IT benchmarking delivers a competitive edge to the enterprise
There's an old adage, "If you don't know where you are, a map won't help, and if you don't know where you're going, any road will do." IT benchmarking is a tool that will give a company direction, help it figure out where it wants to go, and lay in the course. That perspective takes multiple dimensions. It keeps leadership informed of what the organization's competitive positioning is. It's one thing to benchmark the past and current state, but it's more important to benchmark the future because everything is changing.
Howard Rubin, a renowned IT benchmarking expert and CEO of Rubin Worldwide, says, "Understanding where you are with regard to technology right now in terms of business is probably one of the most critical things, along with understanding your customer and other financial aspects you have in a business and your markets. Digitization is the underpinning of everything we see."
It's not just an option
Technology itself has transformed the very nature of business, Rubin emphasizes, warning that "if companies are not benchmarking and not doing calibration, they're just flying blind at the future based on instincts and insights. Maybe that's OK, but it's probably just not enough anymore." The American Productivity & Quality Center at APQC.org offers an online IT Organization Performance Assessment tool as a place to get started.
Figure out what's important to the company. Figure out what a few key metrics are or use an analyst firm to provide advice on key metrics and then attempt it. Don't wait until you've spent exorbitant amounts of time narrowing benchmarks. There are going to be few exceptionally precise measurement, and having a process to benchmark and being able to get started now, rather than developing one over a long period of time, is a more effective approach. You likely have lots of numbers available to you, including over-time comparitive data. Make use of it and get your IT benchmarking process started with the information you have available now.
Get started by focusing on costs, people, and infrastructure. "The first lessons you'll learn are about your own cost transparency. Your numbers will only get better. Numbers beget other numbers and even just your expectations of the first round," says Rubin. During the first round, leaders learn about their numbers, not about their competitive calibration. As companies progress, numbers get better, at which point they can start doing competitive calibration and weave it into the way they work.
Companies should benchmark at a minimum in three cycles:
- At the start of the year
- In a midyear checkup, to see where you stand and how markets have changed because the economy shifts significantly on quarterly cycles
- At the end of the year, as a wrap-up; while you look back, you'll also look forward
KPIs for everyone
Determining key performance indicators (KPIs) involves starting from the bottom up. At the heart of any company's technology is the technology infrastructure, whether it's being used in the external marketplace or in-house. It's servers, desktops, and storage should be measured and their volumes looked at; these are business processes you likely already have in place.
At a higher level, it gets to finances and people factors. Companies should benchmark the true cost to keep the lights on, which includes the number of people required. "As a forward-thinking business, they should be looking at how much they are spending on change to grow and transform their business, I mean, you have to have a nucleus of items to benchmark, and these aren't very fancy things." Ratios can start to get fancier and consider the percentage of IT spend to revenue and of IT spending to operating expense. These become useful over time in different ways.
IT spend versus revenue debunked
Knowing the right amount of IT expense versus revenue, or operating expense, is shortsighted because of the trends in those things. If a company is doing well with technology, the thing to be watching is that over time, as a company invests in technology, it should grow revenue. Rubin says, "Your IT expense relative to revenue should actually look like it's going down. Because if you're doing well to invest to grow revenue, your revenue should be growing faster than you're spending money on technology, otherwise you're getting no leverage."
Frank Scavo, president of Computer Economics, Inc., a Southern California based analyst firm, agrees that looking at IT spend vs revenue is one-dimensional. "Business leaders are used to looking at all kinds of business functions as a percentage of revenue. They look at R&D spending as a percent of revenue. They look at G&A expenses as a percentage of revenue. They look at functions like human resources, sales and marketing spend as a percentage of revenue. But we find that's a one-dimensional view of overall IT spending. We use IT spending per user or you could look at per employee, although we think per user is a better denominator for that."
Scavo also looks at IT spending per desktop. He thinks that both of those denominators, whether it's users, employees, or desktops, tends to be a more direct measure of IT spending. Because IT is often percieved as a support function and it doesn't directly generate revenue, he finds that using at least a three-way perspective for the overall spending level is a good way to get a handle on the overall level of IT spending.
Cloud effects and other change forecasts
The Computer Economics 2019-2020 IT Spending & Staffing Benchmark study provides some interesting benchmarking statistics for companies needing current growth data to compare to. It found that in the first half of 2019, IT operational spend growth was steady at 3.1 percent. This figure is only marginally above the rate of inflation. According to Scavo, "If you're seeing an IT budget increase 3 to 3.5 percent, you're basically just keeping pace with GDP; that's really not much of an increase in IT spending." He attributes this shallow number in part to fears earlier in the year of slowing economic growth, or even a recession.
Supporting the almost flat budget growth figure is that the study shows CIOs are making do with their current budget. Scavo says his company has given this much thought and it's a continuation of what he's seen. "IT as a business function has been getting more productive. It's always expected to help the organization become more productive, but IT itself needs to become more productive. There are a lot of things that contribute to that."
Probably the leading piece of the puzzle is the cloud. He points out, "As more of the application portfolio migrates to the cloud, that lightens the load on the IT organization to support those applications." IT is freed from the administrative and maintenance burden to focus its efforts on higher-value tasks that get them out in front of users and adding value to the business. He believes as the organization starts to take money out of ongoing support they can do more without asking for large budget increases. This is a trend he's been seeing for a number of years. Cloud benchmarking is increasing in importance as this migration steadily gains momentum.
Another piece of good news, at least for small companies, is that they enjoyed the largest percentage of growth at 3.5 percent as compared to mid-size at 3.0 percent, and large companies at 3.2 percent. "Small organizations are often like the canary in the coal mine. They're certainly more responsive to current market conditions. So I take this as a bullish sign for IT spending going forward." But the numbers are indicitive of a consistent level of growth in IT spending across the board.
Tech-savvy from the top-down equals higher performance
MIT conducted a study that demonstrates, in order for companies to fully understand and capture the benefits of technology, that tech needs to be accepted by the business side. According to Rubin who helped generate the impetus for the IT benchmarking, "It's not just the technologies pushing out, it's about the CIO's changing their role to become a company's chief technology economist looking at both the business benefits and technology at once." It's crossing the border and then it's having company boards, or whatever the governance structure at the top of the company, infused with tech-savviness. The study shows the difference in performance between companies that have tech-savvy boards, which means technology committees or technologists on their boards and companies that don't. Study research proved that digitally-savvy boards had 38 percent higher revenue growth, 34 percent higher Return on Assets and 34 percent higher market cap growth. "So it's really about connecting the guidance from the top board level all the way down, and from the bottom up, from the person running the servers, up to the business," says Rubin. Benchmarking means connecting those dots for higher performance, which will, in turn, give companies a competitive edge.
IT benchmarking: Lessons for leaders
- Understand which metrics have the most impact
- Input from business units is key
- This is not a quick process; expect reliable data acquisition to take time
This article/content was written by the individual writer identified and does not necessarily reflect the view of Hewlett Packard Enterprise Company.