense of the underlying complexity that lies behind any published industry average for IT spending as percentage of revenues, we created a scatter plot of actual individual responses from financial services companies to a recent Business Technographics survey of North American and European enterprises. We plotted the IT spending ratios for 39 companies in this industry for three size categories (see Figure 6). Individual companies with 1,000 to 4,999 employees ranged from 1%



Public sector

Finance & insurance


Retail & wholesale trade

Business services

RetailWholesale trade

All industries

Consumer productsChemicals & petroleum

High-tech productsIndustrial products





Small(6-99)2.5%1.2%2.6%1.9%5.5%3.0%1.4%1.9%1.2%2.7%3.0%3.3%1.5%1.8%1.8%1.0%4.6%5.4%6.4%3.4%4.1%3.0%5.5%2.7%

Medium-small

(100-499)2.1%1.0%2.4%1.6%4.5%2.5%1.4%1.7%1.1%2.7%2.6%3.2%1.3%1.8%1.1%1.0%4.4%6.0%6.4%3.2%4.7%3.0%5.2%3.3%

Medium-large

(500-999)1.9%0.9%2.3%1.3%3.8%2.1%1.3%1.5%1.1%2.5%2.2%3.0%1.1%1.7%1.1%0.9%4.0%6.1%6.4%3.1%4.5%3.0%4.9%3.5%

Large(1,000-4,999)1.6%0.7%2.1%1.3%3.1%1.8%1.1%1.4%0.8%2.5%1.9%2.8%0.7%1.7%1.9%1.1%3.6%4.9%6.3%2.6%3.4%2.8%4.1%2.5%

Very large(5,000-19,999)1.3%0.6%1.6%1.1%2.8%1.5%0.8%0.8%0.6%2.1%1.5%2.3%0.5%1.9%1.6%1.1%3.0%3.2%5.3%1.5%3.1%2.8%3.5%1.9%

Global2,000

(20,000+)1.2%0.4%1.5%0.7%1.9%1.2%0.5%0.5%0.4%1.7%1.2%2.1%0.3%2.3%2.3%1.0%2.5%3.0%4.2%1.2%2.9%2.7%2.9%1.6%

Total1.4%0.6%1.8%1.0%2.6%1.5%0.9% 0.9%0.9%2.3%1.8%2.8%1.2%1.9%1.9%1.0%2.6%4.8%5.9%2.1%3.7%2.9%4.2%2.4%

Company size(number of employees)

Industry



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to 30%, with an average of 9% but a median of 5%. The three companies with IT spending ratios to revenues of 25% or more could well be banks or non-bank financial services firms with large data processing businesses — or they could have provided a wrong answer. Yet, these responses pulled the average significantly higher to 9% than the median or most common response of 5%. Similarly, for enterprises with 5,000 to 19,999 employees, the one company with an IT spending-to-revenues ratio of more than 25% helped pull the average for the group up to 7%, even though the median was just 3%. The impact of outliers was less pronounced for the Global 2000 companies with more than 20,000 employees, where two firms with IT spending-to-revenues ratios of 20% took the average for the group up to 12%, just a bit higher than the median of 10%.

Differences between the medians and the averages also show up in the data for IT MOOSE as a percentage of revenues for these financial firms. Because of outliers with high ratios, the average for the large enterprises was 7% versus a median of 5%. For the very large enterprises, there was an average of 6% versus a median of 2%, and for the Global 2000 enterprises, the average was 7.4% versus a median of 6.7%



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Figure 6 Use Peer Benchmarks With Caution Because Of Wide Dispersion Of Actuals


2006 IT spending actuals for 39 North American and European financial services companies6-1

2006 IT MOOSE actuals for 39 North American and European financial services companies6-2

0%

5%

10%

15%

20%

25%

30%

Large enterprises with1,000 to 4,999 employees

Very large enterprises with5,000 to 19,999 employees

Global 2000 enterprises with20,000 or more employees

AverageAverage

AverageMedian Median

Median

0%

5%

10%

15%

20%

25%

30%

Large enterprises with1,000 to 4,999 employees

Very large enterprises with5,000 to 19,999 employees

Global 2000 enterprises with20,000 or more employees

Average AverageAverageMedianMedianMedian



IT spendingas apercentageof revenues

IT MOOSEas apercentageof revenues

Companies with data processing activities in financial services

Companies with data processing activities in financial services

Why An Individual Company’s IT MOOSE Ratio Can Deviate From Industry Norms

There are many valid reasons why IT MOOSE ratios at individual companies can legitimately deviate from the industry norm:



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· The company has invested more (or less) in technology than peers. A company that has embraced technology more intensively than competitors will inevitably have higher IT MOOSE costs. But, it should show benefits in other areas of the business, such as lower operating costs, faster cycle time, better risk management, higher customer satisfaction, or easier regulatory compliance.

· The company has had short-lived revenue gains or falls. As discussed in the prior section, revenue surges will cause IT MOOSE ratios to fall, while revenue declines will cause a rise. CIOs need to look at what is happening to revenues before they get too comfortable with a below-average metric or too nervous about an above-average one.

· The company has grown through acquisition, not organically. Acquisitions result in IT departments inheriting multiple systems that have to be consolidated. Until an IT department has completed this consolidation, its IT MOOSE costs will be higher than companies that grew organically. However, a company that makes an acquisition after a period of organic growth should expect a jump in IT MOOSE in future years.

· The company is global, with operations on several continents and countries. Laws, regulations, and market requirements may force such a company to maintain duplicate IT systems. That would result in a higher IT MOOSE than for peers who operate in just one market.

· The company operates in a subindustry with different IT spending. Our 17 industry groups are inevitably amalgamations of many subindustries with different degrees of technology use. For example, the chemicals and petroleum industry category includes chemical companies that tend to spend more than 2% of revenues on IT MOOSE and oil and gas companies that spend less than 1%. The professional services industry includes legal and accounting firms that spend 3% to 4% of revenues on IT MOOSE, and IT outsourcers that may spend 20% or more. Similarly, general merchandise retailers often spend less than 0.5% of their revenues on IT MOOSE, but specialist retailers may spend more than 2% of their revenues on IT MOOSE — and Internet retailers will spend multiples of that.

· The company does more data processing than peers. As some of the prior examples have suggested, within any industry there will be companies that do a large amount of data processing. In the oil and gas industry, for example, there are oil field services firms that fit that profile. In financial services, there are firms, both independents and subsidiaries of banks and securities companies, that specialize in credit card processing, securities processing, mutual fund processing, or mortgage processing. There are similar firms in healthcare (benefits processing), insurance (claims processing), travel and transportation (reservation systems), media and leisure (Internet portals and hotel reservation systems), and government (Social Security and Medicare). Because the business of these firms is all about processing large volumes of data, they will have much higher IT MOOSE than other companies in the same industry.



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Other Peer Benchmarks Besides The IT MOOSE Ratio Are Available But Less Useful

While we believe that IT MOOSE as a percentage of revenues is the best peer benchmark to use, we recognize that companies and their senior management often want to look at other benchmarks. So, we have provided benchmarks for IT spending as a percentage of revenues, IT MOOSE as a percentage of IT budgets, IT spending per employee, and IT staff as a percentage of total staff (see Figure 7 and see Figure 8).

Figure 7 IT Spending As A Percentage Of Revenues By Industry And Company Size



Public sector

Finance & insurance



Business services


All industries

Consumer productsChemicals & petroleum

High-tech productsIndustrial products





Small(6-99)3.2%1.6%3.1%2.7%6.7%3.9%1.8%2.6%1.5%3.4%3.7%4.2%1.9%2.4%2.9%1.9%6.3%6.4%7.7%3.9%4.9%3.8%6.4%3.9%

Medium-small

(100-499)2.7%1.4%2.9%2.3%5.6%3.2%1.8%2.3%1.4%3.5%3.2%4.0%1.7%2.3%2.0%1.8%6.0%7.2%7.7%3.7%5.5%3.8%6.1%3.7%

Medium-large

(500-999)2.4%1.1%2.8%1.9%4.7%2.7%1.7%2.0%1.4%3.2%2.8%3.8%1.4%2.2%1.9%1.8%5.5%7.4%7.7%3.6%5.3%3.8%5.7%3.6%

Large(1,000-4,999)2.0%0.9%2.6%1.6%3.9%2.3%1.4%1.8%1.1%3.2%2.4%3.6%1.0%2.2%2.8%1.7%5.0%6.1%7.6%3.4%4.5%3.8%5.5%3.4%

Very large(5,000-19,999)1.6%0.7%2.2%1.3%3.4%1.9%1.0%1.1%0.8%2.9%1.9%3.3%0.6%2.7%2.3%1.5%4.4%4.4%6.9%2.4%3.9%3.6%4.4%2.4%

Global2,000

(20,000+)1.4%0.6%1.7%1.0%2.4%1.4%0.6%0.7%0.5%2.2%1.4%2.6%0.4%3.3%3.5%1.1%3.9%4.0%5.5%1.8%3.4%3.4%3.5%1.8%

Total1.8%0.8%2.2%1.4%3.2%1.8%1.2% 1.2%1.2%3.0%2.2%3.6%1.5%2.5%2.9%1.6%4.1%6.0%7.3%2.9%4.5%3.7%5.0%3.0%

Company size(number of employees)

A spreadsheet with additional data is available online.

Industry



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Figure 8 2005 IT Staffing Benchmarks By Industry

PUTTING IT MOOSE IN THE CONTEXT OF BUSINESS PROCESS BENCHMARKING

In a realistic scenario, the CIO has compared IT MOOSE as a percentage of revenues over time and found that it has been declining. She has compared this metric with the peer benchmarks from Forrester and other sources and found that it is lower than the average. Time to relax? Nope. The reason that companies invest in technology is to automate business processes and to perform those processes more efficiently and effectively than if they were done manually and with paper. The only way a company can determine if it is spending too much or too little on technology is by looking at the business as a whole, not just at technology in isolation. Are the total business costs for a process or outcome higher or lower than what competitors pay? Is customer satisfaction higher than for competitors? Are cycle times to get products into market or respond to opportunities shorter than



Public sector

Finance & insurance



Business services


All industries

Consumer productsChemicals & petroleumHigh-tech productsIndustrial products





IT staff as a percentage oftotal employment atcompanies with 20or more employees

2.1%0.4%0.9%1.7%8.7%1.7%0.7%0.4%2.4%3.4%0.7%5.4%0.2%2.1%9.0%2.5%13.0%7.6%7.6%7.4%1.6%1.2%2.9%2.4%

2005 IT spendingper employee

$6,748$3,344$5,586$16,672$12,601$6,002$1,186$900$2,406$6,103$2,909$8,675$2,387$4,135$12,247$8,441$14,606$15,924$18,937$8,181$5,000$2,042$13,983$5,273

Industry

A spreadsheet with additional data is available online.

Source: “May 2005 National Industry-Specific Occupational Employment and Wage Estimates,” Bureau of LaborStatistics, with adjustments by Forrester Research



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competitors? In all these cases, technology is a key element for achieving these goals. And because these are ongoing business processes, it is IT MOOSE that supports them.

Example: Lower Total Process Costs Trump Higher IT Costs To Support That Process

To see the importance of looking at IT MOOSE spending in the context of business result benchmarks, consider a hypothetical Company A, which spends a total of $5 to add a new customer for billing purposes (see Figure 9). Let’s assume that $2 of this $5 is made up of IT MOOSE costs, and $3 represents other process costs. Now, consider Company B, which is a direct competitor. Company B spends $1.50 in IT MOOSE costs to achieve the same outcome of a new customer on the books. From a pure IT cost perspective, Company B is spending less in IT than Company A. However, Company B is spending $4.50 in other process costs. So, its total cost of adding a new customer is $6 — $1 more than Company A. Clearly, even though Company A spends more on IT in this process than Company B, it is getting more value from its IT MOOSE because that higher level of IT spending has led to lower total costs. If the CIO and CEO had just focused on IT MOOSE costs compared with peers, they might have thought that they were spending too much on IT.

There are two challenges in using business result benchmarks. One is calculating total process outcome or unit costs, including the proper amount of IT MOOSE. The other is finding peer company benchmarks for these total process-outcome or unit costs. However, both challenges can be overcome.

· Total process-outcome or unit cost metrics are common business metrics. Many companies already calculate total process-outcome or unit costs in the context of Six Sigma, process reengineering, or total quality management initiatives. If so, these companies already have existing internal cost metrics. Companies that don’t have these metrics in hand should have them. This is a CFO-level activity, so CIOs should discuss the existence or the creation of these metrics with the CFO. The CIO should also work with representatives of the CFO to define a methodology for allocating IT MOOSE costs to various processes and unit costs.

Figure 9 Look At IT MOOSE In The Context Of Total Business Outcome Costs


Benchmark total business outcome cost(a hypothetical example)

Cost percustomer

$5

$6

IT cost per unit Other costs per unit

Company A

Company B

$2 $3

$1.50 $4.50

Unit cost to add a new customer



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· Peer benchmarks for process-outcome or unit cost metrics are available. Consultants who work with companies on process reengineering initiatives or Six Sigma activities often have developed benchmark data for process-outcome costs or unit costs through their work with other companies. Companies can often find noncompetitor companies in other industries with similar processes that would be willing to share benchmark data on unit costs or process-outcome costs. Some benchmarks are also reported in trade magazines and journals that cover an industry. It can take a bit of work, but peer benchmarks for process-outcome costs can often be easier to find than peer benchmarks for IT spending.

There is definitely extra work involved in creating metrics on process-outcome costs (or similar metrics for customer satisfaction, cycle time, etc.), including the right amount of IT MOOSE in these cost calculations, and finding peer benchmarks. However, these metrics are important to CEOs and CFOs in running their businesses and understanding their strengths and weaknesses compared with competitors, so they are worth collecting anyway. And discussions and evaluations of IT MOOSE spending in the context of business metrics is a much more productive and useful exercise than looking at IT costs in isolation.

R E C O M M E N D A T I O N S

CIOS: FOCUS ON IT MOOSE RELATIVE TO REVENUES, AND BENCHMARK THREE WAYS

IT spending benchmarking can seem simple: Find out how much competitor companies spend on technology, and see if your company is higher or lower than that number. As we have seen, though, IT benchmarking is never simple or easy. But, done properly, it can be valuable.

· Focus on IT MOOSE. Comparing IT MOOSE as a percentage of revenues over time will focus the CIO and the IT management team on managing this large and often neglected part of the IT budget. Success in driving IT MOOSE as a percentage of revenues lower each year has a double benefit. It shows the CEO and corporate management that the CIO and IT leadership have their house in order, and that they can manage it effectively. It also frees up IT budget for spending on new initiatives, which can directly create competitive advantages.

· Use peer benchmarks as a trigger for questions, not answers. Comparing IT MOOSE as a percentage of revenues with peer benchmarks provides indicators as to whether a company is spending more or less on ongoing technology operations than peer competitors. That can be the trigger for further investigation. If a company is spending more, is that good because it means higher use of technology to support the business, or is it bad because of poor IT MOOSE control? If a company is spending less than peers, is that good because it is doing a good job of managing its IT MOOSE, or is it bad because it is underinvested in technology? These are good questions to ask, because they lead to more insight about how the company is and should be using technology.



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· Put IT MOOSE in the context of overall business metrics. Comparing total business process or outcome metrics, including IT MOOSE costs, with peer benchmarks is the acid test. This takes the most work, but this analysis is the best way to determine whether a company’s spending on IT MOOSE is delivering real business value.

ENDNOTES1 We laid out the reasons that IT MOOSE is a better benchmark than total IT spending as a percentage of

revenues or IT staff metrics in our 2005 report on IT spending benchmarks. See the May 24, 2005, Best Practices “US IT Spending Benchmarks For 2005.”

2 While less IT MOOSE is generally better, there are many exceptions. Recent M&A activity, globalization or centralization of the organization, and engagement in new product development can all be reasons why IT MOOSE can legitimately be higher than in the past or compared with peers. The maturity and efficiency of IT processes can also dictate whether total IT spending is higher or lower than any published industry spending benchmarks. See the June 6, 2005, Best Practices “The Economics Of IT.”

3 We first introduced the term IT MOOSE in 2005 in a report in which we provided data for what most CIOs consider to be part of IT MOOSE and advice on how to measure it accurately. See the October 18, 2005, Best Practices “Defining The MOOSE In The IT Room.”

4 This list of items that we would include in IT operating and maintenance expenses was published with only minor differences in our report on IT benchmarks. See the May 24, 2005, Best Practices “US IT Spending Benchmarks For 2005.”

5 Forrester has identified three archetypes of IT organizations based on the role that technology plays in different industries. See the March 22, 2006, Trends “The Three Archetypes Of IT.”

6 In this approach, the outsourcer uses variable pricing so that charges go down when company revenues drop and rise when company revenues rise. That way, the outsourcer is the one that flexes capacity, making up in revenue on the upswings what they absorb on the downswings.







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