Management

Enough Already

Some companies view IT as a necessary expense and buy only when needed. Others invest proactively to advance business objectives. It's easy to figure which approach leads to success.

Kevin McNulty, CIO, Bay Street Solutions

Thomas Salzman takes a proactive approach to tech spending.

The IT manager of Greenspoon, Marder, Hirschfeld, Rafkin, Ross & Berger in Fort Lauderdale, Fla., spends between $200,000 and $400,000 each year on hardware and software—1 to 2 percent of the law firm's revenue. The firm allots about the same percentage of revenue to industry-specific software related to its timeshare law practice and to legal search and subscription services, such as Westlaw and Lexis.

"Some small businesses do not look at IT spending as an investment. They look at it as an expense," says Salzman. "Luckily, I don't have that problem. The partners here consider technology an investment because they know that to do the same thing on typewriters costs a lot more."

The Big Guys' Tech Budgets

Large-enterprise IT budget as a percentage of revenue

	2004	2005	Growth
ALL VERTICALS	3.0%	3.2%	6.2%
PHARMACEUTICALS	5.5%	5.8%	6.0%
AEROSPACE & DEFENSE	4.2%	4.3%	2.7%
HIGH TECH	4.2%	4.6%	8.4%
RETAIL	2.5%	2.6%	5.8%
CONSUMER PRODUCTS	2.5%	2.6%	2.9%
GENERAL DISCRETE MANUFACTURING	2.4%	2.5%	5.7%
CHEMICALS	2.0%	2.2%	8.8%
AUTO	2.0%	2.1%	3.0%
OIL & GAS	1.7%	1.8%	4.8%

Source: AMR Rsearch Inc.

Kevin McNulty, CIO of Bay Street Solutions, agrees. The San Francisco-based e-business consulting firm views technology spending as a way to increase productivity and reduce costs, making the company more flexible and responsive to its customers. With its end-user and customer focus, Bay Street Solutions lets planned technology upgrades drive its tech spending. "We measure our IT budget against forecasted IT needs, not what other companies are doing," says McNulty.

As companies grow, they tend to view IT as a means to boost profits rather than as an empty cost center, experts say. One of the IT manager's responsibilities is to continue to ensure that the IT budget reflects the CEO's "hot buttons" and top management's priorities. These often include revenue and business growth, improving customer service and reducing costs through productivity gains and standardized configurations.

Linking IT Costs to Productivity

Many business owners fail to do any IT planning, operating without an overall strategic philosophy and buying only when the need strikes. In a Forrester Research survey last year, more than 20 percent of participants representing companies with six to 99 employees did not know whether their IT budget would increase or decrease in the coming year. "Small businesses tend to be more ad hoc in their approach to IT," says Meredith Morris, a Forrester analyst in Cambridge, Mass. "Medium-size businesses are looking to get bigger, so they invest more strategically."

How does a small business go about crafting an IT budget? Linking technology spending with concrete customer service improvements and productivity gains is a key starting point.

Bay Street Solutions, for example, equips its "traveling revenue-generators"—the consultants that call on e-businesses—with powerful laptops that perform like workstations. "We're focused on making our e-business clients more successful by helping them bridge the gap to all touch-points with their own customers," says Bay Street Solutions' McNulty. And the company's investment in those "Cadillac" laptops is paying off in consultants' greater productivity on the road.

How Much Is Enough?

Thomas Salzman, IT manager, Greenspoon Marder

Across the nation, businesses with fewer than 100 employees spent an average of $12,844 on IT and telecommunications last year, according to AMI-Partners, a market-research firm based in New York. "Thirteen thousand [dollars] doesn't go very far toward helping the business," says Laurie McCabe, the firm's vice president of small and medium business solutions.

AMI-Partners forecasts that small businesses will increase their IT spending by 4 percent this year. "But many small businesses are reluctant to replace a system that still works, even where there is a compelling reason to do so," McCabe says. "It all comes down to productivity."

IT Spending by Company Size

Number of employees	Average spent on IT*
6–49	$145,000
50–99	$445,000
100–199	$919,000
200–499	$4.3 million
500–999	$7.2 million
Average	$2.1 million

* Includes hardware, software and staff
Source: Forrester Research survey of 492 executives of small to medium-size U.S. businesses

Measuring productivity gains against employee downtime helps Chris McMurry determine whether to replace or repair technology tools. "If a guy's laptop isn't working, we chuck it out and get a new one," says McMurry, the CEO of McMurry, an 82-person marketing communications agency based in Phoenix. "How much time and money would it take to fix it? A new one costs $2,000."

Weaker IT Spending Outlook for Small Businesses

Expected growth in IT budget

Small businesses (6-99 employees)	Medium-size businesses (100-999 employees)
2004	2005	2004	2005
7.4%	4.1%	6.1%	5.3%

Source: Forrester Research survey of 1,002 technology decision-makers at North American small to medium-size businesses (SMBs)

The company may be unusual among small businesses because it employs three full-time IT people. But that doesn't mean Chris McMurry is a technology spendthrift. The company invested roughly 2 percent of revenues, or $550,000, in technology last year. About two-thirds of that went toward hardware, software and outside services, and in-house staff costs accounted for the rest.

Once a year, McMurry maps out a strategic budgeting plan with his tech team. "You can accomplish so much through the proper use of technology," he says. "Technology allows me to stay competitive, to be more efficient, to achieve my business goals."

At Greenspoon Marder, tying technology spending to revenue growth is easier than for most small businesses because the professional services provider bills clients by the hour for attorney services. A Research In Motion BlackBerry handheld, which allows a lawyer to attend her son's soccer game and still answer a client's e-mail, pays for itself quickly.

Where the Money Goes

U.S. small businesses spent a whopping $156.6 billion on IT and telecom in 2004, according to AMI-Partners. Here's how the spending breaks down:

Telecom services	38% ($60.4 billion)
Computing	21% ($32.2 billion)
Internet	15% ($24.1 billion)
IT services	14% ($22.1 billion)
Software	7% ($11.2 billion)
Telecom equipment	2% ($2.8 billion)
Security	1% ($.94 billion)
Storage	1% ($1.4 billion)
Networking	1% ($1.6 billion)

Source: AMI-Partners 2004

Pay Now or Pay Later

Another law firm, Keesal, Young & Logan, takes a common-sense approach to IT budgeting, spending short of 2 percent in annual revenues on technology and adhering to a strict replacement cycle. "We're not looking for bells and whistles," says Justin Hectus, director of information for the 80-attorney securities and maritime defense firm in Long Beach, Calif. "We consider what we are trying to achieve and make sure our spending matches up with that."

With the help of an outside consulting firm, Hectus sees that tech spending fits into KYL's overall technical architecture and goals. Each PC is replaced every two years, and the firm buys only one make and model number. "Having a standard configuration saves us a lot of time, money and frustration," says Hectus, who views PCs as appliances. "If you replace one PC at a time and try to ride it out as long as you can with the others, that leads to headaches down the road. You either pay now or pay later."

Every business has to determine its optimum replacement program. Bay Street Solutions has ditched its three-year laptop replacement cycle and adopted a two-year cycle to provide its consultants with state-of-the-art computers. "We're consulting with clients on e-business options," McNulty says. "To make their case, the consultants need leading-edge technology. Because that's what we offer our clients."

IT That Delivers

Takeout Taxi in Schaumburg, Ill., a company that delivers for local restaurants, recently had to make a major IT investment. "We spent $20,000 to $25,000 for new hardware and software," says Perry Margulis, who owns and operates one of a number of Takeout Taxi territories located in major U.S. markets.

The purchase was triggered by the need to install industry-specific software that would enable Margulis to track everything from orders and dispatches to deliveries. To run the software, the company also required new workstations and a server. "We sent all our old hardware to the dumpster," he says.

Without an in-house IT person or a consultant on tap, Margulis makes such buying decisions himself. "I worked with the software vendor to select the applications," he explains. "And our [Vernon Hills, Ill.-based] CDW account representative was very helpful in selecting the hardware."

Margulis says he wasn't searching for a bargain: "What I wanted was quality." In response, his CDW representative recommended Hewlett-Packard hardware as the best fit. "I like the fact that CDW isn't locked into a particular vendor; and I like dealing with a local company that can provide service when we need it," he says.

What Margulis appreciates most, however, is that the guidance he receives from partners like CDW means Takeout Taxi doesn't need to hire an expensive consultant when making IT spending decisions. "Why pay for outside help when you don't have to?"

IT Takeaway

The most effective IT managers make sure their budget aligns with the CEO's goals. A budget that addresses these near-universal management "hot buttons" 1) reflects costs based on a percentage of revenue, 2) anticipates business growth and improved customer service and 3) projects cost reductions. Other budget preparation tips for IT managers:

Talk to line-of-business managers, such as those in sales, to determine whether the proposed annual purchasing schedule mirrors their needs around business spikes and key crunch periods. The worst time to roll out an accounting package is the end of the quarter, when revenue numbers and tax payments are due.

After the purchase, determine if the intended benefit has been achieved. This will help make the case for spending in the next budget cycle and ensure that the IT team stays aligned with real, not perceived, business needs.

Use standard configurations when bringing in new IT. This makes it easier to replace damaged systems and reduce maintenance.

Create strict replacement cycles. Nothing burns through budget dollars faster than ad hoc purchasing and interruptions in planned, strategic implementation.