World-Class Companies Spending More on IT

By Allen Bernard

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World-Class IT organizations now spend 10% more than typical companies, and have fully-loaded IT wage rates that are 32% higher than their peers, according to 2005 Book of Numbers research from business advisory firm The Hackett Group, yet they are also experiencing high turnover rates.

This is the first time in recent years that world-class IT organizations have spent more than typical companies. According to Hackett's Scott Holland, senior director of IT Research.

"The whole message around outsourcing is world-class companies outsource more and typical companies do not," said Holland.

This increased spending is being largely driven by restructuring workforces, enhancing the skill and experience level of staff to improve their ability to deliver competitive advantage and provide strategic support, and a lot of outsourcing.

World-class IT organizations now report they have moved most of their technology portfolio to shared services, and spend significantly more than typical companies on outsourcing in key areas. World-class companies have seen a 168% increase in spending on outsourcing in infrastructure management and a more than 400% increase in spending on outsourcing in application management over the past three years.

"World-class companies are really outsourcing more so that's why there's an increase in costs," said Holland. "The typical companies, the peer companies, they're pretty much a flat line. They're not outsourcing any more. It's the world-class companies where we're seeing the spike."

According to Hackett’s research, world-class IT organizations now spend 10% more than typical companies on IT ($9,617 versus $8,715 per end user). World-class IT organizations now rely on 28% fewer staff than typical companies (26.5 versus 36.8 IT staff/thousand end-users).

However they show fully-loaded wage rages that are 32% higher ($119,383 versus $90,766/IT staffer). This wage rate gap has grown dramatically over the past two years. At the same time, world-class companies are seeing turnover rates for professionals and managers that are 84% and 150% higher than typical companies, respectively.

But this turnover is something IT managers are embracing as a way to bring new blood into the organization, said Holland. "Most of the executives I talk to; the tendency to hear about the lifers really doesn't exist anymore."

In conjunction with these staffing changes, world-class IT organizations are also showing much more strategic use of sourcing alternatives than typical companies. World-class companies now dedicate nearly half of their infrastructure management process costs to outsourcing.

World-class IT organizations spend $924/end user in this area, 69% more than typical companies, and have increased their spending by 168% since 2002.

In application management, world-class companies now dedicate more than 20% of their process costs to outsourcing. They spend $450/end-user in this area, 91% more than typical companies, and have increased their spending by over 400% since 2002. In contrast, the combined outsourcing spend of typical companies in these areas has remained flat over the past three years.

World-class companies are also now making much greater use of shared services than typical companies, having moved nearly 90% of their technology portfolio to a shared services environment.

This includes internal consolidations of applications and infrastructure as well as manager self-service reporting applications generated from greater use of business intelligence throughout the organization, said Holland.

"The whole thing is users are becoming smarter, much more technology savvy … so by giving them the (BI) vehicle to do this certainly heightens productivity," he said.

Hackett’s research also clearly showed that companies that achieve world-class status in other key SG&A areas leverage technology more effectively than typical companies. For example, while world-class finance organizations spend 39% less than their peers on technology.

They make better use of technology and have simplified and optimized their infrastructure, relying on just one enterprise-wide finance platform while typical companies rely on two.

In HR, technology plays a key role in helping world-class companies operate with 14% fewer transactional staff than typical companies. World-class procurement organizations also turn to technology to reduce labor requirements, and streamline both low- and high-value processes.

Procurement staffs at world-class organizations, aided by technology, are able to process over four times more orders per procurement employee annually than typical companies at 61% lower cost per purchase order.