On par with a trip to the dentist’s office, IT budgeting tends to rank fairly low on any CIO’s list of favorite activities. While alternative approaches to forecasting corporate IT expenditures won’t necessarily make the process any less tedious or painful, progressive new budgeting practices could make life easier in the long run.
Though dreaded all year, the annual budgeting process rarely changes for most top IT executives. Corporate officials usually prescribe an amount — 5 percent of total operating expenses, for instance — and expect IT departments to keep spending within that figure. Alternately, the bean counters simply pull IT costs from the previous year and slap on a slight increase to account for inflation.
Seemingly straightforward, the traditional IT budgeting process still manages to put many CIOs and IT controllers on the defensive. Corporate accountants and business unit leaders demand to know what departments are getting in exchange for their technology surcharges, which are often levied as a chargeback or a fee extracted from various operational divisions to fund the IT department.
To inject the new levels of transparency that senior managers now demand, and further assert the business value of IT, more CIOs are becoming proactive.
“Now we are facilitating the dialogue and helping to establish the priorities. This subtle change makes a world of difference and allows my team to get an early heads-up so that we can plan resources accordingly,” says Robert Golden, director of strategic business services at Insurance House, a Marietta, Ga.-based brokerage company that works with independent retail insurance agents throughout the Southeast.
Table talk
Now afforded a more active role at the budgeting table, many CIOs feel immediate pressure to come up with better ways to plan and account for expenditures. “We need to become more sophisticated with our budgeting models, yet keep the process as simple as possible,” says David Oles, IT director of research and development at Rent-A-Center Inc., a Plano, Texas-based chain of rent-to-own retail stores.
One simple move that Rent-A-Center has made involves the designation of new IT initiatives as capital expenditures. The idea is to isolate and highlight funding for new projects, rather than lumping these investments in with operational expenditures.
Rent-A-Center isn’t alone. Many corporations are beginning to peel apart these two distinct budgeting subsets. “There has been a real bifurcation under way,” explains John Baschab, co-author of The Executive’s Guide to Information Technology (Wiley, 2007). “IT departments are breaking the cost of new projects out from ‘lights-on costs,’ a term I use for the funding required just to run the IT department with no new initiatives. There is now a real effort not to mix baseline costs with the funding needed for new projects.” Splitting apart the two main components of a technology budget is little more than a good first step, however. Prudent CIOs will also impose the use of pricing and other industry benchmarks to make sure they are getting the best deals possible.
“Benchmarks are becoming a big driver. It is crucial for enterprise IT officials to find out if what they are paying is out of whack with what the rest of the market is paying,” says Chris Nuttall, managing consultant in PA Consulting Group’s North American sourcing and service management practice.
For CIOs to craft meaningful budgets, they need timely vendor pricing data, argues Jon Winsett, partner and managing director at NPI Financial, an Atlanta-based firm that specializes in budget management practices.
“Leading-edge companies are now working with outside pricing experts to gather historical pricing data. This allows them to understand the pricing flexibility of IT vendors and better grasp the impact that current market conditions really have on their budgets,” Winsett says. “CIOs are more able to accurately identify savings in IT spend, simply by understanding what vendors are really charging for their products and services.”
Golden says his department is determined to use industry benchmarks to fight overspending in all areas. “My managers forecast spend based upon the past 12 months. This includes staff, training, voice and data lines, software maintenance, hardware support and the stand-alone capital expenditure budget. This forecast is done with a solid gauge on the pulse of the market,” he says.
Not-so-nasty chargebacks
For IT department leaders who must routinely justify the costs they pass along to various business units through delicate chargeback arrangements, solid market research is a necessity.
By their very nature, chargeback scenarios can instigate ill feelings between IT and other corporate departments. “You usually see chargeback scenarios in a troubled IT department and in environments where business units are having difficulty trying to get value out of IT,” says Baschab.
“Chargeback mechanisms tend to cause underinvestment in critical infrastructure components, as well as significant internal dysfunctional behavior.”
Yet for many corporations, chargebacks are a fact of life and aren’t all bad. “We use tracking by business unit and an allocation process to charge the business,” says Golden. “Typically, this can be a pretty nasty process, and ours is not without conflict. However, because we now develop our budgets and business cases together with our business partners, most of the spend is known upfront, and that minimizes surprises. We also provide complete transparency to all business unit heads.”
Sean Worthington also recalls mixed experiences with chargebacks from his days as head of the IT departments at Silicon Graphics Inc. and other large organizations. “When I have employed chargebacks, the organization desired to have control over IT spending. However, the chargebacks allowed me to more precisely allocate the IT costs back to the customers of those IT services,” says Worthington, who is now CIO in residence at Planview Inc., an IT portfolio management company in Austin.
In fact, chargebacks can be highly effective, especially in situations involving easily measured expenses. “Chargeback is best for commodity service and cost recovery when consumption is fairly predictable and demands drivers are clearly understood and manageable,” says Scott Holland, senior director and IT program manager at The Hackett Group, a strategic advisory firm in Atlanta. “This is often the case for maintenance projects — for example, when IT dedicates a certain level of full-time equivalents to another department’s maintenance needs and recovers through a chargeback instead of a budget transfer. This helps IT keep management control over those FTEs, where they may have lost management control if a budget transfer was arranged.”
In some cases, chargeback arrangements are morphing into IT usage allocations. Specifically, business units are charged for their consumption of resources, such as storage or network traffic volumes. “For instance, a particular business unit in a financial services company might be processing a million trades per day,” says Howard Rubin, an analyst at Gartner Inc. “IT can figure out how much this takes in terms of storage, networking resources, etc. Consumption becomes visible, and charges are assessed based on system volume and unit cost.”
Allocation of IT resources based on usage often holds practical appeal for business unit leaders. “When both IT and business units know the
