How to Communicate Your IT Budget, Part II

Building the Budget

The precise mechanics you use to develop the budget is beyond the scope of this article, but I will address some key practices I think are worth incorporating in your approach.

Clearly Define Ownership

Begin with a core issue: how does the organization handle IT expenses?  Are IT expenses centralized within one budget or decentralized?    Seldom is this a black-and-white answer, but a detailed understanding is critical. 

Consider for example service subscriptions.  Imagine your finance organization uses a service to help with state income tax rates or expense reporting.  Do they budget for that service?  Does that service index for headcount, does it include support, and how are IT costs impacted by that service?

Almost every area of the organization can have embedded IT expenditures, often without the budget owner's recognition.  Even IT can suffer the same issue, consider all the small "tools" developers and system administrators leverage.  Another example is online training systems which often reside in multiple organizations.  These are the type of issues that need to be explored and understood. 

Having a clear and aligned understanding is essential.  First and most importantly you what to avoid duplicating line items or even worse, missing something.  A related factor is how such services can indirectly impact other elements in the IT budget.  For example, training systems can use a lot of network bandwidth hence influence those line items in the core IT budget.

On a larger scale, it can be difficult to estimate the organization’s overall IT budget when the budget is decentralized.  And of course, decentralization can complicate the purchasing (category management) and enterprise architecture efforts.

Decentralized budgets can and do work.  However, they must go together with clear governance process to avoid creating technological anarchy.

Taking Your First Step

I like to begin with a “back-of-the-envelope” estimates.; a process that is often surprisingly accurate and provides an indication if you missed something.  Look at historical numbers and note any variances.

Bottom-up budgets and supporting basis of estimates (BOE), can be helpful in assuring your foundation.  Although you may elect not to do this every year, I recommend you at least do it during your first cycle and then again from time-to-time to ensure you are not carrying phantom expenses or missing other points.

Make sure you understand some of your critical reoccurring expenses.  For example, what is the cost IT incurs for each new employee?  Of course, it will vary depending on their role and associated equipment and applications, but calculating this number is critical. 

In addition to the new employee cost driver, these employees will generate legacy employee costs in the future for such thing as hardware refreshes, licensing, support, and usage costs are some of the central items. 

In almost all organizations, personnel (headcount) cost are the most significant expense.  Having the ability to speak authoritatively about the impacts of headcount changes on IT can be very impactful. 

When you can explain how the addition of X number of people will impact your budget you can illustrate your point very clearly.

Budget Attributes – Think About the Questions You Need to Answer

Consider designing your IT budget as you would a database.  Understand what questions/insights you will need and ensure you have sufficient information (fields) to support those queries.

In addition to the standard budget line item attributes (fields) such as description, budget category, amount, WBS, you will likely find additional attributes helpful.

As an example, some key ones might include:

  • Business Area: What group(s) are driving this expense? (e.g. Manufacturing, HR, sales, marketing, quality, IT).
       
  • Activity: What activity is driving this line item (Business System Operation/Support, New Business System, Utility-driven costs, IT Operations).
        
  • Cost Driver: What “force” drives this line item.  Is it a business system, IT expense, new system development, headcount growth, or usage.
        
  • Cost Type: The idea behind this attribute is to understand how much practical control you have over it.  For example, is this expense already committed via a contract? Is it driven by usage? Is it core IT required to "keep the lights on"?  Over time, you can impact every line item, but in practical terms, these are not costs that can be quickly changed and/or are under IT's direct control.
          
  • Owner: Consider a “line owner” attribute.  Typically, this is the person on your team accountable for developing the line and associated basis of estimate(s).  As your team size increases, establishing a line owner becomes increasingly valuable.

Validation – Pressure Testing

Validating your budget can be a tough goal, but it worth considering in advance.  How can you confirm the accuracy of your estimates and spot missed or duplicate entries?

Historical estimates can provide some guidance along with socializing with stakeholders. Next, go back to the envelope calculations previously discussed.  If you know there are X new systems, headcount change of Y, and utility rate change of Z; you should be able to have a very rough estimate at least relative to last year’s budget.

Validation can allow you to preview your budget and avoid nasty surprises.  The problem is that everyone is busy with budgets at the same time.  So, engaging with your peers with focused questions is essential.

In Part III, examples of how to present this information will be outlined.



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