Overcoming Common Mistakes in Benchmarking Your IT Spending Levels

Benchmarking is a useful way for IT organizations to justify IT budgets and focus efforts on continuous improvement. But the benchmarking process is sometimes misunderstood, often leading to erroneous conclusions.

In a video presentation, Frank Scavo, president of Computer Economics, talks about best practices in benchmarking, common mistakes, and the advantages and disadvantages of different approaches to benchmarking. The 45-minute video and slide deck is available at no charge.

IT executives often look to benchmarking as a way to understand where their IT spending stands relative to industry peers, to defend proposed budgets, to justify changes in approved budgetary levels, or to identify opportunities for improvement or cost optimization. However, business managers sometimes make critical tactical mistakes in preparing benchmarks and interpreting the results, as outlined in Figure 1. 

Based on over a decade of successful benchmarking, Computer Economics has identified six best practices that allow business leaders to overcome these common mistakes and to gain the maximum utility from benchmarking IT spending and staffing levels. These best practices include the following:

1. Deciding the best benchmarking strategy—three complementary approaches
    
2. Defining the appropriate peer groups—balancing the need for industry specificity with a sufficient sample size
    
3. Comparing against percentiles—why benchmarking against “industry averages” is a mistake
    
4. Going beyond percentage of revenue—other metrics that provide a more comprehensive view
    
5. Benchmarking operational and capital spending separately—how measuring against total IT spending can give a distorted view
    
6. Analyzing the IT spending and staffing mix—where you are spending is as important as how much you are spending

In the full presentation, Frank Scavo describes each of these best practices in more detail. The presentation ends with examples of how analysis of variances can lead to practical recommendations for further investigation or IT cost optimization strategies.

This Research Byte is a short summary of a presentation delivered by Computer Economics President Frank Scavo on April 19, 2012, to the IT Financial Management Association (ITFMA) conference in San Francisco. The full recorded presentation and slides can be viewed on the Computer Economics website.