How to Develop IT Department Budgets?

The IT Budgets represent a significant item in a company’s budget. Increasingly present, the challenges of transformation and digitalization even tend to reinforce its importance and sometimes make it one of the few growing Budgets, where everywhere else savings are demanded.

In business, the Information Systems Director or IT Manager is in charge of drawing up a particularly complex Budgets, in terms of the number of lines – whether Projects or Activities – the volume of suppliers, the specific nature of fixed assets, and the often extreme dispersal of data.

How do you get the most out of this complex, high-stakes business? Methods and advice.

What are the steps involved in drawing up a sound Budgets?

1. Upstream preparation

Let’s start at the beginning. Like any other department within a company or organization, the Information Systems Department is allocated a Budgets, generally with a margin for growth (upwards or downwards) compared with the previous year (N-1). Clearly, this is not a blank check: the overall budget envelope must enable the company to respond – from the most macro point of view – to the maintenance in operational condition of the IS in place and to the evolutions guided by the major orientations of the company’s strategy, and more concretely, to the IS strategy, often multi-year, that you will no doubt have established in a master plan.

Logically, you’re not starting from scratch, and your new IT budget will first be drawn up – within the framework of this envelope – by capitalizing on the current year’s or even the previous year’s budget. An analysis of the existing situation will enable you to give direction to your new Budgets, providing valuable indications as to whether you should continue with the same budget, amend it or identify areas for optimization.

At this stage of the preparation process, it’s all about getting to grips with your Budgets and understanding the cost structure from different angles, without losing sight of the purpose of the expenditure or investments you’ve made to date.

Among the areas of analysis, you can focus on the following points in particular:

• Typology of your IT expenditure between build / run / cross-functional Projects
• Analysis of your Opex (Operational Expenditure) and Capex (Capital Expenditure) costs, and changes in depreciation.
• Costs by supplier
• Impact on expenses of possible software migrations from On Premise to Saas/Cloud
• Evaluation and assessment of your MCO (maintenance in operational conditions) expenditure compared with the previous year, and any over- or under-spending alerts.
• Benchmarks with the market on certain costs or Resources
• Cost analysis by company process or department

2. Draw up operating Budgets

The operating budget is simply the total of all expenses required to maintain the current information system and keep it running. It’s the part of the iceberg below the surface, and it’s enormous. Many CIOs report that operating expenses account for between 50% and sometimes as much as 80% of their department’s budget, whether for hardware, software, telecom subscriptions, maintenance renewals, etc. This is precisely what ensures—as the name implies—the smooth operation of an entire organization’s day-to-day work tools… and in practical terms, it is therefore not possible to turn off the taps or cut off funding during the fiscal year.

By definition, operating expenses are generally consumed the first time they are used, and are of a recurring nature. To build your operating Budgets, simply Starting from its N-1 Budgets, and extending them almost identically. The only factors that need to be modified are unit prices and the updating of inventories and expected developments. Do you need to replace your PC fleet? That’s something to consider. Are you bringing on X new hires at a new subsidiary and equipping them with workstations and a fleet of cell phones? Same thing.

This task can be time-consuming because the operating budget often consists of a very large number of budget lines within an IT department. However, with the right groupings and proper organization by business portfolio, the task can be made much easier.

3. Optimize the run in search of a savings plan for existing equipment

Unless you’re in for a surprise, your Budgets aren’t expandable; on the contrary, you have to work within a constrained framework. Before tackling the Build (projects) and capital expenditure (where you’re most needed), try to find some room for manoeuvre, so that you can fit as many new projects as possible into your Budget forecast (and satisfy what we imagine will be exponential demand from the Sectors).

In any case, it’s an interesting exercise that will enable you to demonstrate to your stakeholders, and in particular the CFO and senior management, your sound management and your concern to optimize the Budgets entrusted to you, and to spend them wisely.

You have two weapons with which to challenge the existing system:

• Renegotiations

The path to follow is fairly straightforward: start with the analysis of your IT costs, established during the preparation phase, and look for possible optimizations: Who are your suppliers? Which ones represent the main expense items, and are any of them redundant? Can you reduce their number and consolidate certain costs, renegotiate certain services or software in relation to established market benchmarks, etc.? Work on different hypotheses, quantify expected margins, and see which projects you should prioritize to free up Resources.

• Decommissioning:

In concrete terms, this involvesidentifying any software that is falling into disuse or not providing sufficient service, and which could be discontinued or transferred to save money.

Faced with an explosion in the number of applications, it’s often salutary to take regular stock of the tools and software with which you are equipped, their respective purposes, the number of licenses allocated in relation to actual use, their TMA costs, their potential obsolescence, and so on. Decommissioning allows you to rationalize your application portfolio, with interesting knock-on effects for your Budgets, whether in terms of maintenance costs, support, storage/servers, version upgrades, etc.

In addition to keeping the Information System alive, a decommissioning approach has the merit of initiating a mapping of active applications within the organization, and associating a cost for each software with this inventory. This is a good way of examining the value of applications, and can help prioritize the actions to be taken.

Preparation, renewal of the operating budget, run optimization plan: once these 3 stages have been completed, we now come to the tip of the iceberg, the one that crystallizes attention and sometimes tension, because it impacts all the company’s departments and Projects…

4. Update Budgets for current Projects

Your Project portfolio doesn’t start with a new blank page every January 1st. Projects can be multi-year or straddle several financial years, and therefore already launched. It will therefore have an impact on your future Budgets.

The problem is that project budgets are often managed independently of your overall management budget, and the reality of progress is rarely in line with the initial forecasts: schedule slippages, unforeseen events which impact on the resources required, and therefore on costs, etc. It is therefore essential to reconcile your project’s current budget with the budget for the year in real time : where are we in terms of actual consumption, are we in line with the initial schedule and budget, are there any shifts or risks of slippage? All these changes in relation to the forecast must be taken into account and carried over to the new Budgets.

5. Integrating new Projects

Final step: determine the budgetary impact of the new projects. This phase is crucial and highly anticipated, as it brings together service requests from all business units. The integration of new IT projects must therefore be carried out in phases, following a systematic decision-making process.

As far as Budgets are concerned: as a first step, don’t rule anything out: collect all project requests and start by making a quick value analysis, cross-referenced with execution factors, including cost forecasts. Then start macro-costing the Projects that have been identified as priorities, to get a more accurate qualification of each one, but with “large mass” envelopes (purchasing Budgets + number of man-days), without drowning in details. Gradually, qualify each project with the professions in a collaborative and iterative way, and specify the costing of priority Projects to secure your estimates. The time will then come for precise, complete and detailed costing of the new Projects to be undertaken, after final arbitration on the new portfolio.

Please note: depending on the operating model of your company or organization, this arbitration of projects may be decided during the budget preparation phase, or separately, either with a dedicated envelope for projects to be arbitrated throughout the year, or with requests for budget extensions for each new project.

Ultimately, the process of developing the IT department’s budget could almost be summed up by the following equation:

Annual budget = Run (including optimizations) + Projects already underway + New projects

The outcome of the negotiations regarding the budget allocated to new Projects will determine the overall budget for your IT department. But to ensure success, don’t overlook the initial steps—especially your plan for optimizing Run operations. Remember that this operational budget carries significant weight and is unavoidable—and therefore something you must accept. It is therefore very important to be able to explain it simply, justify it (using KPIs and other metrics), and demonstrate the efforts made to control and optimize it, so that the real debate remains focused on project prioritization.

What is the typical timeline for developing the IT department’s budget?

Obviously, everything depends on the internal workings of the organization and the fiscal year to which it is subject, but generally speaking, building an IT budget is a long-term exercise (not to mention managing the current year’s budget and any quarterly reforecasts, which keep you busy throughout the year).

• 1st quarter: this is the start of your new financial year, and the ideal time to introduce new management, delegation, organization and reporting methods, before consumption tracking becomes too advanced.
• 2nd quarter: with the benefit of hindsight at the start of the year, take the pulse of the major trends that could have an impact on you, and think about your objectives and the changes you’d like to make to your Budgets (rethinking certain operations, outsourcing, etc.); this is the ideal time to study the options that interest your Management but don’t have a direct impact on the Business Units.
• 3rd quarter: budget preparation or planning: on the basis of a budget framework letter and feedback from all your business contacts, you gradually draw up the 1st model of your IT budget.
• 4th quarter: discussions and arbitration with the CFO and/or senior management, then final validation of the N+1 budget and landing of the current budget.

What tips can help make it easier to create CIO budgets?

1. Involve your team in budget preparation

One of the main reasons it is often dreaded is that budget planning can be very time-consuming. This is especially true for the CIO, who is often forced to handle the entire process alone, if only because the tools at their disposal—frequently simple Excel spreadsheets—are, by their very nature, not conducive to collaboration.

One of the keys to successfully creating a budget “without pain” lies in controlled delegation. Beyond your PMOs—who are obviously key players in the high-level cost estimates for new Projects—be sure to involve your team managers in the overall planning and budget preparation. In addition to freeing up your time, this management practice allows you to maintain the necessary perspective for analysis and fosters the sharing and clear communication of IT department challenges among and with your managers (while also giving greater meaning to the tracking of budget figures that will follow). Not to mention that cross-disciplinary perspectives can lead to excellent ideas for optimization.

2. Communicate continuously with the professions

Be proactive and regular in your exchanges with other company departments, who are often – in a way – your principals. This can enable you to detect a new need that will require a major IT investment at a very early stage, and to anticipate its consequences. In any case, this dialogue is a virtuous circle to ensure the smooth functioning of the IT/Business pairing and promote mutual understanding of the issues at stake. Your contacts may be unaware that a large part of your Budgets is taken up by Run projects, or they may be unaware of the number of different Projects on which your Management is involved. Sharing your Roadmap, your constraints, exchanging ideas to find solutions, is the key to a fluid relationship that can unblock or temper many situations.

3. Speak the same language as your contacts Finance

The importance of the CFO/CIO partnership in companies is well established. Its effectiveness will be greatly enhanced if communication with the Finance functions (management control, CFO) is smooth and efficient, allowing time for high-value-added discussions. Depending on the financial management challenges facing your organization, feel free to present your Budgets with a P&L view in addition to the cash flow view; this will make it easier to align your Budgets and discuss trade-offs regarding depreciation and fixed assets that will impact the income statement.

4. Present your Budgets with care and prepare alternative scenarios

Budgets are up for discussion. To succeed in this exchange, remember first of all to adapt your presentation and your discourse to your interlocutor: be factual, precise, synthetic, visual, think ROI – Return on Investment – and don’t forget to organize your Budgets around the company’s strategic axes.

Start out well-equipped, and avoid arriving with a single path all mapped out for you: giving people a choice is a key to budget negotiation, as it means allowing them to position themselves and become involved alongside you in the process of reflection and decision-making, whether it’s a question of reviewing priorities, outsourcing certain services, imagining new business models, and so on. High, low or median hypotheses: good arguments could well do your business and make the final trade-offs in favor of your most ambitious scenario.

5. Keep track of decisions

Budgets are always discussed, and periodically re-discussed, if only to bring forecasts up to date with reality. To make each of these stages more efficient, remember to keep a record of the decisions you make and the reasons behind them. Remember to make regular stops to compare different situations over time. Capitalizing on the past definitely makes it easier to plan for the future.

Now you have everything you need to successfully develop your IT budget… Has your initial budget been approved? Congratulations—you’ve taken the first real step! But as you know, this is just the beginning of the journey! Prepare an initial budget report to capture a snapshot of the situation at T0, and then confidently begin managing your budget…