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12 Best Practices in IT Budgeting |
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CIO Habitat members whose companies have steadily improved their budgeting approach recommend processes that are:
- Outcomes-based. Business, IT and the supplier/contractor ecosystem are moving from a cost-plus-funding model to a "What can you do for $X?" mode of operation. Buy business outcomes, not technology pieces and parts.
- Vision-based. Keeping the big-picture view visible to all parts of the organization ensures that what's being invested in is clear to all.
- Performance-based. Vendors don't get paid until the benefits materialize.
- Fact-based. Provide tunable views of the IT budget, so the big-picture people see reports at a higher level while the microdetail people see everything.
- Tool-enabled. Use real-time portfolio management to kill unproductive projects in an early stage.
- Understandable. Create an understandable story on the economics of IT across the organization. This creates awareness of operational IT costs but also an understanding of the "IT crumple zone." This zone comprises the financial fenders of IT -- the parts that can be eliminated without impacting business performance.
- Connected to business strategies. Link budgets to enterprise and line-of-business objectives.
- Measured and managed. Create scorecards linking the business value generated to IT monies spent. Measure outcomes associated with every IT dollar spent.
- Innovation-sensitized. Use pilots to test new technologies.
- Inclusive. Engage the intellect of the business people who like to experiment with technology rather than frustrating or alienating them.
- Truthful. Make sure the total multiyear costs of various IT initiatives are honestly revealed. The business needs to be aware of the real cost implications of technology decisions.
- Incentive-based. Eliminate perverse incentives like spending extra monies at fiscal year-end to make sure the funds aren't cancelled.
-- T.M.
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Why is Technology Budgeting So Hard?
We live in an age where information fuels commerce, informs politics and enables social interaction. This information is created, filtered and stored by underlying technologies that most nontechnical senior executives don't fully understand. This is a problem akin to explaining air to fish, and most of these execs have no grounding in why IT costs what it does.
In the absence of understanding comes the delegated expert. IT was supposed to be the "expert" on how this stuff works and how much it costs. But a systemic problem emerges when the nontechnical business executive no longer trusts the IT leader. When this happens, as it does in many organizations, a sad, hyperaccelerated search for knowledge ensues, with the business being guided by a cabal of less-than-objective solution suppliers.
One of the ongoing problems with budgeting is the hidden post-purchase cost of computing. For every dollar invested in putting an IT system into production, some percentage of cost "drops down" into subsequent years in the form of maintenance and enhancement charges. This is called the drop-down ratio by IT budgeters. Some IT budget processes erroneously fail to account for these cash outflows, making the purchase decision based only on the acquisition cost.
Another problem in the IT budgeting process is that certain expenditures. such as those for architecture and governance, materially improve long-term organizational performance, yet are difficult to link to specific dollar savings.
Are Things Getting Better?
There is some good news, in a back-handed way. Only 13.7% of the organizations we talked with think the process could get any worse. The factors contributing to improvement include business executives getting more involved, IT resources being allocated in real-time and the budget process itself becoming less political.
Thankfully, the path out of the budget badlands is not a Homerian Odyssey. Rather, it is a series of straightforward steps:
Step 1: Map your current IT budget process. At the IT Leadership Academy we have assembled more than 300 such budget maps.
Step 2: Re-engineer the IT budget process to eliminate activities that don't make sense.
Step 3: Interview select business colleagues and get them to draw a map of how they think the IT budget process works.
Step 4: Take a page out of General Electric's book and conduct "dreaming" sessions with the business execs or with external customers to paint a picture of what you want the future to look like. This moves you into the budgeting-as-executive leadership space.
Step 5: With your findings from steps 1-4 in hand, go to the CFO and enlist help in applying best-in-class contemporary cost-accounting practices to the flow of IT monies.
Step 6: Make sure your IT team understands how to manage, manipulate and discount future period cash flows associated with IT investments.
Cohn of Pepco sums up the IT budget conundrum: "The CIO needs to be prepared to defend IT's proposals, but also must be prepared to accept defeat gracefully. In the long run, this helps make IT a valuable partner."
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