What Does It Really Cost to Run an IT Department?

I’ve talked with countless organizations about their in-house IT departments, and I’m amazed how the vast majority don’t know either what IT costs them or how to accurately calculate it.

I’m not talking about just their investments in platforms and software but rather the overall departmental and personnel expenses that maintaining in-house IT is costing them. IT Return on Investment and Total Cost of Ownership calculators are readily available to determine the impact of Capital and Operational expenditures, but little attention is placed on the departmental costs.

I’ve broken down the discussion into Labor, Contractors, and Departmental Overhead. Follow along using our Internal IT Department Costs Calculator.

The True Costs of IT Labor

Calculating Technology Labor at Smaller Organizations

You may not have a dedicated IT team, but you still have at least one person who’s responsible for helping with IT.

There are two costs to consider. First is the percentage of time they focus on IT. For example, if their annual burdened salary is $60,000 and they commit 50% of their time to IT, that’s $30,000 toward IT. Second, they may have a billable component to their duties with your organization (e.g., a CPA). If they can bill 1,500 hours a year at $120/hour but only bill 750 hours due to IT duties, your opportunity lost is $90,000/yr.

You may also consider accounting for a percentage of the Taxes and Insurance or Benefits expenses you pay for this employee. In this example, we’d use 50%.

Calculating Technology Labor at Smaller Organizations

With a dedicated IT staff, your labor cost is their fully burdened annual compensation. The major costs to capture labor are:

• Annual Salary or Wages
• Taxes and Insurance (Social Security, FUTA, Workers Comp., etc.)
• Benefits (Health/Dental Insurance, paid time off, perks, etc.)

Tech Employee Administrative Expenses

IT professionals have some other expenses as well that must be captured:

• Training and Seminars: What are you spending to send IT personnel to classes and conventions? Are you providing course materials? What about training subscriptions? These kinds of IT costs can add up fast. 
• Travel: Travel can be associated with Training and Seminars or any instance you send your team to other locations. If you have five locations, how often does your IT Director or engineers travel to these facilities? Airfare, lodging, ground transportation, meals, and incidentals add up, yet they’re often overlooked as one of the costs of IT. 
• Private Vehicle Usage: Employees sometimes get a vehicle stipend or mileage reimbursement when driving for company-related tasks.
• Compliance: If you’re in a regulated industry, have government or military contracts, or security compliance, the IT costs of attaining and maintaining individual and organization compliance must be recognized.

The Cost of IT Contractors

It’s rare not to have at least some contractor assistance. Not everyone in IT is an employee; some may be independent contractors. Do you have a Managed Service Provider? Programmers? Database Administrators? Contracted Support escalation to assist your IT members?

You’ll need to accumulate the annual costs for each and add them to your IT department costs. Don’t forget that they may not always be aligned within IT. Other departments such as HR, Sales, or Manufacturing may also be contracting IT and funding it from a different budget.

The decentralized nature of IT over the last several years means that most larger organizations are dealing with this.

Other IT Departmental Expenses

Aside from Labor and Employee Administrative expenses, there are several other IT Department costs to consider:

• Computers/PCs/Tablets: IT people need systems to do their jobs. Many have several. If you’re responsible for buying this equipment, you know they need more robust systems than other classes of workers. What’s your technology refresh strategy? Most organizations are replacing personal computers for IT people every three years. Do you budget for that? Don’t forget the software and tools they need. Operating systems, collaboration software, Monitoring and Management software, ticketing systems, diagnostic software, and security are some of the more common applications.
• Support and Maintenance: Every piece of equipment and every software application requires some form of annual maintenance and support. Whether you’re replacing hardware each year or not, these costs are still borne.
• Mobile Devices: Communication is critical for IT. Almost every company pays for at least one mobile device for each tech employee as part of their IT department costs. We want IT available for after-hours emergencies, and that access necessitates providing a smartphone.
• IT Management Software: Some of these expenses may be captured with Computers/PCs/Tablets, but if you have department-wide software tools they may not be. If they’re not captured with systems, they should be accounted for here. These tools are specific to the department and shared throughout the organization. A Remote Monitoring and Management (RMM) suite is an example.
• IT Cloud Subscriptions: We’re buying a lot less software these days and replacing those purchases with Cloud subscriptions. The point is to ensure you’re looking for both purchased and rented software. If you have subscriptions, calculate the annual expenses, and add them to your IT department budget.

It’s amazing how fast all these costs add up. When I start a department cost discussion, I often hear something like, “I’ve got three IT employees and we pay them about $80K each a year.”  When we address all the factors noted above, the story changes quickly. That original $240K IT team is now a $400K IT department.

Optimization Strategies for IT’s Costs

Understanding your true costs is the first step in optimizing your IT spending. Once you know the inputs, you can look for better ways to accomplish the same missions. Implementing cost optimization strategies can help you streamline operations, reduce expenses, and improve overall financial performance. Here are some key strategies to consider:

1. Consolidation of IT Resources: Identify opportunities to consolidate hardware, software, and infrastructure resources to eliminate redundancy and improve resource utilization. Consolidation can help reduce maintenance and support costs while simplifying management and administration.
2. Virtualization: Embrace virtualization technologies to optimize server, storage, and network resources. Virtualization allows you to run multiple virtual machines on a single physical server, reducing hardware requirements and energy consumption. This can lead to significant cost savings and increased flexibility in resource allocation.
3. Automation: Leverage automation tools and workflows to streamline repetitive tasks, minimize manual intervention, and improve operational efficiency. Automation can help reduce labor costs, minimize human errors, and accelerate time-to-resolution for IT issues.
4. Outsourcing Non-Core Functions: Consider outsourcing non-core IT functions, such as helpdesk support, network monitoring, and routine maintenance tasks, to specialized service providers. Outsourcing can help reduce overhead costs, access specialized expertise, and free up internal resources to focus on strategic initiatives.
5. Renegotiating Vendor Contracts: Regularly review and renegotiate vendor contracts to ensure you’re getting the best possible terms and pricing. Consolidate vendor relationships where possible, negotiate volume discounts, and explore alternative pricing models to optimize IT costs without sacrificing the quality of service.

Let PEI Help You Determine Your True IT Department Costs

If you need help trying to organize your IT Department costs, PEI has a free IT Cost Calculator that you can download. We’re always happy to assist if you’re a little lost on how to get started or what to include. We also have considerable experience helping firms revise their IT Department strategies to do more with less.

Tim Krueger, PEI