IT Costs

IT costs are the expenses an organization incurs for its information technology. They cover everything needed to plan, build, run and support technology, from the salaries of developers and support staff to servers, software licenses, cloud services, network connections and the consultants and managed service providers who help deliver it all. For most organizations, IT costs are one of the largest and fastest-growing categories of spending.

Understanding IT costs is the starting point for IT financial management. Leaders need to know how much they spend, on what, for whom and why, before they can decide whether the spending is appropriate. Because technology costs are spread across many budgets, vendors and accounting categories, simply seeing the full picture often requires deliberate effort, and Technology Business Management was developed in large part to provide it.

Definition of IT Costs

IT costs, also called technology costs or IT spend, are all costs associated with an organization's use of information technology. They include costs in the IT department's budget and technology costs incurred elsewhere, such as software bought by marketing teams or cloud services used by product teams.

IT costs can be classified in several ways. By type, they include labor, hardware, software, cloud services, outside services, facilities and telecommunications. By accounting treatment, they are either operating expenses or capital expenditures. By purpose, they can be divided into running the business and changing it.

Common Categories of IT Costs

Labor is usually the largest category, covering internal staff, contractors and their benefits. Software includes licenses, subscriptions, SaaS and maintenance. Hardware includes servers, storage, network equipment and end-user devices, whether purchased, leased or maintained. Cloud services cover infrastructure and platform services from public cloud providers.

Outside services include consulting, managed services and outsourcing. Facilities cover data center space, power and cooling. Telecommunications covers networks, connectivity and voice services. The TBM Taxonomy organizes these into standard cost pools, which helps organizations classify them consistently.

Direct, Indirect and Hidden Costs

Some IT costs are direct costs of a single application or service, such as a license used only by one team. Many are indirect costs shared across many services, such as data centers, networks and security operations.

Some IT costs are effectively hidden. Technology purchased outside IT, staff in business departments who manage systems part time and productivity lost to system outages are all real costs of technology that rarely appear in the IT budget. A complete view of IT costs tries to capture as many of these as practical.

Lost productivity is the hardest of these to measure. When a slow system or frequent outages cost employees time, the organization pays for that time through salaries even though the cost never appears in a technology account. Some organizations estimate these costs to strengthen the case for investment in better systems, while recognizing that the figures are approximate.

Importance of Understanding IT Costs

Technology spending has grown steadily for decades and now represents a significant share of costs in nearly every industry. Leaders who cannot see and explain these costs struggle to manage them or to justify investment.

Understanding IT costs also supports better decisions about technology itself, from which applications to keep to how to source infrastructure and services.

Control and Accountability

Clear visibility of IT costs lets leaders see where spending is growing and whether that growth is justified. It also supports accountability, because costs can be assigned to the teams and managers who control them.

Without this visibility, costs tend to grow unchecked. Subscriptions renew automatically, unused licenses go unnoticed and infrastructure is over-provisioned, because no one has a clear view of what is being spent and why.

Linking Costs to Value

Knowing what technology costs is only useful when compared with what it delivers. By connecting IT costs to the services and business units they support, organizations can assess whether each investment is worth its cost.

This link supports conversations between technology and business leaders about priorities. Instead of debating the total IT budget, they can discuss the cost and value of specific services and decide where to invest more or less.