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How to Build a Better IT Budget

Budgeting is a complex process that uses simple numbers, and the simplicity of the numbers can create confusion about what a budget is, does, and how to determine then evaluate your budget. Technology writers, IT professionals leading brand name organizations, and finance professionals often describe IT budgets as a percentage of revenue or other accounting line measures. However, those descriptions are typically historical not future forecasts.

When the CIO of an organization says IT costs are 6% of revenue, they are not planning, they are sharing history. Unfortunately, some technology professionals assume 6% today means 6% tomorrow, then they try to fit the organization’s IT needs in the 6% number, even if the need is 25% or 2%. This simple thinking creates a loss of trust in IT planners and ultimately causes unjustified and unsupported downward pressure on IT spend.

To reduce unsupported budget pressures, IT professionals should not assume 6% this year equals 6% next year. Rather, each budget year should start with zero IT spend then add the costs of business requirements, ongoing and new, so that each budget line includes specific business deliverables. Thus, budgeting is a complex process that uses simple numbers.

While budgeting is complex, there are many ways to develop your next budget. Many IT professionals develop their own system that is adapted to their specific organization’s needs, processes, or procedures. Therefore, there is no one best way to develop an IT budget, which further supports the idea that budgeting is complex. However, historical outcomes, starting with zero, adding specific business requirements, and including an unknown line are four cornerstones anyone can set to begin building a budget.

Begin With Your Past

Did IT deliver everything included in last year’s budget, or will they by the end of the year? If the answer is no, your budget is already in danger. Why would your business believe you should receive one more dollar to support outcomes you cannot deliver? To be clear, things change throughout a budget cycle including increased costs, supply chain shortages, emergencies, and so on. However, all those changes should be documented to support delayed or missed deliveries to demonstrate your own attention to the budget your organization trusted you to manage.

With your success record in hand, or the data supporting why you could not deliver, begin your new budget by resetting to zero every year. Starting from zero demonstrates your commitment to spend only the dollars required to meet business deliverables, past and future. This part of the process is the most concerning for many IT professionals. Saying start from zero conjures up fears of not paying existing maintenance contracts, not renewing software or service agreements, or worse having to fire then rehire every IT employee. None of these things are true. They are the first items to go into a new budget because many of them have long term contracts associated.

After adding long-term commitments, IT employee salaries, etc. to the top of your new budget, you can begin attaching dollars to new deliverables. This effort requires understanding outcomes that the business values enough to fund, and yes this is another layer of complexity. However, this effort makes removing specific budget line items both simple and proportionally painful. If the business knows that cutting the IT budget just 1% means removing very specific business deliverables, or requests, they are making choices and prioritizing the IT work demand, even if they do not intend to do so. Moreover, managing this complexity now makes the budget history work easier next year, and anything you can do this year to make next year’s budget less complex is just a win for your own future.

The Unplanned Budget Line

Finally, with existing costs and future deliverables added to the budget, your budget needs an unknown line. Just as project managers add contingency lines to any project budget, IT needs a budget line to support experimentation, testing new hardware products or support services to maintain a modern footprint, as well as funding to take advantage of unplanned opportunities. Many CFOs reading that last sentence are now shuffling in their chairs because this seems like the “do anything fund” but it is not.

The unplanned budget line supports the business not falling behind the technology curve. For example, buying hardware to test for improved application performance, save headcount costs, or deliver new capabilities to your customers. To be clear, the unplanned line is also why all budgeting starts in the past, with an evaluation of the prior year’s budget outcomes to include a category of unplanned business needs that were delivered this year. That effort supports the new request by demonstrating how each budget line, including the unknown line, delivered business needs, a.k.a. business value.

These budgeting cornerstones are a beginning – not an end. The work of connecting each line item to each business deliverable and the proof that prior spend created value is still complex. However, creating a budget foundation in this way demonstrates that the IT leader is not just applying popular press articles proclaiming IT budgets must be 3, 9, or 20% of revenue. Moreover, the thought applied to developing your IT budget cornerstones can help you understand the things most important to the business. This will ensure you are not guessing where IT resources should be applied or working from an unfunded wish list. While wish-granting genies might exist, I have not met one during any budget review.

Bottom-Up Budgeting

By now you have determined that the budgeting cornerstones process could be described as bottom-up budgeting because each deliverable is justified before it is funded. Creating your budget justifications will require understanding the deliverables your business wants as well as accurate cost forecasts. After all, wild guesses, and hopeful estimates this year will create missed deliverables next year. How can you ensure your budget estimates are accurate? Engage your vendor partners as early in the budgeting process as practical. After all, who has more implementation and delivery history than your vendor partners? They know the reality of major systems upgrades, lifecycle replacements, etc. and many partners offer internal teams to help you cost a project or deliverable down to the last Wi-Fi Access Point, laptop, or 10 G Ethernet cable.

If you’re looking for IT solutions or help with your IT budgeting, contact iT1 today to learn more about our infrastructure optimization services.



Dr. Mike Lewis serves as Chief Information Officer, EVP of Informatics, Security & Technology for Trillium Health Resources, a managed-care organization serving more than 350,000 members in North Carolina. He earned his Doctor of Management degree from George Fox University and is a former MBA adjunct professor at Maryhurst University. Mike has worked in the IT field for more than 25 years with stints at IBM, Merisel, and Dell.


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