IT Management Reference Guide

Budgets play a critical role in any type of organization. This is especially true in an IT environment as companies grow more dependent on IT for higher productivity, greater competitive advantage and increased profits. This section provides a brief, high-level insight to the budgeting process from my perspective and experiences as an IT executive.

Many IT leaders feel that budgeting is a long and painful process with very little return on investment for the level of effort made. This feeling often stems from the immaturity of the organization's budgeting process and the lack of its understanding by IT leaders. It is imperative that IT managers recognize and treat IT budgeting as a process, and realize that enhancements to the IT budget process can produce significant rewards.

Factors that Undermine the Budgeting Process

I have worked for many different IT organizations over the years and have observed the following four factors that consistently undermine the budgeting process:

1. Insufficient time - Most organizations provide insufficient time to plan and prepare a budget adequately. One company I worked at began their annual budgeting process three months into the fiscal year and expected the budget to be completed within two weeks.

2. Ad-hoc perception – In this case the process is perceived as a one-time 'fire-drill' exercise. A former client of mine had the idea that once the budget was complete, tracking of variances and forecasting trends were not required since the budget already was approved. The thinking was that this exercise was not necessary until next year and further enhancements to the process would be a waste of time and resources.

3. Undefined expectations – This arise when expectations from senior management are not defined. Specific criteria, timeframes, and approval cycles should be clear and understood. I worked at one firm that developed its budget in a total vacuum. With no direction from the business units as far as strategic initiatives for the upcoming year, expectations were not clearly defined which in turn affected both capital and operating expenditures.

4. Lengthy expenditure process - Once the budget is approved, you may still be subjected to a long and frustrating process to execute on the approved expenditures. This happened to me at a company that did not utilize the formal budget process effectively. After enduring a long and arduous budget process, a requestor had to endure another lengthy approval process for each purchase order generated.

Enhancing the Budgeting Process

As an IT organization matures with its processes and standards, the budgeting process becomes more continual. The following are some of the enhancements one can make to the budgeting process as an organization matures.

• Consistently allow for sufficient time to plan. For example, start your budgetary process in the same timeframe each year enterprise-wide such as the third quarter of your fiscal year.

• Establish a standard template and format of the information being requested. For instance, ensure senior management clearly defines the data to collect and the factors to consider.

• Gather historical information that pertains to the budget and create a baseline from which to build.

As IT continues to evolve, organizations are realizing that previous budgeting decisions are no longer valid and applicable. The passing of new governance laws and regulations are forcing organizations to implement a more comprehensive financial management methodology framework. In light of recent developments, here are a few suggestions to enhance the IT budgeting process:

1. Use the investment portfolio approach. – The investment portfolio approach treats IT as a revenue generating entity. The objective is to ensure that IT arrives at optimum decisions and realizes the desired results within the expected timeframes and budgets. The payoff is a strategic and long-term outlook that treats IT as an investment asset instead of an expensive liability; managers compare costs against longer term requirements, needs and benefits.

2. Develop a consolidated projects list. - The IT budgetary process begins with the organization identifying projects needed to grow their specific business lines. The next steps are to prioritize the projects for IT to perform an assessment, gather requirements, design both physically and conceptually, perform QA testing, and implement into production. The objective is to provide the IT leaders the complete picture of all proposed projects, the cost associated with these projects, and their prioritization. This provides a level of objectivity in the decision-making process that is lacking in many organizations. The payoff is that it enables IT leaders to have all the information needed to demonstrate that the business units, and not IT, are driving the costs.

3. Identify key costs and resource data. - Managing the IT budget provides key costs and resource data. The objective is to have the ability to view both project related and recurring costs that are essential to formulate budgetary justifications. Managers can monitor these costs against the plan to identify deviations that can be addressed or corrected instantaneously. The payoff, like the previous suggestion above, provides IT leaders and management with a clear picture of initiatives and their total cost of ownership. This enables a more extensive analysis to be performed during planning and implementation. IT leaders gain insights in lieu of subjective or unreliable information.

IT leaders do not have to be subject matter experts when it comes to the budgeting process, but they must understand the basics. Upon acquiring this understanding of fundamental budgeting concepts, IT leaders then have some of the necessary tools needed to improve IT planning and management.