KEY POINTS TO REMEMBER | The Budgeting Process

The budget:

• Understand the IT budget in detail.
• Consider shifting allowable costs between operating and capital budgets.
• Manage the budget on a regular basis.

Financial options:

• Use zero-based budgeting to understand and justify every cost.
• Evaluate the impact of leasing versus buying.
• Charging back IT costs may not be the best answer.

Communication:

• Your relationship with finance and the CFO is critical for surviving the budgeting process.
• Surprises or assumptions hurt your credibility.
• Communicate the budget in acceptable terms so the business has control of the decisions.
• Base the budget on projects that you align with the business, are driven by the business, and are supported through the governance process.
• Communicate the impact of budget cuts to the business.

Perspective:

• Keep the budgets and the budgeting process in perspective. It is not everything.

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.

BUDGET | Budgeting Process

Understand the Operating Budget

Operating budgets are a concrete statement of plans relative to costs. As IT does not generally produce income or revenue, IT budgets forecast the purpose, amount and timing of projects, and operational spending. If you are new to the budgeting process, study the previous year's budget several months before your company's budgeting process begins. The single most important thing for you to do is to understand the details of your budget and know your costs. Each company has slightly different budget categories or line items.

In many organizations, personnel, payroll expenses, and benefits make up the major portion of IT costs. It is important to get the head count right. Include any open positions (and when you plan to fill them), promotions, and salary increases. In the budget, be sure to plan for a certain percent of employee turnover. Companies typically have a benefit percent (i.e., 30 percent) used as a standard. Performance bonuses, hiring bonuses, and overtime expenses can be significant. Be sure to plan for recruiting expenses for new hires or replacement employees, particularly if there will be an additional hiring bonus, which means that expenses may increase up to 30 percent. Pay attention to contract employee expenses and outside services as those costs mount quickly.

Annual hardware and software maintenance is usually predictable. Hardware maintenance is typically 15 to 20 percent whereas software maintenance ranges from 15 to 25 percent. Pay attention to fee increases, and review contract terms for planned increases. Meet with key vendors on a regular basis so that you know their plans and they know your plans. Telecommunications costs are variable and are important to manage. Make sure you understand the business plans and needs for connectivity.

Calculate training costs with an average cost per employee. In addition, budget for large, planned training expenses or specific employee development plans. For example, you could use an average of five development days per year per person at $500 per day. Estimate travel with an average cost per trip times the number of planned trips per month. If you have multiple facilities to support, travel is significant. Review historical travel for comparison, but also consider new efforts or projects that may increase travel. Consider travel costs for consultants or contractors, which typically run about $25 to $35 per hour. To contain costs, think about leasing an apartment for traveling consultants who are contracted over a few months. Alternatively, consider a relocation package if the traveling consultant is engaged for a longer period of time since the $5,000-$10,000 outlay is significantly lower than the weekly travel and lodging expenses. When calculating costs for meetings, consider team-building activities, which could be $500 per person. Companies typically allocate facility costs by a set percentage based on the number of employees.

Compare the new plan to previous years as well as future business plans to validate the new budget. Do not forget to account for new projects that move from development to support and maintenance and have associated operational costs. Consider the company's growth or decline as well as the continued need for faster network lines, more disk space, and more server or desktop processing power. Also, consider that as technology matures, costs typically decline, but you also need to plan for upgrades, obsolescence, or sunsetting technology.

Make sure the budget is aggressive, yet realistic. Although it may be challenging to justify at the time of budgeting, it is far worse to take criticism throughout the year as you try to explain why costs are continually higher than budget. A conservative budget depends on the flexibility of the organization, especially an organization with clear-cut business changes as opposed to a business with budget oversights.