Communicating the Budget in Business Terms

When communicating the IT budget to business executives, organize your presentation into business-oriented subject headings rather than using technical categories. Doing so creates a sense of business ownership, which defuses much of the concerns business executives frequently have regarding the need to invest in expensive technology. Communicating the IT budget in business terms helps executives feel that they have control of the decisions.

If you do not allow enough time for developing the IT budget, you may be tempted to overlook the communication step in the push to complete and submit it. Communication is paramount and must take place throughout the year, not just at budget time. However, as stated at the beginning of this chapter, the budgeting process provides an excellent opportunity to communicate with and educate the organization. The CIO must provide transparency in costs. Many business executives do not understand the IT assets that the business owns. Furthermore, they often do not understand the costs and resources required to operate the systems on an on-going basis. Until they have a basic understanding of the applications, infrastructure, organization, and processes, they cannot have an appreciation for the budget or savings opportunities.
It is time-consuming to present the IT costs in a way that makes sense to the business. However, it is well worth the effort. Below are examples of steps that can be followed to present an IT budget in terms that speak volumes to business executives:
  1. Show a single picture of the complete inventory of business applications. Although this typically includes many applications, show it in groupings that make sense to the business, which could include arrangements by business unit, function, process, or organization. Figure 1 shows one example. It is extremely helpful to identify each service that IT provides as well as the primary outcome of the program or service. Work with the business to understand how critical the program or service is to the business.

     
    Figure 1: Business application inventory sample
  2. Show a single picture of the complete inventory of infrastructure components. The infrastructure consists of components beneath the surface that the business often does not recognize. Components may include desktop applications; server and database software; and operational, systems management, and development tools.Figure 2 provides one example.

     
    Figure 2: Infrastructure inventory sample
  3. Assemble a spreadsheet that includes an inventory of each application. Identify the costs associated with the application, such as:
    • Annual maintenance and support costs.
    • License growth, and expansions necessary in features and function.
    • Fractional full-time equivalents (FTEs) indicate portions of an individual's time over the course of a year for maintenance and support or enhancements. Ensure the time-reporting system captures FTE information by application. Multiply the FTEs times an average internal labor cost with fringe costs.
    • Annual outsourcing or consulting support costs.
    • Any infrastructure costs that are directly attributable to the application are more difficult. This is typically a portion of costs. If you use an Oracle database or a server in 10 applications, divide the cost of the Oracle database, server maintenance, operating systems software, etc., across the applications either equally or by transaction volume. However, you may have to explain that not all costs would go away if you eliminated the application due to the sharing of infrastructure items.
    The total FTEs across all applications would equal the total FTEs in your organization for maintenance, support, and enhancements. Figure 3 shows one example. Also, use this spreadsheet to capture other critical information about each application, such as:
    • Name
    • Description
    • Business category
    • Custom or vendor package
    • Vendor
    • Amount of customization
    • Release installed
    • Current market release
    • Tool set language
    • Database
    • Hardware platform
    • Operating system platform
    • Major interfaces
    • Year installed
    • Year of last major upgrade
    • Primary business function using the software
    • Estimated number of users
    • Primary business contact
    • Primary IT contact
    • Secondary IT contact
    • Application health indicator

       
      Figure 3: Inventory spreadsheet sample
  4. Show the costs by business blocks or categories used in Step 1. Figure 4 shows one example. There are many different ways to show these costs, but the objective is to assign the total IT costs as much as possible to individual business areas or functions as shown in Figure 5.

     
    Figure 4: Cost by business function sample

     
    Figure 5: Summary of IT costs by business function
Although it takes some work, presenting the costs in this way provides the business with the knowledge to evaluate the benefit of each application. Use the diagrams produced in the process described in number 4 above to analyze your applications environment for cost savings. It can be an eye-opening experience for business executives to understand the true cost of the applications. It also communicates that IT is not a free resource. The analysis helps to build the case for replacing or eliminating maintenance-intensive or costly applications. Reducing these business application costs would mean ideally that the business could decide which of the services it feels comfortable reducing or eliminating.
IT executives always need to communicate the value of IT to the business—which is even more important in challenging economic times. A CIO risks becoming unemployed if senior business management does not understand how IT contributes to the business strategy. The CIO must have excellent communication skills and good rapport with other business executives. At one company, after the CIO had finished explaining the current IT environment in business terms, the business executives gave him a standing ovation. They claimed it was the first time they really understood what it was that they had been paying for over the years.

COMMUNICATION | The Budgeting Process

Your Relationship with Finance and the CFO

Budgeting can be a source of frustration and is often one of the least-liked aspects of running IT. Working with CFOs and financial analysts can feel like working with someone who speaks a foreign language, which mirrors the way others feel when working with some IT individuals. In some organizations, the relationship between the CIO and the CFO can be a tenuous one. The reason for this inherent tension is not apparent as on the surface both individuals have the company's best interests in mind. However, if you dig deeper, the two often have very different objectives. The CIO is trying to get funding for IT investments. The CFO is trying to control spending and ensure company investments generate the proper value. The CFO must determine which budget managers are proposing honest plans and which are trying to play the budgeting game. As a result, CFOs are tasked with being skeptical about your budget. Do not take it personally.
Therefore, a key tip for surviving the IT budgeting process is to get to know your CFO and financial department staff, to understand what they want to see and how they want to see it. Learn their hot buttons. Discover how to work with them, not against them. Finance is IT's best ally in a time of need. Look to them for advice on the budgeting process and on managing IT costs. To do that, you have to be either financially astute or willing to enlist the help of others, or both.
Top Tip : Communicate to minimize surprises

"Over communicate to minimize surprises. Be transparent. Have a dialogue with the executives to ask them if you are focusing on the right things. The executives are your customer. Eliminate technical speak; communicate the business value."
—Randy Witt
Restaurant Technologies

Top Tip : Be financially savvy

"Alignment is a great concept, but you need more. Know the business units and how they operate, especially their financial goals and how they achieve them. Understand how the economy affects the company. Be financially savvy. This knowledge will help establish your business credibility and help set you up for alignment."
—Scott Simerlein
North American
Membership Group Inc.

Having a financial resource within IT is a tremendous help. If you do not have a financial resource available that assists with IT issues, consider cost justifying a position. Particularly in cost reduction times, this can save significantly more money than it costs by helping with the financial management and control of the IT budget.

Surprises or Assumptions Hurt Your Credibility

In general, CFOs do not like surprises. When it comes to surprising the CFO, CIOs have plenty of opportunities, such as making incomplete project estimates, failing to plan for infrastructure maintenance, allowing inadequate support from the business, making inaccurate or imprecise estimates, forming broad assumptions, or padding budgets. These appear in both the operating and capital budgeting process as both are equally vulnerable when it comes to surprises. Each of these areas is outlined in more detail:
Top Tip: Engender trust with the CFO

"You need to engender trust with the CFO. They want to see governance, financial controls, and a real cost savings methodology. We document and classify all the savings (hard, one-time, recurring), and use an approval process for financial expenditures. The CFO weighs in on decisions, which builds confidence that we are doing the right things."
—Paul Kay
Long Term Care Group

  • Incomplete project estimates. One of the easiest ways for a CIO to lose credibility with a CFO is to fail to communicate all the upfront costs when the project is seeking approval during the governance or budgeting processes. List of costs to consider when looking at the total cost of ownership. It is distressing for a CFO or CEO to approve a project or expenditure only to find out after the project is completed that additional money is necessary to keep things operational. Include the project's on-going maintenance and support costs, support resources, and upgrades before approving projects through the governance process.
  • Unplanned infrastructure maintenance. Communicate and plan for major infrastructure investments years before you need them. Give early warning signs on infrastructure investments that will be required in the next three years. When presenting the annual budget, provide a forecast for the next two years. Then, when you present the budget, use phrases like "as we talked about last year" so they know the expenses were planned and did not come as a surprise.
  • Inadequate business support. Make sure you work with business executives to develop the IT budget and garner their support before presenting the budget. Through the governance and budgeting processes, position the projects as business projects, not IT projects. As you present the IT budget, make it personal by using the executives’ terms so that it sounds like it is their initiative (which it is). Drop names such as, "CRM, which is John's project to improve sales."
    Top Tip: Understand your costs

    "The budgeting process became much easier when the business didn't see IT as something being done unto them, but rather something they were asking IT to do. They need to see and understand their costs a mile away."
    —Roger Champagne
    Laitram


  • Inaccurate or imprecise estimates. For capital expenditures and larger projects, always have detailed plans on where and how you will spend the money. Take the time to get a request for proposal (RFP) or a request for information (RFI) in order to get accurate and detailed cost estimates. Do not guess at the costs. Validate estimates through reference checks. It is also helpful to provide the CFO or finance department with a time-phased cash flow estimate in addition to the overall cost estimates because you typically do not pay expenditures evenly throughout the life of the project.
  • Broad assumptions. Do not make broad assumptions. For example, just because the company experienced a 10 percent growth, the IT budget would automatically increase by 10 percent. Alternatively, if you read in the latest IT journal that IT spending is projected to rise by 13 percent during the next year, do not use that to forecast your annual budget growth. These broad-brush tactics are not nearly as persuasive as a detailed cost breakdown by category.
  • Padding or sand bagging. For some, it can be common practice to pad or sand bag the IT budget knowing that you will always spend more. Although there is nothing wrong with a conservative budget that you will be able to meet, do not have pockets of unnecessary costs that are questioned. Instead, provide details on budget increases that are tied to business needs. It is reasonable to include contingency funds for projects because it is difficult to know everything at the evaluation or design phase.
In summary, improve your relationship with the CFO and minimize surprises. Begin your operating and capital budget planning early enough so that you have time to be thorough. Start working on the IT budget at least four weeks ahead of the company budget cycle so that you do not run out of time. Take enough time to meet with all the business executives to understand their initiatives and plans so that you are able to determine how they affect IT. Leave no room for doubt. Know what you need versus what you would like to have and draw a clear distinction between the two. Make sure the benefits of the items you would like are clear and real. Be credible. Say what you are going to do, then do what you say. Tell the CFO that you did what you said you were going to do. Do your homework in order to select good technology and solid vendors. Take responsibility for vetting the cost estimates your vendors provide. Be cost conscious and a good corporate citizen who always looks for ways to reduce costs.