Budgeting for IT — and better dialogue
Irrespective of universal acceptance about the importance of technology as a catalyst for business growth and value creation, information technology budgets continue to be under constant scrutiny. One can cite a variety of reasons for this scrutiny including: strained relationship between IT and the business leaders; a lack of understanding about the role of IT; and competing pressures chief information officers face to support the business while dealing with advances in technology and ever changing security concerns.
In a world where every enterprise faces different business environment and competitive pressures, there is no one solution for transforming the IT budgeting process. For example, a web-based enterprise that does all its business through the Internet has very different IT enablement needs compared to that of a traditional “bricks and mortar” business. Similarly, a leading-edge manufacturing company that has a highly automated production environment is very different from a law firm.
However, no matter what, the foremost requirement for a better dialogue on IT budgeting is an understanding and acceptance by the senior leadership team of the vision of the CIO and IT in the enterprise. Naturally, this vision can differ across enterprises. For example, as a shared service, our vision is to be a valued partner of the business to improve customer service for our internal and external customers, provide 100 per cent uptime on all key systems, and protect the enterprise from business interruptions. Our key objectives are:
- Ensuring that business has the right systems and IT (hardware, software, communication) and information management (business intelligence and collaboration) infrastructure.
- Assembling an IT team that is knowledgeable about business needs and the key aspects of IT to ensure cost-effective IT function.
- Keeping on top of leading edge (not bleeding edge) technological advances that can improve the business.
- Supporting business initiatives for revenue improvement and cost reduction through superior IT-enabled systems and processes.
- Demonstrating service excellence and delivery consistency to internal and external customers.
- Demonstrating continued cost efficiency in terms of total IT spending as a percentage of revenue.
There are important takeaways in the vision statement and objectives when decisions about IT budgets have to be made. This framework establishes the role of IT and situates it as a business partner concerned about overall business success, revenue growth and cost reduction, while ensuring that IT has co-operation and an understanding from the senior management team.
Assuming agreement about vision and objectives, the next discussion may be at the tactical level, on how IT budgets for operating and capital expenditures.
At the most basic level, IT budget can be based on a tactical approach where the CIO can categorize the IT spend (including procurement of IT assets) along the following lines:
- Continued business applications and support (enterprise resource planning, customer relationship management, corporate performance management, business analytics, software licensing for business systems, etc.).
- Corporate-organizational support (e.g. desk top support, MS Off ice licenses, life cycle refresh for desktop/laptops/mobile devices).
- Portfolio/project management for “keep the lights on” (KTLO) work and proposed new IT initiatives.
- Discretionary services or projects (required and requested by internal and external stakeholders).
- Core – KTLO (security, storage, DR).
- Investment required within IT department (e.g. network monitoring tools, load balancing, etc.).
One major benefit of this approach is the separation of the IT budget into three components: spending and investment that IT manages on behalf of a business
unit (e.g. a CRM system and associated costs that can be borne by marketing and/or sales department); budget spent on behalf of the entire enterprise (e.g., software licenses for MS Office and ERP system); and budget requirements
by IT department for its own use.
Separating IT budget request in these components and providing a clear separation between the portions of budget that IT manages on behalf of a business unit, and for the enterprise as a whole versus its own budget, ensures a better dialogue between management and IT. Clarity in budget submissions avoids situations where the leadership team thinks the “IT budget is out of control.”
In addition to the tactical approach outlined above, a business-minded CIO must also provide the linkage between high-cost budget items to these criteria so as to demonstrate:
- Strategic alignment;
- Value to customer;
- Improvement in departmental service delivery (and implications on key performance metrics);
- Risk mitigation;
- Leveraging potential for future business initiatives;
- Significance to user/customer base – internal and external.
Since many IT projects are not necessarily amenable to typical net present value analysis, it is easy to detect flaws in the estimation of benefits and this way of thinking about business value allows for a much better conversation within the business, as each project and initiative and the role of IT can be reviewed and validated against these criteria.
This is not necessarily the only approach. Another method may be to link specific items in the proposed IT budget to a specific strategic intent. For example, if the strategic intent is to deepen knowledge about the customer, the budget initiative would implement analytics and business intelligence to enable greater insight into customers’ purchasing behaviors. Some CIOs may even use an information technology infrastructure library service catalogue such as an application development service, application maintenance service, distributed processing service, or network service, and the corresponding cost per unit to justify portions of their IT budgets.
IT budgets will always be under pressure; however, the process for determining the budget can be significantly enhanced by improving the dialogue and providing clarity about the linkage between IT budget and business needs. Since IT is a shared service, it is also necessary for the CIO to articulate the linkage between IT budget request and business value, which obviously means laying out the metrics that will be used to judge IT’s success.
Just as importantly, it is also imperative for an organization’s leadership team to understand the strategic and operational role IT plays in the business’ success.
Originally published in The Bottom Line, February 2015
About Dr. Vijay Jog
Vijay Jog Ph.D. is the Founder and President of Corporate Renaissance Group (CRGroup) – a global firm that specializes in improving enterprise performance through innovative technology driven solutions. He is also a Chancellor Professor at Carleton University where he teaches at the Sprott School of Business. This article is based on his 25 years of experience in dealing with technology and his interactions with CEOs/CFOS and CIOs.
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