IT Spending 101: 4 Rules All Midmarket CIOs Should Follow

Midmarket IT Spending Will Grow In 2013

One of the biggest mysteries of the midmarket is the total IT spend that takes place on services, software, hardware and networking equipment. Actual dollars spent and allocation of IT as a percentage of revenue varies by company and industry in the midmarket. While industry pundits have long debated this issue, a Gartner initiative led by Research Vice President Jim Browning sheds light on the IT spending and behavior of companies considered midsize enterprises, typically employing between 100 and 1,000 workers.

At UBM Tech Channel's recent Midsize Enterprise Summit, Browning disclosed his latest research to midmarket CIOs. Gartner predicts SMB IT spending this year will reach $901 billion, up from $868 billion last year, with estimates that spending will cross the $1 trillion mark by 2015. Here are Browning's four rules for midmarket CIOs to follow in managing IT spend.

Rule No. 1: Do Less With Less

"Do more with less" is common advice given to midmarket CIOs today, but Browning's advice is to "do less with less." Midmarket CIOs need to understand and quantify the business value of every IT investment they make, as well as the total costs associated with them. According to Browning, six out of 10 organizations overspend without improving IT services. Mimarket CIOs need to determine the extent to which all currently funded IT projects support the most important business priorities in the organization and reconsider all IT projects that do not support key business priorities.

Midmarket CIOs also should be careful to not surpass the point of diminishing returns with IT investments. This is often seen in areas where a technology becomes a commodity. Unit costs drop and consumption increases, leading to higher overall costs and wasteful investments that contribute little to business value.

Rule No. 2: Standardize Wherever Possible

Midmarket CIOs need to employ standards to simplify the IT environment. They should look to reduce the number of configurations and IT providers supported, as simpler IT environments translate to less expensive and easier maintenance. Executives also should question all functionality requests that require customization, especially for "nondifferentiating" activities. The key is to practice simplicity first, and customize only when absolutely necessary for as many IT solutions as possible.

Rule No. 3: Segment Users

A "one-size-fits-all" solution is rarely a good choice in today's IT environment, according to Browning. Midmarket CIOs can reduce costs by segmenting users according to their technical needs. The main driver for segmenting users is to ensure that each user gets only the capabilities he or she needs to do the job. Having too many user profiles can result in support complexity and higher costs; having too few profiles can lead to underprovisioning of some workers, which can impact productivity. Browning suggests that most organizations have between three and five user profiles.

Rule No. 4: Consider 'Good Enough' Where Possible

According to Browning, "good enough" solutions are usually appropriate for 70 percent of midmarket CIOs' IT requirements. Executives should embrace new IT delivery options and evaluate alternative sourcing models for every system upgrade. Midmarket CIOs also need to make sure they recognize that many IT investments only need to be "good enough" or have parity with the market. While applications such as financials and email are mission-critical, they are not market-differentiating: It is unlikely that an organization will win new customers with an extraordinary accounts receivable process. However, an organization can lose customers if it's not as good as the general marketplace. So, midmarket CIOs need to make sure they are "good enough" at nondifferentiating business processes and aren't overinvesting in the technologies that support them.

Where Is The Money Going?

According to Gartner, IT spending is largely devoted to nondifferentiating activities. From 2008 to 2012, the costs to simply run an IT department consistently averaged about 65 percent of the budget, leaving 35 percent to grow and transform the business.

"Prioritize your IT spending to support what makes your business win," Browning said to the IT executives at the MES conference. "It's important to divest and rationalize existing IT systems in order to make room to grow and transform your business."

Browning told the midmarket IT executives to constantly analyze their portfolio of projects and IT strategy to prioritize initiatives around the most important goals of their organization.