Effective IT Budgeting

Bob Ivkovic, Principal of IT Architects

October 9, 2019

Proper IT budgeting is what makes or breaks an organization. Organizations either optimize their IT services or make a mess of it. IT leaders have a duty to develop a successful IT budget to keep their organization competitive and operationally efficient. IT budgeting can range from a painful annual process to the actualization of a well-crafted IT strategy and roadmap that allows an organization to meet its business needs. The problem is that IT management doesn’t always have a sense for its business needs, or isn’t mature enough in the art of developing and implementing a rock-solid IT budget. They won’t admit it, but many IT managers are uncomfortable with numbers or unable to buy into the justification process of budgeting. Thus, it can be an onerous exercise and there’s a temptation to simply reuse or tweak last year’s budget resulting in arbitrary cuts. And of course, these cuts end up eliminating core IT projects on the critical path of delivering optimal business value.

The IT budget is a strategic tool that allows organizations to drive business priorities, as well as a planning and communication tool which gets business and IT stakeholders within an organization on the same page in terms of meeting its corporate goals and objectives. As the saying goes, “You put your money where your mouth is”, and the IT budget ultimately puts a company’s IT resources behind the plans that are meant to derive IT benefits expected by the business throughout the year.

The Value of an IT Budget

IT budgeting is the process of forecasting the resource spend for IT projects, programs, and operations. This includes software, third-party resources, IT and business resources, hardware products and leases, and the list goes on. IT budgeting can be a recurring annual process, or a one-off completed for IT initiatives critical to the business. A proper IT budget should be the numeric manifestation of an organization’s IT strategy, and include both business and IT stakeholders to affirm corporate goals and objectives for the budget period. An IT budget represents the required funding for all IT projects/programs and IT operations. IT budgets are especially important for organizations making major shifts to alternative technologies or IT deployment models such as migrating on-prem infrastructure to the cloud. IT budgets highlight operational savings and justify deployment of innovative solutions.
In its basic form, an IT budget should forecast spending in terms of ongoing and project expenses as follows:

1. Ongoing Expenses

• • Staff and compensation
    • Recruiting and staff acquisition
    • Internal staff
    • External staff (contractors and staff augmentation)
  • Hardware
    • Servers
    • Client computing resources (laptops, tablets, mobile devices, etc)
    • Network infrastructure
    • Support contracts
  • Software
    • Licensing
    • Subscriptions
    • Development/support/maintenance contracts

   2. Project Expenses 

• • Project A
    • Consulting expenses
    • General and Admin (office space, remote facilities, travel, etc)
    • Hardware
    • Software
  • Project B

IT budgets can also be developed at a subsidiary, departmental, functional area, or business unit level allowing the organization to charge costs back to these sub-organizational entities. Chargebacks add significant complexity to the budgeting process and require financial specialists to roll up costs to various reporting levels comprising the financial reporting hierarchy.
Similar to a project plan or IT roadmap, the budget provides direction and a holistic view of an organization’s funding requirements. It allows the organization to readily determine whether resources are overcommitted in one or several areas of the business, and in the case of departmental or business unit IT budgets, it allows organizations to compare spending across its organizational constituencies. IT budgets can also be validated against industry standards based on industry, company size, area of business, and other organizational characteristics.
IT budgets provide value by prioritizing IT initiatives and validating whether investment costs align to strategic priorities. For example, organizations transitioning to mobile technologies must not only ensure adequate funding for mobility infrastructure and mobile devices, but also funding for hiring and training. IT budgets also identify where money is being overspent with commensurate value in return. A software budget may determine that money is spent on unused or unneeded software licenses or on support expenses for an older version of a software product. An IT budget justifies the deployment of strategic initiatives. One of the more prevalent IT budget scenarios is determining whether expensive infrastructure costs and staffing can be avoided by moving to cloud. The IT budget is a validation mechanism for the IT strategy, not solely an administrative process for managing funds.

IT Budgeting Best Practices

There are some best practices to consider with developing an IT budget. We’re all aware that an IT budget for the coming year is developed after the previous budget and leverages the past budget as a starting point. Furthermore, management monitors spending against last year’s budget, and as variances occur and more effective budget allocations are identified, they are updated within the existing budget or carried into the subsequent budget. Before a budget is due, last year’s budget is compared to current year expenses, and then areas within the budget are identified that could be reduced or reallocated. Effective organizations start promoting their budget early, while communicating and gaining consensus for their IT strategy. A large IT project is more easily justified at budgeting time when everyone knows its purpose, impact, and objectives than if budget season is the first time the project is announced. Thus, if there is agreement on the IT strategy, it’s less likely to dismiss budgetary categories or demand arbitrary reductions, since there is a direct link between the previously agreed strategic imperative and the budget item. And when economic circumstances call for cuts, a mutual understanding of priorities can help identify cuts that will have the least impact on the direction provided by the strategic plan.
If an organization doesn’t already have an IT strategy, it can use the budgeting period as an opportunity to craft a preliminary strategy that’s presented immediately before the budget. In conjunction with a well-conceived plan, the money to execute that plan is less likely to be questioned. Finally, if the organization is required to make significant reductions in various areas of the budget, capabilities that will be affected by the cuts are readily highlighted. The IT budget is not a demand order for money to be spent by IT in any way that it wants to, but rather it’s a prioritization of initiatives and capabilities. Unless the organization has unused capacity, a cut in one area will affect the IT strategy. The IT budget should help determine which capabilities should be cut first and how that will affect the overall organization. The better the organization can map its IT budget to past results, the easier it is to justify future expenditures.