In January business owners look back at the previous year, count up the numbers and ponder financial ratios. This attempt at reading the “tea leaves” is to understand the relationship between investments, sales growth, operations and profit. Most businesses experience technology as a rapidly growing investment category that can seem like an endless pit of potential investments. Sorting through opportunities for improved security, aged equipment replacement and other initiatives takes time. Just what is the relationship between technology investments and variables including sales growth, staff recruiting and retention, operations and those ever-elusive profits?
CFOs watch their financial Quick Ratio but may be less familiar with their Technology Investment Ratio. Typically businesses spend between 2% to 5% of their revenue on technology investments. Tech spending as a percentage of revenue varies significantly by industry sector. According to the IDC IT Spending Guide, these investments have grown annually with a forecast that it will surpass $1 trillion for North America in 2017. The typical small business with sales of $5 million makes about a $200,000 investment annually. If spent wisely, investments can boost sales to gain market share; improve operations to reduce expenses; accelerate management insights to avoid losses and even assist in staff recruitment and retention. If technology investment opportunities are squandered, however, profit margins may slip below the small business average of 25%.
Focus on technology investment ratios to drive success through wise business investments.
Shifting to increased technology investments often provides businesses with a firehose of additional data. Estimates show that by 2020, there will be more than 44 Zettabytes of information. For comparison, 1 ZB can hold 323 trillion copies of War & Peace—at 1,250 pages each! Fortunately, the cost of hard disk data storage per gigabyte (visualize the bed of a pickup truck filled with paper) has halved every 14 months from over $3M in 1980 to just $0.03 in 2015.
Savvy managers have learned how to harvest this data to provide intelligence in areas such as marketing, sales and manufacturing. Analyzing key customer needs allows them to target the right markets with the right products to grow customers and profits.
For Vermont businesses, the good news is that trends indicate technology is truly delivering “more for less” as spending per employee is lower than in the past 5 years. This may be due to use of the Cloud and internet-based software applications. Businesses using less expensive software-as-a-service and creating new economies of scale in the Cloud are more efficient and productive. These savings have allowed even small companies to commit a higher percentage of the technology budget toward new initiatives that will yield even higher cost savings while boosting revenue.
The value of technology investments accrues across the entire business as Cloud computing generates new revenue streams. Big Data analytics provide insights leading to streamlined and revamped processes that further reduce the cost of operations. These investments have changed the focus away from technology maintenance and toward additional innovations. Over the past 50 years, real returns on capital investments have averaged about 10%. Using smart management and a combination of recurring costs (Cloud software) and capital expenditures (devices, phones and computers) businesses can expect to further increase returns.
Clearly the relationship between technology and business performance has changed in the past few decades. Technology-related initiatives now account for a major and growing percentage of overall business investment and this proportion of technology investments compared to overall investments will continue to grow. Increased business performance leads to increased competitiveness in every sector, so make 2017 the year to focus on your technology investment ratios to drive success through wise business investments.
This article appeared in the January 2017 issue of Vermont Business People in the column All about IT written by John Burton.