A blind man crosses the road – Budgeting in IT

 Ever seen a blind man cross the road..? – or is that just Exco (The executive committee) trying to decide on the IT budget?

Ever seen a blind man cross the road..? – or is that just Exco (The executive committee) trying to decide on the IT budget?

There is something greater than the anxiety felt by the CIO just before she presents her budget – and that is the anxiety of the Exco who are concerned that they are in for another ‘lights and mirrors’ show that will leave them feeling generally uneasy but compelled to approve the IT budget.

And then the show starts, with the CIO talking about how an upgrade to their ERP system will just about stave off financial ruin for the company provided they include the new DRQ and ABT modules, but unfortunately gentlemen, this kind of groundbreaking technology doesn’t come cheap or easy. (Did you understand that? If so have a gold star).

The CIO is probably even right and the money has to be spent, but she wears down the Exco into acceptance through ‘death by PowerPoint’ and a liberal smattering of technospeak. Finally with the look of rabbits staring into oncoming headlights the Exco give their approval. However the Exco really would like to be able to take business decisions about IT, based on good business reasons, using their business experience and logic (which is what they are paid for surely?).

If all this sounds a little too cynical, just ask an executive – they’ll confirm that they feel their company is on a runaway IT budget train, with very few options for their constructive input. One CEO recently asked his IT department to please present their budget on a single piece of paper, rather than the thud-worthy report that they annually inflicted on him. And the IT department managed it too: By using font-size 8 and A3 paper, bless them! So the CEO looked at the bottom right-hand corner, where all good spreadsheets finally come to the point, and said: ‘Cut that by 20% then come and talk to me again’. Now what kind of business decision is that? You can be sure that the CEO felt uncomfortable about making it, but what choice had the IT department given him?

There is a way of presenting the IT budget on one page, in a language that business people not only understand, but also can contribute to. (So if you’re one of those CIOs who wants to keep their Exco in the dark while extracting IT’s compulsory tithe from them every year, read no further).

The method is not rocket-science. I presented it at our recent Butler Group IT Governance Masterclass, and it was so well accepted that Butler Group are using in their other Masterclasses in Europe.

Firstly get out a pen and a blank piece of paper. No really. Do it now: Start with the axes of a graph: The vertical axis will represent spend, and the horizontal axis will remain unnamed for now. Draw a horizontal line across it at about halfway up the vertical axis. Then next to the line, put the amount of money your company will need to pay in IT costs next year just to keep its operations running exactly the way they are now. I mean exactly the way it is - no improvements or degradations at all. I call it the business momentum line – the budget needed just to maintain existing business momentum.

Now you need to break the IT budget into three types of expenditure: IT Operations, IT Development and IT Leadership. Then imagine that each of these budget types is a floating block of wood, with the horizontal momentum-line being the water level. The IT Operations ‘block’ will float very low in the water with most of its bulk being below the momentum-line. It’ll probably also be the biggest block, being the largest portion of the IT budget (usually between 65% and 95%). Some of the IT Operations block will float above the line, because this is budgeted expenditure for operational improvements in IT.

Now draw the IT Development block with 80% above the horizontal (momentum) line to the right of the low-floating Operations block. In this IT Development block, there are some developments which are absolutely essential if your business is to maintain its momentum, and these will go below the line. But the majority of developments will be business improvement related, aimed at improving the business operations, and these will ‘float’ above the line.

Finally draw the IT Leadership block to the right of this which will float entirely above the line. IT leadership is about exploring new ideas, opportunities and technologies with the intention of creating new markets or products for the business.

And that’s it on one page – you have a horizontal line representing what the business needs to spend on IT in the next year in order to maintain its operational momentum. Then you have three blocks each depicting three types of IT spend, distributed above or below the momentum line, depicting whether this spend is essential to maintaining your business momentum, or improving the business.

Obviously it’s not that simple, and you will need a whole bunch of supporting documents to back up your budgeting thinking.

However while this IT budgeting model is simple, it is not simplistic: Decisions made about IT Operations spend have different business criteria from those made about IT Development, as they will be different for IT Leadership budgeting. These three categories are not new. For about ten years or so, most IT Research Houses have made these distinctions about spend in IT. Some research organizations call them: “Run the business, Grow the Business and Invest in the Business”. Butler Group calls them: “Run the organization, Change the Organization and Drive the Organization’s Market Value”. Different flavors of the same thing really.

Now where were we? Making decisions about the IT budget in the operations area is all about two things: Cost displacement and Risk Mitigation. Firstly; can IT help displace more costs in the business, or indeed within IT? But probably the most important thing for business to realize is that spend on IT Operations is mostly about risk mitigation. And this is where many CIOs miss an opportunity. If you can clearly identify the risks (and the opportunities that risk mitigation brings) that any particular spend addresses and clearly separate this spend from other types you will have gone a long way towards giving your Exco the ammunition they need to make business decisions. Also interestingly, Exco’s expectations of cost savings in the IT Ops budget area are much more realistic once they understand the risk and opportunity drivers for spending in this category.

Approval of IT Development budget is directly linked to ROI for any given project and this is where your hurdle rates and portfolio prioritization techniques come into play. But you have to match your budgeted spend to real business improvements, and then next year show that you achieved those business benefits.

And finally, spend on IT Leadership activities tends to be more speculative, but the litmus test for approving budget in this area is: “Will it change the organisation’s market value”? A tough call – I prefer to look at IT Leadership this way: “Do our activities in this area have the potential for being a major feature in our next annual report”? Again, executives need to understand the speculative nature of this spend, but with proper risk/reward analysis they will be more likely to approve budgets in this area.

But wait, there’s more: We haven’t talked about managing benefits, or extracting value, or measuring performance in these three categories. But that will have to wait for another time.

The bottom-line is this: If you don’t present your IT budget in business terms, you can’t expect business decisions. But you can expect suspicion about IT’s motives, and what CIO wants that?

Documents are in common file formats such as Microsoft Word (doc), Powerpoint (ppt), Excel (xls,csv,xlsx), and Adobe pdf.

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A blind man crosses the road - Budgeting in IT

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