Nobody likes to talk about budgets, but if you’re running an IT operation, creating one is an absolute necessity. Whether it’s a one-off project or an entire IT support operation, you need a plan – a document that shows stakeholders how much it will cost to create the deliverable they want.
But since most CIOs are trained as engineers and not accountants, it’s difficult to know where to start. You’ll need not only proof of projected costs but also input from vendors, estimates on the work hours needed and quotes from suppliers. Along the way, you’ll have to decide whether the staff you have can handle the job effectively – and affordably – or if it would be more cost-effective to seek the help of a managed IT services firm.
Then, you have to be able to total that and compare it with any ROI that can be projected. Hey, nobody said it was going to be easy.
In Part I of our extended blog series on IT spending, we covered the various areas that eat up your budget. In this installment, we’ll cover the basics of building a budget that will show your bosses you have a clear plan of attack. Chances are, the same bosses will hold you accountable for that budget on the back end, so it’s a process not to be taken lightly.
Let’s start with the most basic of questions: What is an operating budget?
Start at the Bottom and Work Your Way Up
It’s important to understand that an operating target is not a forecast but a target of expected expenses.
There are essentially three types of estimates a manager can perform, each requiring a greater level of detail. You can do a “rough order of magnitude” budget, with an expected variance from minus-25 percent to plus-75 percent. A “budget estimate” can vary from minus-10 percent to plus-25 percent. Most likely, you’ll be expected to produce a “definitive estimate,” with a plus or minus of 5-10 percent.
For a definitive estimate, you’ll need to cost out your project or IT operation from the bottom up, meaning you must come up with a detailed estimate for the labor and materials needed from beginning to end.
Here are five recommended, broad steps to get you across the finish line:
- Identify goals and any uncertainties ahead: From the 20,000-foot level, you need to know what projects and goals your department has for the time period covered in your operating budget. And, critically, do those goals line up with the organization’s goals? You need to understand these things in order to plan effectively, and getting clarity on the questions might be difficult if you work in an organization that does not have a strategic plan. Once you understand the problems and uncertainties facing your organization, you can develop an IT Strategic Focus that will help identify budget priorities.
- Gather information: In this stage, you want to summon all available data, including: benchmarking studies showing what other companies are spending on IT; historic data on your organization’s expenditures; the cost of labor in your market and the age and condition of your technology. This is also time to take stock of the current state of software licenses, data storage and disaster and recovery. As a starting point, take a look at last year’s actual itemized expenses by category: Salaries, hardware, training, maintenance, supplies. Knowing these figures will give you a good baseline for what’s needed.
- Gaze into the future: Taking into account your organization’s strategic goals, think two to five years into the future. Take into account Moore’s Law of Big Data, which says data doubles every two years. Will you have enough storage? What about evolving technologies? Do you have the right tools? Does your current IT staff have the skills that will be needed in the future?
- Assess alternatives and formulate your plan: Now that you have your goal, your information and your prediction for future needs, it’s time to make some choices and commit it all to a plan. Among those choices, do you have the right skill sets in-house for whatever IT projects you need to tackle or should you seek IT outsourcing services? After all, if your staff lacks the right skills, that means training, and training costs money. Another choice: Given current and future data needs, do you build out more on-premise storage capacity or build a private cloud? When estimating work hours, it’s important to consider whether your staff has the appropriate skills or will have to undergo training. In committing your plan to paper, it’s helpful to align it to general ledger categories so the CFO can easily compare the budget to previous budgets. It might be itemized along these lines:
- Work hours: The most expensive element of any IT operation. This should include the time of any vendors or consultants you work with who bill by the hour.
- Procured goods: Any hardware, tools, software, cables or miscellaneous items.
- Software licensing: In some organizations, the IT department might pay for initial licensing, with other departments kicking in for their use of the software. It’s important to nail that down on the front end.
5. Implementation and evaluation:Now that you have your operating budget, you have your “rules of the road” going forward. It’s easy for expenses to spiral out of control. Watch out for “might as well” spending, as in, “We might as well go for the larger server,” or “We might as well get the faster processor.” A few bucks here and there start to add up, so stick to your plan. There are sure to be some areas where you have no choice but to go over budget – usually in work hours or in managing some unforeseen crisis.
It’s imperative that you document expenditures along the way and come up with a detailed method for tracking that spending aligns with the plan. That way, you’ll be sure to notice a “runaway project” in time to reel it in. Toward the end of the budget cycle, it’s time to evaluate: Where did you underestimate? Where was the budget inflated? What “hidden costs” did you fail to take into account? And, looking forward, what new goals or needs to you have?
Writing and maintaining an operating budget is an ongoing process, and an ongoing opportunity to learn – about the true cost of IT and about your business and its strategic goals. Remember, technology is not an expense but an investment. Your role as an IT manager is to safeguard the investment dollars and ensure that the bottom-up cost estimates are predicted as accurately as possible.
Achieving that level of accuracy will require a good flow of communication – among team members, vendors and consultants – in both forecasting expenses and them tracking actual expenditures along the way.