Chapter 3. Information Technology Costs


You cannot ask us to take sides against arithmetic.

 --Winston Churchill[1]

There are only two qualities in the world: efficiency and inefficiency, and only two sorts of people; the efficient and the inefficient.

 --George Bernard Shaw, John Bull’s Other Island, 1904, Act IV[2]

This chapter outlines the process for benchmarking IT spending in a corporation. It suggests general determinants and targets for IT spending and presents multiple methods of calculating benchmarks as well as the pros and cons of each. It also introduces historical IT spending trends in aggregate and by industry.

The chapter is organized around the IT cost benchmarking process. First, we introduce some of the historical spending levels of U.S. corporations. Second, we outline the various methods for benchmarking and discuss key IT cost drivers, which can affect IT spending, and the subsequent attempt to benchmark spending. Finally, we analyze scale economies that can be achieved as a company grows and then provide recommendations for aligning IT spending with the corporate business strategy.

Benchmarking approaches discussed here are intended to be guidelines for spending—not a specific recommendation as to the precise amount for a given company to spend on IT. First, the data provided by industry group is a blunt metric. The Chief Information Officer (CIO) must perform some independent analysis to gather peer group information to add additional meaning and context to ...

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