IT Budgeting When the Heat Is On
Summer is over, but businesses across the U.S. are feeling the heat. Soaring energy and gas prices, coupled with declines in consumer confidence and spending, are forcing businesses to slash their budgets. In fact, a recent study of 950 high-ranking technology managers at large businesses in North America and Europe by Forrester Research found that more than 40 percent of the companies polled have reined in their technology spending. Particularly within the U.S., 20 percent of those polled indicated plans to reduce hardware, software, and services spending -- by far the most dramatic total reductions for any region, according to the research.
But amidst what appears to be an economy distressingly close to recession and a period in which companies are reining in their technology spending, companies still must examine their planning processes to ensure that the right funding and resources are allocated for implementing new systems and other technology. Taking measures such as forming a governance committee, modifying the company spending culture, and surveying the latest technology services and products often move companies forward to stay within budget and ensure that investments in technology continue to create business value for the company.
Supply and demand
Information technology budgets often grow for a number of reasons including technology’s declining visibility into the needs of other business departments. Chief Information Officers (CIO) and other technology managers rarely create the demand for IT systems and technology. Rather, functional departments within the company like manufacturing and supply chain create demand for systems and technology that are neither budgeted nor planned for. Unfortunately, the “strategic roadmap” developed by IT and the company does not always include the needs of the functional areas, and the unplanned requests of such departments often remain unchecked because the business side of the company does not have to pay for the systems and technology out of their budgets. Rather, IT pays for such demand of new systems and technology.
To overcome such challenges during the planning process and equip IT with the appropriate visibility into the technology demands of other business departments, companies should form an IT governance committee. Such a committee not only strengthens the planning process but also sets the stage for creating the “strategic roadmap.”
The IT road map
An IT governance committee is an essential tool when deciding what technology and systems to implement within a company, and ultimately, how much to budget for such projects. The committee should be comprised of the most senior executives from functional departments such as marketing and finance, which often create the demand for new systems and technology. And while it seems intuitive that the CIO or other designated technology manager should chair the committee, their role should be that of an advisor.
Rather than establish business priorities or allocate human and capital resources, the CIO should advise the committee on what technology projects are possible and the implications of any decisions the committee makes. For instance, if the committee decides to implement a new enterprise resource planning (ERP) system, the role of the CIO is to communicate the potential impact on other strategic projects or the possible increased costs associated with such a decision. Well defined committee roles ensure that planning processes achieve realistic results.
Budgeting best practices
Once a committee is formed, company executives can move forward to determine the needed systems and technology along with a related budget -- but not without first establishing guidelines. Budgets typically run over because of a lack of disciplined spending requirements during the planning process. CIOs and other technology managers are often expected to know what is needed from beginning to end when implementing new technology; however, additional functional or technical requirements sometimes emerge and ultimately increase the projected costs.
Best practice models indicate that budgets should be organized with 70 percent of funds allocated toward maintenance, 25 percent for planned projects, and 5 percent for unanticipated demands. However, unanticipated demands can be avoided by requiring all of the major users of technology within the company to develop requirements. Requirements can be outlined into distinct categories such as capital costs that include hardware and software or operational costs that may reflect green initiatives to minimize electricity or comply with environmental regulations like Leadership in Energy and Environmental Design (LEED). Once a department has outlined its specific technology needs, a business case can be presented to the IT governance committee, who then makes the final decision based on the strategic needs of the business. Using such processes not only creates a framework to determine how companies designate technology spending, but also inserts discipline into the company’s spending culture.
Rules of engagement
Establishing an IT governance committee and an accompanying set of spending guidelines are important measures to undertake when creating a spending budget, but regularly monitoring the latest technology services and products equip technology managers and other department leaders to make informed and effective decisions. Researching options such as buying or leasing hardware, outsourcing IT functions or purchasing packaged or custom software can often signal areas in which companies are over spending and thereby present new alternatives when purchasing technology services and products.
Although decision makers are often consumed with the daily responsibilities of their position, other employees as well as consultants can participate in preliminary research to determine which technology expenditures will ultimately create more value for the company. In the end, these measures plus consulting with the IT department as a whole to offer multiple pricing options for products and services will help determine what is necessary and what else can be circumvented in the quest to reduce the company’s overhead and stay within budget.
A study of 800 IT managers by Dynamic Markets Limited last summer found that 49 percent of respondents suffer budget overruns, but amidst an economy experiencing little growth, staying within the budget should be the rule – not the exception. Examining the company’s planning processes and thus instituting an IT governance committee are the first steps toward building a successful technology budget. However, technology managers and leaders from each of the functional department areas should regularly engage in identifying and managing technology demand to ensure all investments are creating value for the business.
Mike Gorsage is a Partner and Technology Practice Leader for Tatum LLC. Tatum is the nation’s largest executive services firm, providing financial and technology leadership nationwide.