In Europe the average IT budget spend is between 2.1% and 4.5% as a percentage of total revenue, at least this is what the figures in a 2021 benchmarking report found. This report, focusing on computer economics, highlights how IT spending trends are shifting towards cloud technologies and data analytics, emphasizing the importance of strategic planning for effectively allocating technology funds.
This covers all information technology spend including capital projects and operational functions. If your business is spending lower than these figures you might be holding your business growth and profitability back.
Understanding IT Budgets and Their Importance
IT budgets are a crucial aspect of any organisation, as they enable companies to invest in technology that drives business growth, improves efficiency, and enhances competitiveness. A well-planned IT budget ensures that a company’s technology investments align with its overall business strategy and goals. Understanding IT budgets and their importance is essential for organisations to make informed decisions about their technology investments.
Information Technology enables businesses
Every business is unique, however, if the Pandemic thought us one thing, it’s, the business is technology, technology is the business. (That’s a statement you’ll see dotted across our publications)
We’re firm believers that IT should not be viewed as a simple operational cost, but a vital part of every company’s overall strategy, improving the business revenue, client satisfaction, maintaining trust and security and enabling the business to achieve its objectives while overcoming challenges. Digital transformation is crucial in aligning technology investments with overall business strategy, enhancing operational efficiency, customer service, and long-term competitive advantage in a rapidly evolving market.
Factors to Consider When Determining IT Budget Allocation
Determining IT budget allocation requires careful consideration of several factors. These factors can be broadly categorized into business goals and objectives, industry benchmarks and company size, current IT infrastructure and security requirements, and competitive landscape.
Business Goals and Objectives
A company’s business goals and objectives play a significant role in determining its IT budget allocation. Organizations should consider their short-term and long-term goals, such as increasing revenue, improving customer satisfaction, or expanding into new markets. IT investments should be aligned with these goals to ensure that they drive business value.
Industry Benchmarks and Company Size
Industry benchmarks and company size are also essential factors to consider when determining IT budget allocation. Companies should research industry benchmarks for IT spending as a percentage of revenue and adjust their budget accordingly. For example, a small business in the retail industry may allocate a smaller percentage of its revenue to IT compared to a large enterprise in the financial services industry.
Current IT Infrastructure and Security Requirements
A company’s current IT infrastructure and security requirements also impact its IT budget allocation. Organizations should assess their existing IT infrastructure and identify areas that require upgrades or replacement. Additionally, they should consider their security requirements, such as compliance with regulatory requirements or protection against cyber threats.
What should businesses spend their IT budget on?
The number one focus in 2022 is Cyber security.
We witnessed a shock reaction to the pandemic in 2020 that resulted in a rapid transition to the cloud and remote working. With this dramatic shift in the use of technology, there were companies that didn’t prioritise IT security.
We have seen an ever-increasing sophistication in cyber attacks that are leading to a tightening of regulations and standards. Companies that are seeking Cyber insurance will also be seeing rising insurance premiums as insurers report substantial increases in claims. Organizations operating in a highly regulated industry, such as healthcare or finance, face even more stringent cybersecurity requirements due to complex security and compliance needs.
It is our prediction that we will see constant and sustained financial investment in Cyber Security in the coming few years as new regulations and insurance requirements are enforced.
Use software for digital transformation
Software applications have become the backbone and driving force of technology and innovation in businesses.
There has been a shift from software applications being siloed and simply productive tools, the software we use every day has evolved to not only reduce manual tasks but deliver operational insights and integration with other systems and applications both internal and external.
The data in these systems has been recognised as having a significant value by combining information from various departments, vendors and clients.
Old outdated software can limit your innovation and growth. What if, for example, your main competitor has a fully integrated platform that not only works throughout the businesses departments but also connects in real-time with suppliers, they might have access to real-time inventory and future supply that they can allocate whereas you have to wait for a manual update on spreadsheets from the supplier.
Even using an old productivity suite to access company data may put you at a significant disadvantage if your competitors can access their data from any secure device and from anywhere. This allows their staff to serve the client anytime.
Outdated software can place your organization at a competitive disadvantage by limiting your ability to innovate and integrate new technologies. This can lead to operational disruptions and losses in efficiency, making it difficult to keep up with better-invested competitors.
The cloud, to become agile and efficient:
We’re seeing the vast majority of businesses are investing in cloud adoption, transitioning legacy systems and infrastructure to cloud computing.
While the move from on-premise legacy infrastructure is well underway for larger companies, small businesses were a little bit behind but they are catching up as they generally have less complex IT ecosystems, therefore their transition is generally much quicker.
Those that moved early will begin to look for further efficiencies and management of their Cloud environments together with integration projects to combine data and workflows with other applications.
Interestingly, the average company in the US is ahead of Europe in cloud technology and therefore the cloud presents a competitive advantage for those European companies who prioritize their transition to the cloud. By strategically investing in cloud technology, companies can gain a competitive edge, enhancing their efficiency and aligning IT projects with business objectives, ultimately leading to increased revenue and growth.
Gain Business Insights to make informed decisions:
Data Intelligence and integration is next, as business look to become more agile and data centric with an obvious focus on efficiencies and gaining competitive advantage.
Understanding key metrics is essential for leveraging data intelligence to maintain a competitive edge.
Where are businesses reducing spending in IT?
Data Centre’s are a thing of the past
There has been a significant and sharp pullback in data centre investment by businesses, in fact, there’s a predicted negative company spend in data enters in 2022, this correlates with our own experience with clients preferring cloud platforms such as Azure and native SaaS applications.
With this reduction in investment and retiring data centres, it signals a move away from capital intensive expenditure to the more operational expense that can adapt and adjust rapidly to changing business and market requirements.
Are IT Budgets increasing?
Yes, overall in 2021 the benchmark report found an average of 2.5% IT budget increase, however, with rising inflation in 2022 and from speaking to many businesses on their outlook, it is our expectation for this to increase to 4% or 6% if not more. Most organizations utilize the metric of IT spending as a percentage of revenue as a crucial tool for assessing their IT expenditure levels, making it easier to understand variances across different industries, company sizes, and regions.
With regard to support costs, there is a trend towards stabilisation of IT Support Services (Managed Support Services) costs, where they are loosely bound to inflationary pressures.
The exception is where an IT provider is not providing basic cyber security as part of the services. While it’s Lantech’s view that cyber security must be an ingrained part of the providing of IT support services not all providers do, typically this has been used as a tactic to appear less expensive than competitors.
It’s important therefore for businesses to be proactive to establish exactly what is included to ensure a baseline level of protection.
How much should a business spend on Managed IT Support Services?
There are a number of factors that contribute to the price of IT Support and Cyber Security services such as the complexity of infrastructure, number of users, industry etc. however, to provide a rough guide, we created the following example,
- A professional service that has approximately 40 users.
- No internal IT expertise or department therefore the business requires strategic advice.
- The business is in the professional services industry
- They have few regulatory requirements but want to ensure they adhere to good cyber security practices.
For a business such as the one above, we would expect a per user spend of approximately €800 – €1,100 totalling between €32,000 – €44,000 per annum or €2,666 – €3,660 per month.
However, this would be a very rough guide for a small business to spend on IT as there are numerous factors that influence the price, it’s important to remember that this should be viewed as an investment to which you see a return on efficiencies, productivity and cyber security protection, making your business more profitable and secure. Insufficient IT funding can have a significant impact on a company’s growth and competitiveness, highlighting the importance of adequate IT support services.
Wrapping Up
Technology is essential for every business, the better and more efficient the technology is, the greater the impact on growth and innovation.
Technology should not simply be viewed as an expense, rather, it should be seen as an investment, one that should be measured and expected to contribute to the growth of the business, therefore, it’s imperative that the allocation of the IT budget is efficient and cost-effective to support the business objectives and goals. Insufficient IT investment can hinder innovation and ultimately lead to a loss of market share as businesses fail to keep pace with industry advancements.
Growth
In 2022 and beyond we expect strong growth as the economy grows. As previously mentioned, it is unlikely the current annual budget increase of 2.5% will remain, rather, we are seeing pressure towards 4%-6% but it’s very hard to predict.
We’re seeing this for a few reasons
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- Businesses are taking the savings from moving to the cloud and putting them back into the business, when this is broadly complete we will see diminishing savings
- The demand for increased intelligence, automation, reporting and efficiencies will force the replacement and in some cases development of legacy software applications to provide this functionality
- Cyber Security is rightfully becoming a boardroom topic, the risk posed to businesses is significant, from financial, regulatory and reputational damage. As the sophistication of the attacks increases so too must the defences.
- Businesses must continue to innovate, technology will be seen as the platform to facilitate this transformation as they reinvent how business products and services are delivered and clients are served.
Skill shortage
There is already a shortage of digital skills and this is unlikely to change anytime soon, it’s becoming increasingly difficult for businesses to hire, yet retain skilled IT staff.
There is also a belief that having an internal IT resource is a risk to the business should the person leave for a more lucrative role, not only does the person leave but so too is the built-up knowledge.
Outsourcing to specialist firms that continually document, manage, monitor and maintain the IT eco-system provides a continuity of service.
