The idiot index sounds simple: compare the price of an item to the cost of the raw materials. For example, if a component cost $1,000 while the steel for it cost $200, the idiot index would be 5. Elon Musk coined the term at SpaceX, when he was trying to understand why rocket parts were so expensive. He was incredibly strict with his team, insisting they knew which parts had the highest idiot index. As he put it: “If the ratio is high, you’re an idiot.”
While the idiot index is simple enough, applying this idea inside a company gets complicated fast. Office politics are often a driver of high idiot index consumption. For example, when you hear phrases like, “We’ve always done it this way,” you’re probably looking at political incentives in action, and a rising idiot index. Let’s treat this as a thought experiment: imagine that office politics play a minimal factor, and everyone’s acting in good faith and trying to understand the business they’re really in.
We’ll use the original term in this article for clarity, but you could just as easily call the idiot index something less blunt—like the “i2 ratio”—if it better gets your point across.
You Can’t Optimize It All Yourself
In theory, vertical integration delivers maximum efficiency. However, even the most vertically integrated companies (including SpaceX) still rely on vendors to stay strategically focused. Full vertical integration usually isn’t operationally feasible, politically tenable, or compliant with monopoly regulations. So let’s also move forward with this assumption: you can’t do everything yourself.
The goal isn’t to only pay for raw materials for every item, which would mean driving your idiot index down to one. Instead, the goal is to identify the core parts of your business that you need to understand fully, and to reduce the idiot index on them.
IT buyers can set idiot index benchmarks at differing levels in the supply chain. For example, a multinational enterprise IT buyer’s benchmark is a finished box. Conceptually, for this thought experiment, buying the finished box directly from the manufacturer would start their idiot index at a 1. (There are other things that need to be added to a box in order for it to be useful—we’ll dive into an example in the following section.) While hyperscalers might go deeper into the supply chain—including examining the manufacturer’s raw materials and subcomponents, etc.—multinational enterprises don’t need to go that deep. The idiot index can adapt to the buyer’s size and consumption levels.
For example, companies that depend on having a global IT hardware presence deliver their services—such as hyperscaler cloud companies, CDNs, telecoms—have a lot to gain by reducing their idiot index in consuming IT. (By “consuming IT,” I’m referring to factors like procurement partners (i.e., “the channel”), international taxes, trade services (including IOR services), compliance, special economic zones, and more.)
This is already happening to some degree. For example, a hyperscaler’s idiot index for global IT consumption is much lower than that of a typical Fortune 500 company. Still, there’s plenty of room for further reduction. If the average multinational lowered its idiot index on global IT hardware spend, it could save 8–12%—amounting to tens of millions in potential cost savings.
I know this gap exists because I’ve spent the last decade helping multinational enterprises close it. I lead FGX, an IT 3PL that’s spent the last decade supporting clients with their global IT logistics. Over the years, I’ve seen firsthand where global IT supply chains break down. Here’s a quick example.
The Hidden Costs in Your Global IT Supply Chain
Imagine you need networking gear deployed at a data center in India. Assume the gear would cost $100,000 if you bought it from a U.S. distributor. If your operation is set up properly, you would ship in compliance with the MTCTE, use your local entity as an Importer of Record (IOR), and deploy the gear into a Special Economic Zone (SEZ)—avoiding duties and taxes. Let’s break down the raw materials:
- IT hardware: $100,000
- Duties and taxes (reduced to $0 for SEZ): $0
- Logistics: $5,000
- Basic compliance and trade services: $5,000
- Total cost: $110,000
In this scenario, a $110,000 total would reflect an acceptable idiot index. But that’s not how most companies operate.
Most businesses don’t follow this playbook. They end up paying $160,000 to $175,000—or more if they buy the hardware in India. That pushes the idiot index up to at least 1.6 or 1.75, for one simple deployment.
Good vendors help you understand what your idiot index could be. FGX, for instance, often advises clients to serve as their own IOR when they can, which lets them reclaim taxes and avoid extra fees.
How ING Used Private Cloud to Regain Sovereignty
In 2022, ING Bank’s then CTO, Ron van Kemenade, reported that approximately 34% of the bank’s applications were running on private cloud. The shift away from public cloud was the result of ING Bank applying a clear cost rationale (an idiot index) to its infrastructure strategy. For always-on workloads, the costs of public cloud simply didn’t add up. As Wouter Meijs, working as Global Head of Cloud at ING, explained: “For the standard 24x7x365 workloads… we found that a private cloud is more economical than the public cloud.”
Rather than overpaying for scalability and services it didn’t need, ING built a highly standardized, converged private cloud platform tailored to its performance, compliance, and automation needs. Software engineers now provision infrastructure through fully self-service modules, eliminating the middleman and enabling faster, more scalable operations.
Van Kemenade reported ING Bank saved over €100 million in operational expenses the few years prior. ING planned to expand its private cloud footprint toward the 70% mark, while deepening automation, broadening its reusable service catalog, and maintaining a pragmatic hybrid cloud strategy—reserving public cloud for the workloads where it truly fits.
Don’t Let Inefficiency Become the Norm
The idiot index is a sharp, straightforward tool for spotting waste, whether in overpriced aerospace parts or bloated global IT supply chains. Though the term is provocative, the insight is pragmatic: when the gap between base cost and final spend gets too wide, something’s broken.
Most inefficiencies stem from politics, visibility gaps, or inherited processes. However, as ING Bank’s infrastructure consolidation shows, even entrenched systems can be made leaner with clear ownership and structural change. The point isn’t to drive your idiot index to one for every item in your business. It’s to understand your costs, know why they exist, and take steps to reduce inefficiency.