Market Sizing - Why IT Budgets Aren't Accurate - Part I

Updated: Apr 2

This is the first in a two-part series exploring IT Budgets.

Highlights

While an effective tool in the right context, the concept of an "IT Budget" as a measure of projected IT spending is problematic.

  • "Budget" implies a formal, structured process, which IT budgets are not.

  • "IT Budget" is an inherent misnomer. The concept is not actually a budget at all.

  • "IT Spend" more accurately describes the concept behind "IT Budget".

  • IT companies working to size the market to allocate resources and plan strategies should be weary of using IT Budget as a bellwether.

Overview

Tech sellers and marketers often use "IT Budget" as a concept similar to TAM (Total Adjustable Market). This posts explores why using IT Budget as an indicator when planning your public sector strategy is problematic.


"IT Budget"

The concept of an "IT budget" refers to the amount spent on information technology. At its core, it is a pretty straightforward idea. An IT budget is a quick and easy way to judge a jurisdiction's strategic importance, decide whether resources should be invested, or project sales. Most IT budgets are presented as 1-2% of the total budget and assumed to include all information technology - hardware, software, services, telecom, etc. While an effective tool in the right context, in general IT budget is a problematic indicator.


Defining IT & IT Budget

Information technology is a general term used by different people in different ways. Governments do formally define IT, though this is not always widely known. No one would argue that a computer is considered IT, but what about telephone service? Telecom predates modern IT by decades and as such has been a part of government's budgeting and reporting processes. Even if a government establishes clearly defined parameters for what is IT, a shared definition is useless if all relevant parties do not participate. All the stakeholders would need to work off the same definition - finance, leadership, IT, etc. This is further complicated in large organizations with multiple IT departments. Why is this problematic? To answer that, let's borrow from the field of semantics (a branch of linguistics focused on the meaning of language). "Budget" carries connotations - the association of meaning with words. Doing a quick word association exercise, here are the first ideas that come to my head when I think about "budget": process, plan, formal, iterative, legislature. This list accurately represents the definition of a budget for our uses - a formalized spending plan created by a legislature that occurs on a regular cadence. Let's see if these ideas also apply to "IT budget". IT budgets do not (generally) have a formal budgeting process, they are not set by the legislature, and there is not an established iteration schedule.

"IT Budget" is an inherent misnomer. The concept is not a budget at all.

The meaning and connotations of "budget" cannot be separated from "IT budget", though we have shown the two concepts as inherently different above. Without active attention to the distinctions, the two can become conflated.

"IT Budget", as defined above, seems simple enough. However, a closer look exposes holes in the definition. Technology budgeting is not a standalone category, discrete from other standalone entities.

A useful way to test whether an item belongs in a group is to compare its features with the other members. In theory, the members should share certain key features. Let's see what happens when we compare a departmental budget with "IT Budget", as shown in the chart above.

"IT Budget" does not share any of these features with a department budget. This indicates that they are fundamentally different, so the way we think about them and how we use the information needs to be fundamentally different too.

The concept behind "IT Budget" is more accurately described by "IT Spend". IT Spend looks at historical, real data to determine how much has already been spent on IT, whereas budgets are forward-looking.

Takeaway

IT companies working to size the market to allocate resources and plan strategies should be weary of using "IT Budget" as a bellwether. It is not an accurate representation of what is actually spent on technology.


In Part II of the series, we will explore techniques and methods for replacing "IT Budget" as an indicator.


Read Part II (Coming Soon)

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