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Improve IT Budgeting Based on the Service Lifecycle

Effective IT budgeting will identify all IT expenses related to a particular service or customer for a given period of time. Budgeting for IT expenses combines previous commitments, such as reoccurring hardware or software maintenance, and new expenses, such as additional staff to determine the resources for a given service or activity.

The following sections focus on maturing an IT organization's budget process beyond a reactive organization, which does not proactively budget for IT resources. These sections also suggest ways to link your budgeting process with business cases and the value-added financial management practices that follow this section.

It is critical that the budgeting process not be done in isolation. If you aim to develop a given budget for an IT service, it is often helpful to link this effort to your service level management, service portfolio management, and business cases. We summarize these related efforts in detail in Chapters 3 and 5.

Cost-Focused IT Budgeting for IT Services

An IT cost center often has an internally focused budgeting process that seeks to break even over a specific period of time. If an organization seeks to become a cost center, it should develop a budget through evaluating historical expense information with forecasted needs to meet the agreed-upon service levels.

The organization should first gather expense information regarding prior years' expenditures. These expenses are largely those expenses discussed in detail in the accounting and charging section. A key mistake that cost centers must avoid is strictly basing the IT budget on prior years' expenditures or a flat allocation from the business units. This practice is shortsighted because it disregards the fact that the business and IT operational needs are rarely on an annual basis. For example, if an organization purchases a storage expansion every other year, it should not budget for this expense each year.

Instead of just relying on historical expense information, you should also determine future operational expenses based on agreed-upon service levels. These operational expenses should reflect the capabilities needed to support the service levels reflected in your service catalog or SLAs. If they do not exist, you can internally determine the service levels you plan on achieving in a given year.

Together, this historical and forward-looking information should then be the basis of the annual budget.

The structure of the budget itself should closely follow the cost types identified in the IT accounting section. As you will see in Table 4-9, this budget form simply mirrors the form developed in the IT accounting section.

Table 4-9. IT Budget Form for Web-Hosting Service

Budgeting Form for Web-Hosing Service

Cost Type

Budgeted Amount (FY10)

Prior Year Expense (FY09)

Hardware Costs

UNIX servers

UNIX servers' maintenance

Load balancer

Load balance maintenance

Storage

Software Costs

Operating system

Web software

Staff

Salaries and benefits

Facility

Space

Power

Improving Your Budgeting to Become a Profit Center or Business Partner

As an organization improves its budgeting process to reflect its view of IT as a positive ROI, it discounts all IT projects and their cost by some discounted cash flow (DCF), develops its budgets strictly based on the organization's service catalog, and implements a continuous improvement effort through business intelligence and business cases.

Review Budgets Using Portfolio Management and Service Investment Analysis

As an organization's budgeting process becomes more mature, it evaluates its IT budget through the business impact and business objectives. It uses increasingly sophisticated financial tools, such as subjecting all significant projects within its budget to an NPV calculation, to determine which projects bring the most financial value to the organization. ITIL also identifies a range of other measures to evaluate budget items, including operational, strategic, and industry-specific items that are summarized in both Chapter 2 on service portfolio management and Chapter 5 on developing different types of business cases. To evaluate a given service or project's business impact, refer to the service portfolio management sections in Chapters 2 and 5.

Service-Based Budgeting

As an IT organization's budgeting process matures, it aligns its budgeting process to its service portfolio. By developing budgets associated with a particular service, an organization ensures that any expenditure results in some benefit to its customer. By establishing the annual cost of an IT product or service, the organization can evaluate the budgeting needs based on the number of customers, opportunity for expansion of customers, and operational needs of that particular IT product or service.

IT Budgeting Continuous Improvement through Business Cases

As an IT organization's budgeting process matures, it develops continuous improvement initiatives, which encourage disciplined budgeting throughout the year. Continuous improvement of IT financial management practices is a critical success factor in the ongoing, continued maturation of IT business practices, and specifically IT financial management practices.

Business cases, discussed in detail in Chapter 5, are excellent tools for continuous improvement efforts. In developing a business case, an IT organization or business unit will evaluate the business impacts and risks and develop recommendations. The amount of financial and operational rigor used to develop the business case increases with the organization's IT financial management maturity. As an organization becomes more mature, it often develops more linkages between the business case and its budgeting and charging process. It develops more collaboration between the business unit and the IT department, as reflected by the operational and financial data collected in the business case. It increases the number of alternatives it must evaluate before making the purchase. For a detailed guide to developing a business case, see Chapter 5, which discusses this process in detail.

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