Why Does 'IT' Cost So Much? (page 1 of 4)

The dramatic increase in IT directly correlates to the increase in the money spent on IT. Costs have skyrocketed, and CIOs charged with IT strategy and management are becoming concerned. CIO magazine, a publication for top IT professionals, reported in a December 2002 survey of CIOs that 67 percent of CIOs named decreasing IT costs as their No. 1 business priority.

The Maintenance Madness
To understand the rising costs, you must understand how IT budgets are spent. In general, IT budgets today range from 1 to 10 percent of a corporation's overall revenue. Top IT experts conclude that 78 percent of an IT budget is spent just managing existing system and software infrastructures. In 2001, Gartner Group, a global analyst firm tracking the high-tech market, published a report that summarized the typical IT budget (see Figure 1).



Figure 1: How much of your IT budget goes to maintenance?


This is bad news for any company looking to reduce IT costs. The fact that 78 percent of your IT budget is spent maintaining existing systems means less money for IT innovation and for alignment with business processes. It means that psychologically, IT managers have more of a stake in keeping current systems running, rather than looking for better ways to manage technology. Table 1 shows the scenario for eight large companies, assuming they spend 1 percent of total revenue on IT and that 78 percent of that budget is spent managing existing software.



Table 1: Estimated dollar-figure scenarios for IT maintenance, assuming companies spend 1 percent of revenue on IT, 78 percent of which goes to maintaining existing systems.


The dollar figures are huge. Even estimating conservatively, the cost to these eight companies for managing their existing computing infrastructure tops US$1 billion per year.

In the face of reduced or flat IT budgets and the need to cut costs, there are few resources available to do anything new or strategic. If the lack of ability to innovate continues, IT is in danger of being relegated once again to the backroom where computer systems first emerged.

Why is it so expensive to maintain existing systems? And how much should it cost? According to Gartner Group, "Customers can spend as much as four times the cost of their software license per year to own and manage their applications." Consider the implications of this statement. Assume you purchase software for US$500,000.

At four times the purchase price, the cost to operate will be US$2 million per year. Over five years, that's US$10 million. So the company is not making a US$500,000 decision, it's really a US$10.5 million decision.

Why are the costs so astronomical? Amy Mizoras, a leading analyst at International Data Corporation (IDC), cites five major areas that cost companies millions of dollars annually. "CIOs and their departments really focus on five key aspects to the management and maintenance of their computer and software systems: availability, security, performance, problem management, and change management."

Availability
Understanding the hidden costs behind these numbers helps reveal the problems CIOs and their departments face. While the cost of availability management may be high, the cost of not managing availability may be higher.