final project 580
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ISEM580_ITBudgeting-Finance_Lecture.pptxHarrisburg University ISEM 580
IT Budgeting & Finance
Objectives
IT Budget Overview
Forms of Budgeting
Creating IT Budget
Operational & Capital Expenses
Financial Perspective
Presenting IT Budget
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IT Budget-Overview
IT financials aren’t just for company CFOs and accountants. As an IT manager one of the most important responsibilities is effectively managing the money and how your department spends it. It is imperative that IT managers have a solid understanding of the following:
Financial Terms & Concepts (e.g., NPV, ROI, Break-even, TCO, overhead, sunk costs, fixed and variable expenses, depreciation, etc.)
Budgeting Process
Creating & Managing the IT Budget
Capital versus Operating Expenses
Leases versus Buying
Capital Investments (Justification & Decisions)
IT Project Financials
Chargebacks
Budgets during difficult times
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IT Budget-Overview
Typical IT budget is anywhere from 2 to 10 percent of company revenues
IT and corresponding budget supports many functional areas in the organization (e.g., Sales & Marketing, Manufacturing, Engineering, Finance & Accounting, Human Resources, Customer Service, R&D, etc.)
CIO and IT managers will be tasked to identify opportunities and make defendable recommendations on how best to manage resources and the IT budget to improve the financial position of the company
C-level executives, VPs, and senior managers will be competing for more money in their budgets and the ones that can effectively negotiate and clearly demonstrate the value position will bring home the bacon
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IT Budget-Overview
IT managers need to understand IT financial management and be able to clearly articulate the value proposition to C-level executives in articulate and convincing manner based on accurate, factual, data/information and defendable financial analysis. As a IT Manager you should do the following:
Raise the financial awareness of all IT staff
Establish sound financial procedures, processes, and tools for budgeting and cost management
Command & Control of four main IT Financials Processes
IT Planning & Budgeting
IT Cost Management (CAPEX; OPEX, & Forecasting))
Demand & Capacity Management (Planned & Unplanned)
IT Portfolio Based Investment Planning (Run, Grow, Transformation)
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IT Budget-Overview
IT Budget is the amount of money spent on an organization's information technology systems and services, including compensation for IT professionals and expenses related to the construction and maintenance of enterprise-wide systems and services.
Successful planning of an Information Technology department budget must consider long-term business needs, routine maintenance, system replacement costs and unexpected system failures.
Whether you run a small or large IT department for a multinational corporation, a thorough budget is essential to meeting the business goals of the business
Although the CIO has responsibility for the IT budget, the CIO is not the only person to devise and approve of the entire package
IT budgets are notorious for being “subject to change”. By their very nature, IT budgets will fluctuate in waves, in accordance with hardware replacement cycles.
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IT Budgeting
Forms of Budgeting (Baseline & Zero-based Budgeting)
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IT Budget - Forms of Budgeting
Baseline or incremental budgeting: Baseline budgeting uses current spending levels as the "baseline" for establishing future funding requirements and assumes future budgets will align with the current economic environment.
It is also referred to as incremental budgeting because the process is mainly concerned with the incremental (or marginal) adjustments to the current budgeted allowance and is adjusted for known factors.
Most widely used approach
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IT Budget - Forms of Budgeting
Advantages of Baseline-Incremental Budgeting
Easily understood (as it is retrospective), makes marginal changes and secures agreement through negotiation;
Administratively straightforward (and therefore cheap);
Allows policy makers to concentrate of the key areas of change. Ministers, elected representatives and senior officials are not required to study long and detailed budgetary documents;
Particularly useful where outputs are difficult to define/quantify; and,
Stable and, therefore, changes are gradual
Disadvantages of Baseline-Incremental Budgeting
Backward looking – focus more on previous budget than future operational requirements and objectives;
Does not allow for overall performance overview;
Often underpinned by data or service provision which is no longer relevant or is inconsistent with new priorities;
Encourages systemic inertia and ‘empire building’;
Assumes existing budget lines are relevant and satisfactory
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IT Budget - Forms of Budgeting
Zero-based Budgeting: starts from the basis that no budget lines should be carried forward from one period to the next. Instead, everything that is included in the budget must be considered and justified. Since zero-based budgeting requires justification and approval for budgeting, this means that budgets are started from a zero-base and are completely started over every year.
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IT Budget - Forms of Budgeting
Advantages of zero-based budgeting
Allows questioning of the inherited position and challenge to the status quo;
Focuses the budget closely on objectives and outcomes;
Actively involves operational managers rather than handing them down a budget from above;
Can be adaptive to changes in circumstances and priorities;
Can lead to better resource allocation.
Disadvantages of zero-based budgeting
More time consuming than incremental budgeting
Need for specialized skills/training;
Difficulties can arise in the identification of suitable performance measures and decision/prioritization criteria ;
The specification of a minimum level of service provision;
Questioning of the inherited position can be seen as threatening to organizations and their people;
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IT Budgeting
Creating IT Budget - Considerations
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IT Budget-Creation Considerations
Summarize the previous year's IT expenses by categories
Use the IT budget summary as the foundation for your new IT budget
Consult with business development and executive management (Goals & Objectives)
Evaluate employment goals and changes
Consult with and query to all other functional areas that will be or currently using and/or requesting new or existing IT related products and services
Evaluate the Business & IT strategies, tactical plans, and operational plans impacts on the IT Portfolio (Current and future demand requirements & capacity capabilities)
Cloud service providers, software and hardware purchases and/or leasing
It facilities capital improvements and operational expenses
Examine existing contractual agreements and options
Evaluate RFPs (Request for Proposals) for any new projects or large purchases to obtain accurate expense projections
Compile all budget information and numbers into a comprehensive document
Successful planning of a reliable IT budget should start 6 months before your IT budget is “due”
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IT Budget-Typical Components of IT Budget
Personnel & Consultants
Salaries and benefits for all internal IT staff
Support costs for external IT consultants
Training and education for internal IT staff to make sure they are kept informed about cutting edge IT for your industry
Travel Expenses
Software
New purchases for software (O.S., Antivirus, Productivity, EIS, etc.)
Cloud-Based Software Fees and Expenses (e.g., SaaS, PaaS, Hosted COTS)
Ongoing enhancements, maintenance, and support for custom applications
Annual support costs for vendor’s software you own
Licenses and renewals
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IT Budget-Typical Components of IT Budget
Hardware
New purchases for Computers, Servers, Firewalls, Routers, Switches, Printers, Storage Devices
Leases for computer hardware and equipment
Telephone systems and equipment
Annual support costs for vendors hardware you own
Routine maintenance, system replacement costs, hardware and software licenses and warranties, and even unexpected system failures
Data network including WAN connections, ISP links, VPN expenses
Services
Outsourced services costs, including monitoring, patching, helpdesk, spam filtering, and any other managed services
Outsourced engineering, security, systems integration, project management, software development services
Outsources backup and disaster recovery services
Outsource business or IT auditing or security assessment services
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IT Budget-Typical Components of IT Budget
General & Administrative
Telecommunications (Fees & Data Plans, Cable, ISP, etc.)
Rent
Legal
Office Supplies
Parking
Insurance
Facilities
Custodial Services
Building Repairs
Pest Control
Plant & Equipment Purchases
Note: Align budget with IT projects planned for the coming year
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IT Budgeting
CapEx and OpEx
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IT Budget-Capital Expenses (CapEx)
Capital expenditure, or CapEx: are funds used to acquire a long-term asset or improve the useful life of existing assets.
There are two types of Capex: Money spent or investment in newly purchased assets (PP&E) to foster future growth or when money is used towards extending the useful life of an existing asset.
Customarily, regardless of the manner of investment, Capex is money spent with the intent of initiating future cash flow and a substantial return on investment (ROI) for the organization
Capital expenditures are amounts spent on:
Acquiring fixed assets (PP&E to include software purchases and computer equipment and in some cases, intangible assets)
Repairing an existing asset so as to improve/expand its useful life (to include major upgrades to enterprise information systems software)
Upgrading an existing asset if it results in a superior fixture
Preparing an asset to be used in business
Purchasing or restoring property or adapting it to a new or different use
Starting or acquiring a new business
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IT Budget-Operational Expenses (OpEx)
Operational Expenditures: An operational expenditure (OpEx) is the money a company spends on an ongoing, day-to-day basis in order to run a business or system.
Depending upon the industry, these expenses can range from the ink used to print documents, wages paid to employees, utilities, maintenance, software and systems maintenance/support agreements, leaseing computer equipment, vendor cloud-based services (e.g., PaaS, IaaS, IaaS, etc.) and repairs, fall under the category.
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Capital Expenses (CAPEX) Versus Operational Expenses (OPEX)
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IT Budget- CapEx Versus OpEx
A lot of organizations (private and public) that are currently using in-house developed systems, are now moving to outsourcing options to reduce maintenance cost and to assure scalability
From an IT perspective, the decision about CapEx vs OpEx should also be taken based on several factors:
Investment supporting core business function or not
Ability of IT organization to sustain or add value to asset
Commodity products or services (Low administrative and vendor traction)
Level of competition among suppliers
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IT Budgeting – Financial Perspective
Aligning the IT Budget with Organization’s Strategy
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IT Budgeting & Finance – Strategic Alignment
Once IT initiatives have been evaluated and incorporated into the budget, organizations should take a step back from the details and look at the big picture
One approach to frame the IT Budget relative to the big picture view is to segment, qualify, and compare the budget through the lenses of three distinct perspectives: Run, Grow, and Transform.
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IT Budgeting & Finance – Straegic Alignment
Run budget items keep the organization operating.
Grow budget items help the organization introduce new capabilities or improve existing ones.
Transform budget items are research- and-development-type activities.
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IT Budgeting & Finance – Strategic Alignment
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By looking at the percentages of the Run, Grow and Transform components of an IT budget, IT Financial Planners can analyze the role that IT plays in the organization.
A Run-Grow-Transform analysis can determine whether the IT budget properly reflects IT’s designated role in achieving the organization’s mission.
IT Budgeting & Finance – Strategic Alignment
IT budgets often have large capital- and operating-expenditure components
The final IT budget needs to be incorporated into the organization’s overall budget to determine whether the timing or financing options for IT initiatives could have any unintended consequences
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IT Budgeting & Finance
Presenting the IT Budget
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IT Budgeting & Finance - Presenting the IT Budget
Do Your Homework
Business – Not Technology
Don’t Forget the Polish
Rehearse & Pace Yourself
Get Feedback
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Assignments
Chapter 6 (IT Managers Handbook)
Homework 6: IT Budgeting
Project 3:
Creating an IT Budget
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