IT budgeting can range from a painful annual process to the actualization of a carefully crafted IT strategy and roadmap. For an IT executive who is uncomfortable with numbers or loathe to endure the justification process that accompanies budgeting, it can be a difficult exercise, and the temptation can be to simply tweak last year's budget, to succumb to arbitrary cuts.
To help IT leaders not only endure the budgeting process, but to use it as a strategic tool to drive their priorities, we've assembled this guide (which is also available to download as a free PDF). It should make budgeting less painful and help you understand how to use your budget as a planning and communication tool. As the saying goes, "You put your money where your mouth is," and your budget ultimately puts company resources behind the plans you've been articulating through the year.
- What is IT budgeting? Budgeting is the process of allocating monetary resources to various IT programs. These could range from recurring expenses like hardware leases and staffing to expenses dedicated to a fixed-duration project or initiative. In some companies this is primarily an annual exercise, while other companies might demand budgets for each initiative as it arises.
- Why does IT budgeting matter? Budgeting is obviously important, as it provides the funding to keep your department running. Beyond just "keeping the lights on," your budget is an important tool for identifying and executing the IT initiatives that are crucial to your department.
- Whom does IT budgeting affect? While IT budgets are usually presented and overseen by IT leaders, everyone from line managers to consultants could have a hand in preparing the budget. The activities your employees and consultants will be engaging in during the year are defined by the budget, so it's a critical document for taking your priorities from concept through to execution.
- What are IT budgeting tips and best practices? A well developed and presented budget should be the numeric manifestation of your IT strategy that's well communicated and understood by your peers. When done right, budgets should merely affirm what's already been understood and should get approved with minimal pushback.
SEE: New equipment budget policy (Tech Pro Research)
What is IT budgeting?
In the worst case, an IT budget is a wish list of funding for every conceivable project and technology that's expected to be reduced, trimmed, and rejected. In some companies, a reasonable budget is developed and then doubled or tripled to try to "game" the budgeting process and garner what's actually needed. Your approver, whether he or she is in IT or from the finance side, is probably on to this game, has a general idea of what's appropriate, and will probably impose increasingly draconian cuts as you respond with increasingly ridiculous increases.
Rather than an attempt to secure the maximum pile of cash, the budget should be regarded as a manifestation of your IT strategy. If you've been communicating a strategy of migrating infrastructure to the cloud and highlighting the operational savings, your budget should reflect those savings and use them as justification for increased project expenses elsewhere. In short, every line on the budget should tell a story that maps back to your IT strategy. If you've done a good job of communicating and sharing that strategy, it will shift the budgetary process to tweaking amounts rather than justifying whole categories of spending.
Generally, an IT budget can be divided across various categories, depending on the complexity and sophistication of your department and its structure. At a basic level, you could structure your budget as follows, with each subcategory "rolling up" to the parent to create a total budget:
More sophisticated companies might attempt to allocate the elements of their IT budget to the various departments or organizations that IT supports and even charge costs back to that department. While chargebacks are beyond the scope of this discussion, be aware that they add significant complexity to the budgeting process and should not be undertaken lightly.
- Quick glossary: Corporate budgeting (Tech Pro Research)
- IT budgets set to grow in 2018, driven by AI, IoT, VR adoption (TechRepublic)
- The art and science of creating a killer IT budget (ZDNet)
- Five major IT budget mistakes you never want to make (ZDNet)
- Ten budget-busting IT disasters you should learn from (ZDNet)
Why does IT budgeting matter?
Without a budget, you may be forced to request and justify every IT expenditure as it arises, which makes for significant unnecessary overhead. Smaller organizations may find themselves willingly migrating into a periodic budgeting process, as IT expenditures that were once simply spent as incurred, or justified with a 30-second hallway conversation, blossom into significant IT spending that can be consolidated and made more transparent through a budgeting process.
Like a project plan or IT roadmap, the budget provides direction and a holistic view of your department and its funding requirements. It lets you quickly determine whether resources are overcommitted in one area or another, and in the case of department-level IT budgets, lets you compare what you're spending versus similar departments. With the help of benchmarking organizations, consultants, or simply a call to a peer at another company, you can even perform this on the most sophisticated and complex IT budgets to see whether you're spending more or less than peers on a particular area.
Rather than just a wish list for funding, consider the budget as a tool to prioritize your IT initiatives and validate that your monetary investment matches your strategic priorities. If one of your strategic imperatives is that you retool your organization to support a shift to mobile apps, but your hiring and training budgets are minuscule, you've likely set yourself up for failure before you've even started. Similarly, your budget lets you quickly identify areas where you may be overspending. A massive software budget might reveal that you're spending on unused or unneeded software licenses or on support expenses for an older version of a tool. Your budget can also serve as justification for strategic initiatives. Expensive infrastructure costs are easy support for a move toward cloud infrastructure, just as excessive external staffing expenses might justify additional hiring.
Instead of looking at the budget solely as an administrative process, regard it as a validation and support tool for your IT strategy. If you don't have a formal or informal IT strategy in place, the budgeting process is as good a place as any to start investigating areas for improvement that will be cornerstones of your first attempts at more strategic IT management.
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- The battle for the IT budget: Operation versus experimentation (ZDNet)
- How should CIOs deal with legacy technology? (ZDNet)
Whom does IT budgeting affect?
IT budgets may seem narrowly focused when you're doing them at the departmental level, or they may seem disconnected from the thousands of staff who support your efforts when you're a Fortune 500 CIO. But they directly affect the people and initiatives you're able to deliver. Like it or not, they're also subject to the constraints of the organization as a whole. A high performing organization, with the perfect set of initiatives and a correctly sized budget, may still be subject to painful and arbitrary cuts if the overall organization is suffering.
Budgets also affect your external partners, ranging from software vendors to strategy consultants. Most are more than happy to help you through the budgeting process; however, it's important to remember that they have a significant vested interest in the portion of your budget that affects them and tend to see your needs through the eyes of the solution they bring to the table. A cloud provider will see every budgetary problem solved by shifting funding "to the cloud," just as a consulting provider will see the answer to every problem in a dramatically increased consulting services budget. These organizations can provide valuable benchmarking and planning assistance, so certainly use them as a resource; just be aware that the perspective that's provided may not always directly align with your interests.
- Hiring kit: IT finance manager/budget director (Tech Pro Research)
- The innovation dilemma: Who really calls the shots on new tech? (ZDNet)
- CIOs must argue for smarter, more strategic technology investments (ZDNet)
- IT as profit center versus cost center: State of the argument (ZDNet)
- Using the IT budgeting process to your advantage (ZDNet)
What are IT budgeting tips and best practices?
Consider how deeply the budget can affect your organization at all levels and put the appropriate time and diligence into its creation. It's easy to see budgeting as a painful administrative process; however, it truly is the financial manifestation of the strategy and direction your department or organization will take over the coming year. Ideally, the process of developing your budget begins immediately after the previous budget is approved and leverages the past budget as a starting point. Monitor your spending against last year's budget, and as you see variances or ways to allocate funds more effectively, use them as input to an ongoing draft budget.
Several months before your budget is due, review last year's budget and this year's expenses and identify areas that could be reduced or reallocated. When you arrive at the budgeting cycle with activities already launched to reduce extra "fat," it will be easier to justify a budget that's optimized rather than larded up with unnecessary items.
Some organizations demand more diligent defense of a budget than others. So if you work for an organization that demands justification of every line item, it's especially important to start selling your budget before you even write the first line, while communicating and gaining consensus for your IT strategy. A massive 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 anyone hears of it. If you've gained agreement on your strategy, it's harder to simply dismiss budgetary categories or demand arbitrary reductions, since there should be a direct tie between the previously agreed strategic imperative and the budget item. When you must make cuts, a solid understanding of your priorities can help identify cuts that will have the least impact on the effectiveness of your strategic plan.
If you don't already have an IT strategy, use the budgeting period as an opportunity to craft a "light" strategy that's presented immediately before your budget. If you have a cohesive and well-conceived plan, the money to execute that plan is less likely to be questioned. Finally, if you are required to make significant reductions in various areas of your budget, highlight the capabilities that will be affected by the cuts.
As you review the budget, remember that rather than just a pot of money for your department, it's a prioritization of initiatives and capabilities. Unless your organization is rife with unused capacity, a cut in one area will affect an element of your IT strategy, and there's no harm in collaborating with the approver to determine which capabilities should be cut first and how that will affect the overall organization. The more closely you can map your budget to past results, the easier it is to justify future expenditures.
- Enterprise IoT calculator: TCO and ROI (Tech Pro Research)
- Simplify IT budgeting year-round with our template and tips (ZDNet)
- 10 do's and don'ts for creating your IT budget (TechRepublic)
- New Equipment Budget Policy (Tech Pro Research)
- When it comes to IT budgets, bigger isn't always better (ZDNet)
- 10 ways to shrink your IT budget without killing progress (TechRepublic)
- 10 must-have IT budget items (TechRepublic)
- 10 ways to secure funding for your next IT project (ZDNet)
- What to do when projects are always over budget (TechRepublic)
- Start planning for year-end now by assessing initiatives, staff, and yourself (TechRepublic)
- How to manage a departmental budget: a guide for beginners (TechRepublic)
Note: The article was first published on Oct. 19, 2015.
Patrick Gray works for a global Fortune 500 consulting and IT services company and is the author of Breakthrough IT: Supercharging Organizational Value through Technology as well as the companion e-book The Breakthrough CIO's Companion. He has spent over a decade providing strategy consulting services to Fortune 500 and 1000 companies. Patrick can be reached at firstname.lastname@example.org, and you can follow his blog at www.itbswatch.com. All opinions are his and may not represent those of his employer.