IT budgeting can range from a painful annual process to realizing a carefully crafted IT strategy and roadmap. It can be a difficult exercise for an IT executive uncomfortable with numbers or reluctant to endure the justification process that accompanies budgeting. The temptation may be to adjust last year’s budget or give in to arbitrary cuts.
We’ve assembled this guide to help IT leaders navigate the budgeting process and leverage it as a strategic tool to drive their priorities. Also available as a free PDF, the guide is designed to ease the burden of IT budgeting and help you understand how to use your budget as a planning and communication tool.
Executive summary
What is IT budgeting? Budgeting is the process of allocating monetary resources to various IT programs. These could range from recurring expenses such as 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 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 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 help prepare the budget. The budget defines the activities your employees and consultants will engage in during the year, so it’s a critical document for taking your priorities from concept to execution.
What are the main components of an IT budget? IT budgets must include the full range of expenditures incurred across modern technology estates — from traditional hardware and software costs to growing cloud infrastructure and innovation spending, including in areas like artificial intelligence.
What are IT budgeting tips and best practices? A well-developed budget should be the numeric manifestation of your IT strategy well-communicated and understood by your peers. When done right, budgets should affirm what’s already been understood and receive approval with minimal pushback.
How can data help refine IT budget decisions? Data should play a key role in engaging business stakeholders in your budget narrative, informing and shaping IT budgets, and acting as a line of defense when important budget measures are under threat.
How often should IT budgets be reviewed or updated? IT budgets will always be part of a wider business’s annual budgeting cycle, but they should be viewed as living documents rather than static to ensure flexibility as circumstances change. Regular quarterly reviews are recommended.
SEE: Budget planning tool (TechRepublic Premium)
What is IT budgeting?
An IT 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.
Every line on the budget should tell a story related to your IT strategy. Effectively communicating and sharing this strategy will transform the budgeting process into adjusting amounts rather than justifying entire spending categories.
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 willingly migrate into a periodic budgeting process, as IT expenditures that were once simply spent as incurred 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. Regarding department-level IT budgets, you can 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 perform this on the most sophisticated and complex IT budgets to see whether you’re spending more or less than peers in a particular area.
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 your spending on unused or unneeded software licenses or support expenses for an older tool version. Your budget can also serve as justification for strategic initiatives. Expensive infrastructure costs are easy to 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, the budgeting process is a good place to start investigating areas for improvement that will be cornerstones of your first attempts at more strategic IT management.
Whom does IT budgeting affect?
IT budgets directly affect the people and initiatives you’re delivering. 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 external partners, ranging from software vendors to strategy consultants. Most external partners are happy to help you through the budgeting process. However, 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 solve every budgetary problem 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 use them as a resource. But be aware that the perspective that’s provided may not always directly align with your interests.
What are the main components of an IT budget?
Generally, an IT budget can be divided across various categories, depending on the complexity and sophistication of your department and its structure. As well as the all-important personnel costs companies will incur to bring the skills they need into their IT operations, an IT budget will usually cover:
- Hardware costs, such as servers and workstations.
- Software costs, including licensing fees and development tools.
- Cloud and hosting service costs.
IT budgets must also consider network and communication costs, growing cybersecurity expenditures, and data management and IT support costs. They should also set aside budgets for contingencies or miscellaneous surprises that are bound to arise.
Increasingly, businesses have to think carefully about creating IT budgets that balance the maintenance of their existing IT estate with the need for business innovation and transformation. For example, depending on the size of an organization, research, and development may form a critical part of a budget, while important funds may need to be set aside and directed to specific projects or initiatives designed to capitalize on the business advantage or respond to changes in the market, such as investment in artificial intelligence use cases.
An IT budget should include only those components a business has determined are important to its business or industry rather than being too swayed by trends or hype.
Generally, an IT budget is structured to present and account for expenditures across these categories. At a basic level, you could structure your budget under your key headline cost items (like personnel), with each sub-category “rolling up” to the parent to create a total budget (like recruitment, internal staff wages, and so on).
More sophisticated companies may allocate the elements of their IT budget to the various IT support departments and even charge costs to that department. Companies must also be aware that chargebacks add significant complexity to the budgeting process and should not be undertaken lightly.
What are IT budgeting tips and best practices?
When creating an IT budget:
- Consider how deeply the budget can affect your organization at all levels and put the appropriate time and diligence into its creation.
- Develop your budget immediately after the previous budget is approved, leveraging the past budget as a starting point. The more closely you can map your budget to past results, the easier it is to justify future expenditures.
- Monitor your spending against last year’s budget. As you see variances or ways to allocate funds more effectively, use them as input to an ongoing draft budget.
- Review last year’s budget and this year’s expenses to identify areas that could be reduced or reallocated. It will be easier to justify an optimized budget than one loaded with unnecessary items.
- If you don’t already have an IT strategy, use the budgeting period 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.
- Highlight the capabilities that will be affected by budget cuts.
Some organizations demand more diligent defense of a budget than others. If you work for an organization that demands justification of every line item, 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. 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.
SEE: All of TechRepublic’s cheat sheets and smart person’s guides
How can data help refine IT budgeting decisions?
Data can be a guiding light in the IT budgeting process and a helpful defense against cuts.
Using data analytics, businesses can analyze historical spending on big items like the cloud or identify usage metrics across on-premise infrastructure or the ecosystem of SaaS systems. IT teams can use data to measure the return on investment from IT projects and provide evidence of security incidents and software vulnerabilities, which can be an important part of cybersecurity risk assessments.
How often should IT budgets be reviewed or updated?
To gain traction with stakeholders across a business, IT teams must ensure they are flexible when there are emergent needs, such as new cybersecurity threats or new technology tools that require more funds. Ideally, IT budgets should be seen as living documents to be monitored and adjusted throughout a financial year to ensure they stay on track and tweak as required.
Organizations will often choose to conduct regular budget reviews over a shorter time period, such as quarterly reviews, so they can remain financially nimble and adjust for unforeseen expenses or reallocate funds as necessary. As existing budgets are reviewed, IT leaders must also monitor the next budgeting cycle to be prepared ahead of time.
