The IT Budgeting Process

Chapter 7

7-1© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Problems with IT Budgets

Takes too long.

Process may be disconnected from the business objectives.

Rigid adherence to annual plans may inhibit responsibility for performance.

May inhibit the business needs to be flexible. 7-2

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Fiscal IT Budgets

Capital Budgets – consist of large expenses spread over multiple years.

CIOs are limited in what can be capitalized.

Operating Expenses – consist of the annual costs of running the business.

7-3

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Capital Budgets

IT Expenditures that may be capitalized include:

1. Project development2. Infrastructure3. Consulting fees4. Major technology purchases

7-4

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Capital Budgets Continued

IT capital expenses may be managed centrally (from a corporate account)

or

IT capital expenses may be allocated to business units that use the service

7-5

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Functional IT Budgets

Used by IT managers as spending plans

Spending plans are based on:

Operations costs

Strategic investments

7-6

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Operations Costs

Costs to “Keep the Lights On”.

Includes maintenance costs, computing and peripheral functions, in-house support and outsourced support.

May include operating and capital costs.

7-7

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Strategic Investments

Consists of “New” technology spending.

May include business improvement initiatives, business-enabling initiatives to transform company operations or new technology business opportunity projects.

May be classified as capital or operating costs.

7-8

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Cost Allocation

The process of allocating IT costs to others’ budgets.

Allocation may be based upon a formula using factors such as size of business unit, prior year spending, or percentage of use of IT services.

May lead to artificiality in allocating development resources.

7-9

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Effective IT Budget Factors

1. Fiscal Discipline

2. Strategy Implementation

7-10

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Fiscal Discipline

“IT Costs too Much”.Demonstrating the realities of business finance has become a significant part of IT leadership.IT budgets may be used to limit or manage demand.Used to hold IT leadership accountable for what it spends.

7-11

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Strategic Implementation

Budgets link long-term goals to short-term execution through the allocation of resources.Where IT dollars are spent can impact corporate performance.How discretionary IT dollars are spent impacts project outcomes.The budget process reinforces strategic decision making.

7-12

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

The IT Budget and Planning Process

7-13

Figure 7.1

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Corporate Processes

Establish corporate fiscal policy.

Establish strategic goals.

Set IT spending levels.

7-14

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Factors that Affect IT Spending Levels

Number of competitors

Uncertainty

Diversification of products and services

Affordability

Growth

Previous year’s spending

7-15

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

IT Processes

Set Functional IT Budget – determine what is spent on IT operations and strategic investment.

Set the Fiscal IT Budget – transform the functional IT budget into operating and capital spending categories.

7-16

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

IT Budgeting Best Practices

1. Appoint an IT finance specialist

2. Use budgeting tools and methodologies

3. Separate operations from innovation

4. Adopt enterprise funding models

5. Adopt rolling budget cycles 7-17

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

IT Finance Specialists

Understand IT costs and drivers.

Can manage the translation between the IT functional and fiscal budget.

Can develop business cases for new projects.

7-18

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Use Budgeting Tools and Methodologies

Link IT Budgets to IT Plans.

Link IT Budgets to Corporate Strategic Plans.

Link IT Budgets to Resource Strategies.

Link IT Budgets to Performance Metrics. 7-19

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Separate Operations from Innovation

Split operations costs from new project development costs.

Provide visibility to business unit managers to better understand true costs to deliver and service new systems and ongoing services.

7-20

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Adopt Enterprise Funding Models

Separates centralized core IT services from decentralized business unit services.

Used to develop IT operations budgets at an enterprise level.

7-21

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Adopt Rolling Budget Cycles

IT Plans and budgets need updating more than once per year.

Quarterly eighteen month rolling plans enable new projects to be funded more quickly.

7-22

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Conclusion

The IT budget process can be a critical lynchpin between many different stakeholders: finance, business units, corporate strategy, and IT.

IT budgets play a key role in implementing strategy and controlling costs.

7-23

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall 7-24