Dollars and Sense: Understanding Your IT Expenses Before Borrowing

Business.com / Funding / Last Modified: February 22, 2017

Before filling out your loan app, take time to gain more visibility into your IT expenses in order to identify areas of silent spending.

Most businesses – especially small and midsize ones – need to borrow money at some point or another, and when it comes time to do so, best practice dictates a comprehensive review of all available borrowing options, including alternative sources like crowdfunding, peer-to-peer lending, factoring and lenders that specialize in providing funds based on a company's cash flow.

Before filling out those loan applications, there's an important step to take that even the most savvy entrepreneurs often forget – and that is to gain a thorough understanding of where your money is currently being spent, especially when it comes to your technology spend.

Gaining insight and more transparency into spending before borrowing, may mean you have to borrow less – or even not at all.

Related Article: Before the Business Loan: Questions That Must Be Asked

Look in the Shadows

Need to cut back on your IT costs before borrowing? There are two parts to your pre-borrowing strategy: Understand your "shadow IT," and gain greater transparency into costs with things like industry benchmarks.

"Shadow IT" is simply the existence of technology projects and implementations, which are often purchased and deployed by departmental managers outside of the IT department and outside of the IT's control – and often without approval outside of the department. This phenomenon has grown considerably with the prevalence of easy to deploy and inexpensive cloud and as-a-service offerings.

Why, for example, would a department manager wait for possibly weeks for IT to take action, when if all they need is a server, they can simply go online, and get cloud-based servers all day long from Amazon that can be up and running in a few minutes? It's a hard argument to refute. But, the costs generally come out of the departmental budget rather than the IT budget, which means the true picture of IT costs is skewed – and the risk of duplicate processes and redundant data (resulting in more expense) increases.

And, because IT is not involved, there is a new level of decentralization that leads to a breakdown in strategy – and often results in redundancies and duplications that in the end, actually cost a lot more than expected. These unintended consequences often come back to lead to serious problems, not the least of which is unexpected cost, possible security problems, and a reactive rather than a proactive IT environment.

Am I Spending More Than Others?

In addition to better understanding "shadow IT," an important step is gaining more transparency into overall costs. One way to accomplish this is through benchmarking, a process that has been around since 1979, and is used as a means to understand and manage a company's technology spend. This process – often used as part of a methodology known as Technology Business Management (TBM) – acts as a baseline into costs. On a more strategic level, benchmarking provides deeper insight into how you acquire, provide, and provision IT services, and helps to optimize IT costs.

The insights gained from benchmarking, according to market intelligence and advisory firm ISG, leads not only to cost savings through greater standardization but also leads to strategic and transformative business changes by allowing more consolidation, simplified management processes, and reduced services costs.

Look for Efficiencies in Your Business Processes

"Because we've always done it that way" isn't good enough. Sure, your business processes may work, but chances are, they could work better and cheaper. The processes that define and drive your business often evolve without strategy and on a reactive basis.

Applying a little rigor to your business processes – through proven methodologies like Six Sigma and Business Process Management (BPM) – will place more of an emphasis on metrics, reducing variability and increasing predictability, and improving quality – and, by applying that rigor to every business process, you can drive value, improve results and lower overall costs.

Related Article: Getting By Without a Business Loan

So – if you feel the need to take out a loan, before doing so, ask yourself the question – what am I spending relative to my peers? What money is being spent on "shadow IT" projects that don't appear in the technology budget? After gaining more transparency, understanding the "shadow" and benchmarking your spending against industry standards, you will get a better understanding of where your spend rates should be – and where you might be able to cut spending – before resorting to outside finance.

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