The right IT Budget – where is the ROI?

I participated in a series of discussions on the topic of IT investments in the last couple of weeks. There is a wide range of people, those that look at it as an expense, similar to the paper they put into their laser printers, and there are those that look at IT as an asset, a piece of equipment that enables a company to run certain processes more efficient and effective. I wrote about this topic earlier in a posting you can read here.

This time, I would like to take a different angle on the topic. Computer technology is enabling us on one hand to do things we could not do otherwise, we could never draw a bar-code with a pencil or read an RF-ID tag with our glasses. Computer technologies therefore enable us to do things that customers or government agencies require us to do, that would otherwise not be possible. If we exclude this aspect for a moment, and assume that we buy computer technology ONLY to automate business processes in our organization, we very quickly talk about labor costs reduction. It is actually true that a majority of tangible and intangible savings in projects stem from labor savings. I am not saying entirely, and I know for a fact that there are algorithms and technologies that make our decisions better, but especially in food we are mostly talking labor, labor, labor.

Labor is normally about 15% of revenue in meat packing or meat processing plants, and the largest single block of costs after materials (meat, ingredients, packaging). Companies spend usually between 1% and 3% of revenue on IT related costs, a medium average of about 2% of revenue. I would actually consider a 2% budget fairly balanced.

Companies that spend 1% of their revenue sometimes feel that they are ‘saving’ money that goes straight to the bottom line. While this is true, it is short sighted. Yes, you may save that 1%, but you pay by using more labor. If all your employees are exempt from overtime and enjoy 60 hour work weeks, this may be the most economical model for your particular organization, but otherwise it is not.

Companies that spend 3% (and more) on IT Systems are most of the times overspending. This can be related to just very expensive Systems and Implementation costs (a good SAP consultant charges about the same then a good law firm does) or is related to a lot of projects that are made without proper cost justification. These are the instances, where companies spend $100,000 on $10,000 problems. You see this occurring very often with companies that have their own development department. These people sit there, they are on your payroll. They sometimes create dependencies by developing solutions that are not maintainable once they leave the organization. They also create systems because it is their job and there is normally no cost justification for keeping them on the payroll. The just do!

Sometimes companies overspend because they need to catch up with current technologies. Overspending in these cases seems prudent, but most of the times companies will hit a brick wall with their internal change management. The users will only be able to change to much and learn so many different new ways of doing what they used to do the old fashioned way. More often than not, the implementation will stall and a lot of the purchased modules and some of the related training and implementation effort will go to waste, even though the investment was well intended and suggested at least on paper a strong ROI.

Believe me when I tell you, that if your IT Budget is outside of the 1,5% to 2,5% of revenue in a meat packing and processing facility, you are in trouble. You may not know it, but you are.

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