IT Budget Management: Setting Direction and Strategy
Effective IT budget management — once seen as a necessary, but not strategic, activity — is now a critical capability for CIOs.
Not just managing costs, IT executives also need to understand their IT cost structure and drivers as they look to expand the scope of optimization from IT cost to IT cost and value.
Managing the IT budget involves more than merely holding spending within set targets and cost-cutting when possible. Best-in-class enterprises continually seek to improve the price performance of IT, as well as driving more business value from their IT investments.
Historically the safe bet has been to look at the current budget and take guesses at which areas are most likely to be approved. IT leaders should eschew the games and take a more measured approach. Here are five places to look for direction when assembling your IT budget.
Set the baseline
Every budget needs to start somewhere, and beginning with a known quantity provides a basis for review. But this year take a critical look at your budget with an eye for issues that could use serious changes. Try to approach your review from an outsider’s vantage point, thinking about what is working and what should have worked better in addition to what should never have been included. A fresh approach may provide insights that make a difference in your overall budget and free you from legacy opinions you either inherited or talked yourself into. If additional funding is needed to accomplish your new directions, the fact that you didn’t merely revise the previous budget may give your request more credibility.
Generate discussion with your staff about their priorities and where they see the need for change. Don’t overlook things like training that may have been reduced or eliminated under previous tighter budgets. Look beyond the obvious conclusions and work out priorities based on how they see their work being improved or changed. Whether you have stand-up meetings or formal discussions is less important than that you engage in meaningful conversations. Try to uncover trends they observe and how they see them fitting into what they do concerning the company’s mission. Incorporate your findings in your budget planning with specifics.
Part of the CIO’s job is to understand the business of the enterprise. That includes the initiatives being executed and planned by business units. Budget planning is the appropriate time to engage with peers and higher level executives to make sure your current understandings are valid. But it’s also an excellent opportunity to brainstorm with them and discover upcoming or unstated projects they may be contemplating. Bring your knowledge of current and future technologies into the conversation as a way to explore future possibilities. Take the opportunity to enlist project sponsors and advocates as finalized budgets take shape.
Even if this is your umpteenth time putting together a budget, ask for help. There are experts inside your organization who deal with these issues all the time. You may be an Excel expert, but there are nuances about budgeting that may be specific to your company and may have escaped you. There may be changes in the formatting and categorization that need to be put in place. Even if you do know everything about your company’s budgeting process, asking a few questions of the right players can help build credibility and assure you’re on the right track. If you are unable to ask for help internally, or if you haven’t worked on budgeting before it may be time to consider outside help. Local higher education institutions may offer budgeting classes that, while they won’t address the specifics of your company, can get you a long way toward understanding the process.
Mind your priorities
Budget time is the right time to reevaluate your operational priorities. Don’t fall into the trap of thinking an across-the-board increase will do the trick. It may get your budget passed, but it won’t necessarily create growth or optimize your operations. Look deep into your findings from the previous suggestions and devise a revised or even wholly new budget structure that meets your needs for next year. Prioritize your changes based on what you’ve learned in these exercises and be prepared with justifications for the changes you’ve instituted.
»Read more: The CIO's guide to IT cost optimization
4 Strategies to IT budget management
Follow the money
From data centers to application development and application support, baseline current IT spending to identify the most significant opportunities for cost savings and value optimization. It is critical to have the right roles and processes to effectively run the business of IT with best-in-class enterprises seeking to improve IT process maturity in areas like service management, financial management, vendor management, and portfolio management to ensure that they are managing IT efficiently and effectively.
Use benchmarks to identify areas of opportunity
An enterprise might track the cost per terabyte of storage over time and use that metric as a proxy for price performance. If the enterprise found that its unit cost per terabyte was higher than the average, then the next step would be to assess whether it was utilizing current best practices and new technological innovations to drive down storage costs.
Manage fixed versus variable costs
Identify how budget management initiatives will impact the IT budget, which is mostly composed of fixed costs. Gartner’s research finds that in the typical enterprise, the percentage of the IT budget that is “variable” is generally about 25%. While it doesn't consider staff costs to be a variable cost, it does include contract labor as a variable.
Optimize costs and value
While it is essential for CIOs to execute disciplined cost management to ensure they provide business capabilities efficiently, it's imperative that you adopt new approaches to keep enterprises competitive. Too much focus on managing IT as a cost center, and not enough on using IT to generate business value, could soon lead to a crisis in which underfunded IT organizations cannot compete in a digital world.
On average, IT spending is only 4% of total enterprise operating expenses, or 3% of revenue. The real business value of IT comes from reducing total enterprise costs via automating business processes, delivering the right information to enable better decisions, and changing business models to increase revenue.
A framework to optimize technology costs
You know there are opportunities to save, but your team struggles to identify them and gain buy-in to make the necessary changes. Attempts at optimization (such as infrastructure consolidation, application rationalization, cloud adoption, vendor consolidation, or offshoring) often overpromise and under-deliver because they lack hard data and rely too much on instinct.
Every single business action requires an IT action. There is no such thing anymore of those two being separate. TBM and the ability to cut cost is helping us switch those dollars to where they’ll matter the most—to the business.
—Philip Bame, VP of Global Delivery IT, HPE
In our experience, there are four ways to optimize technology costs and support IT budget management:
- Scrutinize to tie up loose ends. For IT cost optimization purposes, financial loopholes are defined as inaccurate applications of ITFM principles.
- Economize to eliminate waste. For IT cost optimization purposes, waste is defined as having more of something that is needed.
- Rationalize to avoid duplication. For IT cost optimization purposes, duplication is defined as having two or more of something that does the same job—without any justifiable reason for having duplication
- Commercialize to curb demand. For IT cost optimization purposes, demand is defined as the business’s consumption of IT services.
The four ways are generally ordered from easiest to hardest—getting your IT financial management (ITFM) principles in order is a lower lift than applying market forces to influence demand.
The path to effective IT budget management is through this framework of optimizing technology costs.