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November 20, 2006

US IT Spending Benchmarks For 2006by Andrew Bartels

Helping Business Thrive On Technology Change

BEST PRACTICES

B E S T P R AC T I C E SNovember 20, 2006

Includes Business Technographics data

US IT Spending Benchmarks For 2006by Andrew Bartels with Ellen Daley, Laurie M. Orlov, and Heidi Lo

How To Turn The CIOs Bane Into An Eective Tool For IT Budgeting

EXECUT I V E S U M MA RYEvery year, CIOs and their nance people get prepared for the following question from their CEOs: How does our IT spending compare with our competitors? To help them respond, Forrester is providing 2005 and 2006 IT spending benchmarks, including IT spending as a percentage of revenues by industry and size of company, IT spending per employee, and IT sta as a percentage of total sta. Our recommended IT spending benchmark, though, is spending to maintain and operate the IT organization, systems, and equipment (MOOSE) as a percentage of revenues. Our 2006 estimates for this benchmark metric are included in this report. We also recommend that CIOs should measure and track IT MOOSE over time and against business results, not simply against peer companies.

TABLE O F CO N T E N TS2 IT Benchmarks: Turning the CIOs Bane Into An Eective Tool 5 Issues In Measuring IT MOOSE Over Time 7 Issues In IT MOOSE Peer Benchmarking 15 Putting IT MOOSE In The Context Of Business Process BenchmarkingRECOMMENDATIONS

N OT E S & R E S O U R C E SForrester analyzed data on IT spending as a percentage of revenues from Forrester Business Technographics surveys and from InformationWeek 500 surveys, as well as from Bureau of Labor Statistics data on IT sta.

17 CIOS: Focus On IT MOOSE Relative To Revenues, And Benchmark Three Ways

Related Research Documents Dening The MOOSE In The IT Room October 18, 2005, Best PracticesUS IT Spending Benchmarks for 2005 May 24, 2005, Best Practices

2006, Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, WholeView 2, Technographics, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each gure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to www.forrester.com. Information is based on best available resources. Opinions reect judgment at the time and are subject to change. To purchase reprints of this document, please email resourcecenter@forrester.com.

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Best Practices | US IT Spending Benchmarks For 2006

TARGET AUDIENCE Chief information ocer, business process and applications professional IT BENCHMARKS: TURNING THE CIOS BANE INTO AN EFFECTIVE TOOL Every year, Forrester receives calls from CIOs looking for IT spending benchmarks to prove that they are not spending too much on information technology to management or, less commonly, that they are not spending enough. CIOs are looking for these benchmarks mostly for defensive purposes, a sacricial lamb that they need to oer to appease the management gods. They breathe a sigh of relief if they can demonstrate that their own IT metrics are lower than industry peers, or they sweat through the exculpatory explanations if their metrics are higher than peers. To help CIOs and those contributing to the benchmark process, we provide Forresters calculations of appropriate IT spending benchmarks by industry and by company size. Before we present the data, we provide a framework for making IT spending benchmarks, a vehicle for having a constructive dialog with management about the role and value of technology in business success. Focus On The Right IT Benchmark: IT MOOSE As A Percentage Of Revenues The most frequently requested benchmarks are IT spending as a percentage of company revenues for a specic industry, followed by IT spending per employee or IT sta as a percentage of total employees. As we have argued in the past, Forrester believes that these benchmarks are not very useful and can be counterproductive.1 Total IT spending as a percentage of company revenues combines spending on new initiatives more is generally better and spending on ongoing operations and maintenance less is generally better.2 Therefore, an aggregate metric provides little insight into whether a given level of spending is too high or too low. Sta metrics are awed because outsourcing (or lack thereof) at either the IT or the enterprise level makes comparisons meaningless. Instead, we recommend that companies focus on the metric of IT MOOSE as a percentage of revenues. IT MOOSE is the acronym that we use as a substitute for the much more cumbersome description of spending on Maintaining and Operating the [IT] Organization, Systems, and Equipment. MOOSE has the additional benet of conjuring up the image of the large, ugly animal of North America and Europe that can often be found knee-deep in marshes and lakes, which is a pretty accurate metaphor for this part of the IT budget.3 Using IT MOOSE as the main benchmark does not mean ignoring total IT spending as a percentage of revenues. The dierence between IT MOOSE and total IT spending is spending on new initiatives that can create new business value. Its important to know and show how much room there is in the IT budget for new initiatives at a given level of total IT spending to revenues. However, benchmarking spending on new initiatives either against time or against peers is generally not useful. Business requirements (support for a new customer strategy, meeting new regulatory requirements, or an upgrade in disaster recovery or security capabilities, for example) will require

November 20, 2006

2006, Forrester Research, Inc. Reproduction Prohibited

Best Practices | US IT Spending Benchmarks For 2006

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an increase in new initiatives in one year at one company, but those same requirements may not be relevant the next year or for another company. Lastly, new initiatives are almost always subject to rigorous business case and return on investment justications; there is little need for benchmarks to see whether too much or too little is being spent. IT MOOSE in most cases includes the following items of IT spending (see Figure 1):4 1. Depreciation on previously purchased computers and network equipment and also for software licenses or development costs if these are treated as capital investments. 2. Maintenance fees for purchased software. 3. Salaries and benets for IT sta members who maintain and operate existing IT systems but not sta members dedicated to managing new projects. 4. Existing outsourcing agreements. 5. Ongoing IT consulting and integration payments for IT projects carried over from the prior year. 6. CIO and core IT senior sta as well as security, enterprise architecture, and vendor management positions that would continue even if there are no new projects. 7. Any other expenses that would be ongoing even if there were no new IT projects.Figure 1 Whats In IT Moose?Typical distribution of IT MOOSE by itemPercentage of CIOs including item in MOOSE IT operations sta Software maintenance fees20% 5% 10% 20% 10% 10%

25%

98% 98% 90% 88% 79% 64% 64%

CIO and core IT sta Existing IT outsourcing agreements Depreciation on computers, etc. Depreciation of capitalized software Continuing IT services engagements

Base: 42 CIOs from the Forrester Leadership Boards CIO Group40453 Source: Forrester Research, Inc.

2006, Forrester Research, Inc. Reproduction Prohibited

November 20, 2006

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Best Practices | US IT Spending Benchmarks For 2006

IT MOOSE as a percentage of revenues has several advantages as a benchmark metric.

Relative stability. It has less year-to-year variability than total IT spending as a percentage of

revenues, which are aected by the yearly ebbs and ows of new initiatives and new investments to meet business needs and requirements.

Large part of IT budget. Because it typically represents the largest proportion of the IT budget,

benchmarking and controlling IT MOOSE means focusing on where most of the money is being spent. Using Forresters three IT organization archetypes, IT MOOSE can range from 50% to 70% for IT departments that are Partner Players, 70% to 80% for Trusted Suppliers, and up to 95% or more for Solid Utilities.5

Symbolism. It is a measure of IT management eectiveness because it consists of expenses thatare directly under the control of the CIO. Benchmark IT MOOSE Against Time And Business Results, Not Just Peers Once CIOs see the advantages of using IT MOOSE as a percentage of revenues as a benchmark, their rst instinct is to measure their own IT MOOSE ratio against available published data from Forrester or other sources on IT MOOSE ratios for comparable companies in similar industries. However, this exercise has hazards of its own, including 1) nding ratios for truly comparable companies that measures IT MOOSE the same way and 2) being able to trust that these ratios are accurate and reliable. For reasons that we will discuss, it is very hard to overcome these hazards. We recommend that CIOs take a three-step process to benchmarking (see Figure 2):

Step one: Benchmark internally. A CIO should benchmark his or her companys IT MOOSE

ratio in a given budget year to the comparable ratios in past years. This internal comparison is advantageous because it measures IT MOOSE the same way, and that data can be considered to be trustworthy. It also shows trends in IT MOOSE spending that the CIO can use to demonstrate the competence of the IT management team or to identify opportunities to improve IT operational management.

Figure 2 Three Benchmarks for IT MOOSETime metrics IT MOOS

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