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Corporate Information Technology (IT) budget planning

Oracle Database Tips by Donald Burleson

Back when I was in MBA school (and Information Technology was called Data Processing) the professors taught that a corporation should be spending at least 15% of their net revenue on computerized information systems.

In other words, a company with a $200m net income should be investing at least $30m on their IT infrastructure.  Undercapitalized spending on computer infrastructure is a major problem in corporate America as CFO's reject reasonable IT budgets because they see IT spending as a non-revenue producing, fixed-cost" burden.

Granted, the costs of computer hardware have fallen by orders of magnitude since 1982, but IT salaries (adjusted for inflation) have increased slightly. 

Consider these changes to hardware technology:

  • Falling disk costs - Disk costs fall 10x every year, storage media is obsolesced every 25 years, and RAM-SAN solid-state devices are now replacing disk storage.
     

  • CPU speed outpacing RAM speed - CPU speed continues to outpace memory speed. RAM speed has not improved since the 1970's. This means that RAM sub-systems must be localized to keep the CPU's running at full capacity.
     

  • Rapid server depreciation - Many corporation are surprised to see that the server that they spent $200k three years ago now sells on eBay for 5% of the original price.

We may remember "Mores Law" which states that CPU speed will always increase in a predictable fashion.  Of course, prices fall dramatically over time as well:

 

What is the proper IT budget in 2006?

Many corporation are discovering that their investment in IT resources is not a burden but a measurable revenue producing investment:

  • Data Warehousing - Market analysis tools can save millions of dollars each year.
     

  • Online sales - Online sales portals are a major revenue source.
     

  • Increase customer goodwill - Better service builds customer loyalty

While information technology spending remains a volatile budget area, we now see that savvy corporations are realizing that they are undercapitalizing their computer units and they struggle to get the most from their budget dollars.  For example, CIO Magazine notes that companies are now using on-site training to reduce travel costs:

"And he urges staff to take local training courses rather than travel."

While every corporation is unique, the general rule of IT budgeting remains approximately the same, and the 15% of net revenue rule appears to remain the "sweet spot" for funding Information  Technology in the private sector.


 

 

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