How much should you be spending on IT?
Earlier this week I came across this post on LinkedIn, which made me smile and that I can certainly identify with.
As a result, I was curious to see if there was any empirical research out there, which indicates how much SME businesses should typically be spending on IT.
Recent Economic Challenges
Obviously, Small and Medium-sized Enterprises (SMEs) face the critical task of allocating their financial resources wisely and recently they have been grappling with the lingering effects of the COVID-19 pandemic, the ongoing wars in Ukraine and Gaza, and rising interest rates aimed at curbing inflation. Despite these challenges, research highlights SMEs have shown resilience and have invested, creating a significant number of new jobs and accounting for a substantial portion of employment and turnover in the UK private sector.
One of the pivotal areas of investment is Information Technology (IT), which for many SMEs has become the backbone of operational efficiency and competitive edge. However, determining the right amount to invest in IT can be a complex decision, influenced by various factors such as industry norms, company size, and revenue.
Spending Guidelines
A general guideline suggests that SMEs should consider allocating around 4% of their revenue to IT spending. This benchmark serves as a starting point for businesses to evaluate their current IT expenditure and adjust accordingly. It’s important to note that this figure is not a one-size-fits-all solution, but rather it is a flexible recommendation that may vary based on specific industry requirements and the company’s strategic objectives.
For instance, industries with a heavy reliance on technology, such as financial services, may find themselves allocating a higher percentage, ranging from 4.4% to 11.4% of revenue. On the other hand, sectors like discrete manufacturing might invest a lower proportion, between 1.4% and 3.2%. These differences underscore the importance of industry-specific considerations when budgeting for IT.
Moreover, the size of the SME company can also influence IT spending as a percentage of revenue. Larger SME organisations often have more complex IT infrastructures and thus may dedicate a greater share of their turnover to maintain and enhance these systems. Conversely, smaller enterprises might operate with leaner IT setups, potentially requiring a smaller percentage of their revenue for IT.
Ultimately, the decision on IT spending should be aligned with the SME’s strategic goals, operational needs, and the specific challenges and opportunities presented by the economic context. Regularly reviewing and adjusting IT budgets in response to changes in the business environment and technological advancements will ensure that SMEs remain agile and resilient in the face of economic fluctuations.
To summarise, whilst the recommended 4% of revenue serves as a useful reference, SMEs should tailor their IT investment to their unique circumstances, ensuring that every pound spent on technology drives value and supports the company’s long-term success.
Recent Experience
But bringing the discussion closer to home, I currently have proposals submitted to two SMEs, who both turnover in excess of £9 million and based on a conservative estimate of 1.4% of turnover, they should be spending approximately £126,000 annually on IT. If I then assess the need for this expenditure based the drives values and supports the company’s long-term success (mentioned in the paragraph above), the proposals are for IT Support, Microsoft 365 subscriptions and then vital Cyber Security measures, which have been neglected by the incumbent provider, leaving the business exposed to potential cyber criminal activity and risk of data breach. Surely this qualifys as driving values and supporting the company’s long-term success’. In all instances, our proposal comes in significantly under the £126,000 suggested by the research and indicates our pricing is extremely competitive and offers excellent value for money.
In conclusion, UK SMEs should prioritise IT spending as a key factor in their long-term success and view it as an investment rather than a cost. By leveraging technology, SMEs can enhance their operations, improve customer experiences, and position themselves for growth in the challenging economic landscape of 2024.
Thanks
Richard
