Does Your Tech Budget Have Teeth?

By Paul A. Strassmann Print this article Print

A quick assessment that will tell you whether your tech budget has bite.

Time to make a case for your information-technology department's annual budget to the CEO?

The typical chief information officer's presentation shows line-item spending for hardware, communications, applications development, maintenance and overhead. Most likely, it breaks out money devoted to startup projects from annual operating costs, including labor, hardware and software, as well as training.

For another view, identify the "tooth-to-tail" ratio of your I.T. budget (see "Real Numbers," p. 30). That ratio is often discussed in terms of the portion of defense spending for combat troops (tooth) vs. outlays for support—logistics, supplies and administration (tail).

In information technology, the "tooth" represents the portion of spending on projects intended to yield a competitive advantage. That includes the direct operating costs, excluding overhead or fixed costs, of computer applications used by salespeople, brand managers and market researchers, customer service reps, or other staff.

The "tail" has two major areas of spending. First, there's direct operating costs of applications attributable to functional departments such as purchasing, finance and accounting. Put the staff managing the I.T. department in the back-office category, or identify it separately. Next, figure out the cost for infrastructure such as servers and network connections.

To calculate the tooth-to-tail ratio, divide the costs of servicing customers and coping with competition by the sum of all other information-technology costs. Your I.T. budget may warrant further review if:

  • Your infrastructure costs consume more than one-third of your budget and are rising faster than your total I.T. budget.

  • If your ratio of direct I.T. support to customer and competitive applications is anywhere close to 1.0, your overhead costs are likely to be excessive.

  • Support functions eat up more I.T. per capita than money-making operations.

    Tooth-to-tail ratio analysis can display the structure of technology spending in ways more in tune with CEO thinking than the usual budget presentations. If your numbers are not better than those in our worksheet example, get to work to deliver a more convincing story next time.

    This article was originally published on 2005-05-04
    Paul Strassman created and trademarked the Information Value-Added and Information Productivity formulas behind the Baseline 500 rankings. His career in technology, which began in 1956, includes stints as a top information-technology executive at Xerox, General Foods, Kraft, the Department of Defense and NASA.

    Strassman is president of The Information Economics Press and senior advisor to Science Applications International Corp., he is also Distinguished Professor of Information Sciences at George Mason University's School of Information Technology and Engineering.

    He has written numerous articles and books on information management, including Information Payoff: The Transformation of Work in the Electronic Age (1985) and The Squandered Computer (1998).
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