The Inconvenient Truth of Technology Podcast Episode 3

Hello, I’m Howard Rubin, as I keep telling people and I hope it’s true, but I’m generally known for my work in technology economics. And this is part of our series on inconvenient truths. And the inconvenient truth that I want to discuss today was about the metrics that are used commonly to benchmark technology spending in organizations. I went to my last video, I think I said you might call me rambling Rubin because this is a big topic. So if you think about what are the most common metrics people look at?

And it’s propagated through the analyst community and all sorts of publications and everything else. The two metrics that are looked at are typically IT spending as a percent of revenue and IT spending as a percent of operating expense. And it’s very interesting that historically those are the most published two metrics about IT spending. However, just think about it. Suppose for a moment that you do a benchmark and you turn out that you’re high versus IT spend versus revenue. Let’s just separate that one out.

So you look at that and your management might say, my gosh, you’re spending too much. But what does high really mean? Cause when you look at total IT spending, that covers your spending on both keeping the lights on and investment. So if you’re high versus IT spend versus revenue, and I’m taking that one for a start, but you’re high because you’re investing a lot and your run is efficient. Maybe that’s not a bad thing. So high might be good because it means you’re investing more than your competitors.

If you’re high versus IT spend versus revenue and it’s all run the business, that means probably you run the business is too expensive if there’s no reason to invest. So in fact, on that side of the metrics world, the error with using that metric is it doesn’t really look at what you might be your core economic efficiency, which is your run cost versus business size. And I’ll get into that because revenue isn’t enough to look at it. And number two, what your investment level is.

So again, if you’re high on that because you’re all run, you’re not investing. If you’re low on that, it might be because you’re very efficient and or you’re under investing. So that metric falls apart pretty quickly. And the proper way to look at basically even that kind of metric. And we’ll talk about IT has been operating expense. If you’re a bank, not interest expense, you need to look at also more about your core economic efficiency, which what does it cost you to keep your lights on? And that covers everything in terms of your

infrastructure costs, your application support costs, your cybersecurity and all this other stuff in there. That’s pretty much in your software licenses, your procurement costs and things like that. And it becomes important to measure your IT run efficiency. And you can start to look at that and there’s some metrics that are in great, but your level of how many dollars of revenue supporting for your run, assuming you’re getting resiliency and everything else. But the other side of it, your investment, the percent is interesting.

But if you’re competing, even you take banking and JP Morgan advertises, not advertises, they’re invested in a presentation to talk about. They’re spending $18 billion on tech and of that 18 billion, and you’ll look at a couple of investor day reports, roughly 7 billion or more as an investment and you’re another bank and you’re investing two, $3 billion, hundreds of thousands and you’re competing with them. It’s like a technology, I would say a technology war also. mean, who’s spending enough on the technology armaments to get them.

the future. It’s a terrible way to look at it. But in fact, benchmarking technology investment and where it’s going is done more of a micro level and then the eventual payback from that versus looking at the run where you can look at the run basis. The other dangerous metric is IT as a percent of operating expense. And that’s equally dangerous when you’re high or low. But what does high really mean? If you’re digitizing your business or using technology to make yourself more efficient,

You expect you’re driving out non-tech costs. That means operating expense will go down, technology costs will go up. So literally what will happen is in a company, you’ll expect that over time, IT is a percent of operating expenses is going to rise. So if a board looks at that, says, God, most of our operating expenses is IT, we got to cut it. That may be the wrong thing. You’ve got to look at the dynamic. So as organizations become more technology intense, and I’ll use that word again in a moment, the issue really becomes.

what’s going on in the dynamics of your operating expense. So this is some insights into using perhaps what you might consider the wrong high level macro metrics, because you can’t look at them separately. Because in fact, in a healthy organization, IT expense versus revenue in the big picture, understanding the run and investment components, run versus change, call it, that may stay flat as revenue goes up or its revenue should set that may decrease. But IT is a percent of operating expense is going to shoot up and expect an increase as you become more technology based. And there’s a metric I developed. If you think of this whole thing as a triangle, IT is the revenue and operating expense. I actually have a patent on something called IT intensity and IT intensity looks at those two things simultaneously. So you can look at your behavior of how you supporting revenue, your core efficiency and how you’re basically leveraging technology to drive down your operating expense. And IT intensity really is about by partners of that triangle. And we’ll have more about that. But INT &T intensity is the only measure that actually correlates with business performance to see if you’re getting value for a for-profit organization. For nonprofits, there’s separate sets of measures. So with regard to this inconvenient truth, the inconvenient truth is most companies are benchmarking improperly. They’re using these single line measures. IT spent of revenue, IT spent of operating expense not even looking at them properly because they have very little meaning if they’re high or low where they stand. You need to understand how to benchmark your core economic efficiency and what technology is doing to that and the behaviors of your technology spend for run and change, which is your investment and how it behaves versus operating expense to give you leverage. So I’ll be coming up with some more videos on inconvenient truths, but these are the inconvenient truths about maybe the title should be benchmarking badly and badly doesn’t mean what the results are means using the wrong metrics. So follow us for more, I say, on furthermore, and I can’t even say it in convenient truths. That’s why I call myself Rambling Reuben when I get too excited about this stuff. But follow us some more, and you’ll see some of the more of the analyses we do. Thank you very much.