Take the confusion out of IT budgeting
To ease the budgeting process, base IT budgets on projects and services that business managers understand, rather than abstract technologies.
 | Talking routers and servers with non-IT executives overwhelms them, but if you talk functionality, capability, and profit opportunities, all of the sudden [the IT budget] starts to make sense. |  | | Bruce Skaistis
Independent IT consultant and former CIO
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IT budgeting is often a painful process, marked by miscommunication between business leaders and technology executives. But that needn't be the case. "There are two kinds of [IT] budgeting—traditional budgeting and sensible budgeting," observes Dean Meyer, president of N. Dean Meyer and Associates Inc., a Ridgefield, Connecticut-based research and consulting firm that specializes in organizational effectiveness. Traditional budgeting focuses on technical categories that mean nothing to business managers and align awkwardly with important corporate initiatives. "Sensible budgeting", by contrast, follows these four basic principles:
1. Treat the IT department as a vendor
Instead of providing funds directly to the IT department at the beginning of the year, have your business units use their own budget to "buy" IT products and services from your CIO. That essentially turns the IT department into an internal vendor that must earn its funding by providing sound advice, intelligible offerings, and clearly defined return on investment. It also forces business managers to make tough IT spending decisions, rather than simply ask IT to "do more with less."
2. Base the budget on deliverables, not technologies
To help business executives better understand what their money is buying them, organize the budget around services and projects instead of technologies. For example, have each business unit set funding levels for email, Web access, and customer relationship management support rather than hardware, software, and bandwidth. "Talking routers and servers with non-IT executives overwhelms them, but if you talk functionality, capability, and profit opportunities, all of the sudden [the IT budget] starts to make sense," says Bruce Skaistis, an IT consultant and former CIO based in Kingston, Pennsylvania.
3. Include indirect costs in your budget estimates
IT departments incur both direct costs for expenses such as equipment purchases and software licensing, and indirect costs for training, help desk support, and other activities not associated with a specific project. IT managers should factor a share of their indirect costs into the prices they charge business units for products and services, rather than account for them separately. That way almost everything business leaders pay for from IT is linked to a concrete deliverable with clear benefits. Be careful not to hide indirect costs, however. IT managers should specify that they are included in the rates they charge.
4. Pay premium rates for premium service
Everyone understands the principle that you get what you pay for—except when it comes to IT. "For some reason, the myth has grown up in many companies... that people can always ask for 'more' and 'better' without having to pay for the additional costs," writes Mark Lutchen, a senior partner at consulting firm PricewaterhouseCoopers LLP, in his book Managing IT as a Business: A Survival Guide for CEOs (Wiley, 2004). Ask the IT department to offer multiple pricing options for products and services, Lutchen says. This way, you can choose whether to pay standard rates for standard performance and reliability or higher rates for peak performance and availability. "This increases each business unit's feeling of trust and control over its IT destiny," he notes. And that, after all, is the ultimate goal of any sensible IT budgeting process.
 | Rich Freeman is a Seattle, Washington-based freelance writer specializing in business and technology. He has more than 14 years of strategic marketing and communications experience in the IT industry. |
