The Hidden Costs of AI: The 1:5 Rule Every Executive Must Know

This article focuses on one of the most critical financial facts every executive should understand when considering investments in large language model (LLM)-based technologies. This fact, confirmed by the experience of global firms like Deloitte, fundamentally changes how AI projects should be budgeted and evaluated.

The 1:5 Rule

For every dollar spent on the technology itself, you need to plan for and invest an additional five dollars in implementation and change management.

The 1:5 rule is directly tied to the implementation of technology. For product-based LLM solutions (e.g., a SaaS product designed for a specific function), the ratio is closer to 1:2 or 1:3, but organizations still require many such products.

This is not a metaphor – it’s a realistic financial model for achieving meaningful results. Failing to consider this ratio is one of the primary reasons why multimillion-dollar AI investments often fail to deliver the expected returns.

What is the “$1” (~17% of the budget)?

This is the visible, easily understandable portion of costs — the tip of the iceberg. It includes:

• Software licenses or SaaS subscriptions
• API and cloud compute costs
• Basic technical integration and setup by the IT department

This part is easy to estimate and is what technology vendors typically sell. At this stage, there’s an illusion of control and predictability over expenses.

What is the “$5” (~83% of the budget)?

This is the hidden-but critically important-portion of the investment that transforms technology into real business value. These funds don’t go toward hardware or code, but toward the most complex asset: people and processes.

Breakdown of the five dollars:

• $1 of 5 – Business Process Reengineering
• Costs: Payments to business analysts and process consultants. Employee time spent in workshops to redesign daily operations. Development of new policies and procedures.
• $1 of 5 – Comprehensive Training and Skills Development
• Costs: Creating customized training materials (as opposed to generic vendor videos). Internal or external trainer fees. The time employees spend learning instead of performing their regular duties.
• $2 of 5 – Change Management and Communication
• Costs: This is the most expensive part. Includes work by professional change managers. Development and execution of months-long communication campaigns to address fears and resistance. “Change ambassador” programs. Creating a psychologically safe environment for learning and adaptation.
• $1 of 5 – Ongoing Support and Iteration
• Costs: Building a “concierge team” for pilot groups. Expanding support team capabilities from “bug fixing” to “efficiency consulting.” Gathering feedback, analyzing usage patterns, and continuously improving both the tool and surrounding processes.

Understanding the 1:5 Rule = A Shift in Management Mindset

This isn’t just a budgeting adjustment. It’s a fundamental shift in how organizations approach leadership, investment, and vendor selection.

Consequence #1: Budgeting Revolution

The traditional IT budget, where 80% goes to technology and only 20% to implementation, is outdated in the age of AI and almost guarantees failure.

Solution: Any AI investment proposal must be evaluated by the CFO and board only if it includes a detailed budget and plan for the “human factor” that aligns with the 1:5 ratio. A $ 500,000 license proposal without a $2.5 million implementation plan is not a viable business case.

Consequence #2: The Vendor Selection Paradox

Most technology companies only sell the “$1”. They lack both the business model and the motivation to take responsibility for the complex and risky “$5”.

Solution: Organizations must stop looking for a “magic pill” from a single vendor. Responsibility for change management and process adaptation lies entirely within the company. It is an internal competency that must be developed. When choosing a technology, the key criterion should be: “Is the vendor prepared to support our internal implementation team?”

Consequence #3: A New Talent and Team Structure

The 1:5 rule proves that successful AI implementation is 80% about operations, change management, and learning, and only 20% about traditional IT execution.

Solution: Organizations must form cross-functional implementation teams where the key roles are played not just by engineers, but by organizational behavior experts, business analysts, and trainers. Finding and developing such talent becomes a strategic priority.

The AI Decision-Making Test

Before signing any contract for AI technology, leadership must answer three key questions:

Budget Question: We see a $100,000 bill for the technology. Where is the detailed plan and budget for the $500,000 needed to ensure real usage and ROI?

Responsibility Question: Who in our organization has the authority, budget, and competence to manage these $500,000 effectively? Do these people or teams currently exist?

Partnership Question: How specifically will this technology vendor assist us in executing our $500,000 implementation plan? Besides technical support, what are they committing to? Are there any real-world examples where they’ve supported organizational change?

‍

‍