How Much Should Companies Spend on Technology: Guide to IT Budgeting  

From enhancing productivity and streamlining processes to improving customer experience and boosting profits, it can help businesses thrive in the competitive market landscape. However, organizations often find it challenging to determine how much and how to spend on technology. With so many options and advancements available, knowing what to prioritize and how much to budget can be a little daunting. 

This article aims to empower tech leaders with the knowledge and tools to make informed decisions when it comes to investing in technology for organizational success.

Establish IT requirements

Leaders should first understand the overall business goals and strategies to identify how technology can support these objectives. They then need to identify the key priorities for the upcoming year to determine which areas require significant investments and which can help save costs.

Next, the company’s IT infrastructure must be assessed to determine whether it adequately supports operational needs. If the hardware, software, or network is hindering productivity, an upgrade needs to be made accordingly.

Categorize the cost to gain better clarity

Leaders need to categorize the expenses to better understand how the money will be spent. Some of the key elements to consider are:

• Innovation – investments in the latest technologies, such as artificial intelligence, machine learning, cloud computing, etc
• Staff costs – include all costs associated with hiring, training, and retaining an employee.
• Cybersecurity – costs associated with safeguarding company data and IT systems, such as those for firewalls, antivirus software, incident response, and security awareness training etc

The budget allocation for each category can be adjusted depending on the business priorities. For instance, if the company wants to move toward a 100% AI automation infrastructure, leaders can dedicate more of the IT budget to innovation investments.

Set aside funds for tech renewals

While preparing the IT budget a thorough check needs to be done on the warranties and end-of-life support dates. Some tech pieces typically offer a warranty period of three to five years, during which they will repair or replace any malfunctioning parts for free. For example, software vendors like Microsoft, in particular, offer support and updates for up to 10 years after a product’s initial release date. After those expiration dates, the company will have to resolve the hardware or software issues on its own or pay for extended support from the manufacturer. Hence, leaders should allocate some of the budget for renewals a year before the hardware or software expires.

Contingency and miscellaneous

We live in a world of uncertainty. Despite our best efforts and meticulous planning, unforeseen circumstances can arise at any moment, threatening the success and viability of the projects. Hence, a portion of the budget should be set aside for unforeseen expenses or emergencies related to IT. It will help mitigate risks and maintain the project’s financial stability, thereby promoting stakeholder confidence and project execution continuity.

Ways to maximize the value of your technology investment

Even though companies often spend millions of dollars on technology, many are not yet taking steps to maximize the value of those investments. As technology becomes increasingly vital for businesses, tech leaders must ensure they optimize the use of new solutions.

The easiest way to maximize the value of the technology investments is to leverage solutions from a single vendor. With a single-vendor approach, leaders can eliminate the need to juggle between multiple maintenance contracts and costs.

Before investing in expensive solutions, tech leaders can explore alternative solutions like free trials and employee upskilling. A free trial of a software product allows employees to explore its various features and get a better understanding of how it works, which helps save time and cost.

CTOs can optimize tech investments in today’s economy by embracing a “less is more” philosophy. By prioritizing technology that scales and adapts to changing needs, tech leaders can ensure they are investing in solutions that offer long-term business value. Moreover, leaders can encourage a culture of innovation, where employees who understand customer needs can contribute to creative tech solutions.

To ensure the effectiveness of technology solutions, it is important to monitor and measure their performance. This practice helps CTOs identify areas that require improvement, optimize resource allocation, and make informed decisions about future technology investments.

Contextualize global IT spending by industry

IT spending varies across different industries due to differences in the nature of the businesses and the purpose of the technology. According to a recent study, the average small company (less than $50 million in revenue) spends 6.9% of its revenue on IT, the mid-sized (between $50 million – $2 billion) spend around 4.1%, and the larger companies (over $2 billion) spend a relatively tiny 3.2% of its revenue on IT. However, it’s essential to note that these benchmarks should be used as a starting point and that CTOs should consider factors specific to their business needs when determining their IT budget.

Likewise, tech experts indicate that global IT spending will increase over the upcoming years because of many factors, including the growing digitization of businesses and the necessity for enterprises to keep up with the quick pace of technological advancement. According to the latest forecast by Gartner, Inc; worldwide IT spending is expected to total $5.06 trillion in 2024, an increase of 8% from 2023.

This research provides valuable insights for tech leaders and IT professionals from various industries, further enriching their understanding of global IT spending and its potential role in business operations today.

In brief

IT budgets can be a significant expense; hence, CTOs should ensure that the money is being spent effectively to achieve the desired results.