It’s mid September and CIO’s should already be getting themselves organized for the FY13 budget planning process which promises to be very challenging. Here in Wisconsin like many other states, public sector institutions will be facing another year of very tough budgeting decisions. Because these budget decisions impact students for several admission cycles they can also take years to recover from. That’s precisely why CIO’s must work to moderate the pressures to reduce costs and find ways to focus on using an IT budgeting process that is focused on improving the IT value proposition.
What is a Budget
I assume we all have the same basic idea of what a budget is. In it’s most elemental form a budget is an allocation of expenses, revenues, time, etc set aside for a particular purpose. In most every case the budget is itemized and applies to a specific period of time.
Practically speaking though, a budget is really an operational plan representing the intended uses of resources for specific purposes. Budgets are most often thought of as the expenditure side of the plan whether that be a cost center’s budget or a project budget covering resource hours and funding. But budgets do include plans for funding the expenditures by also planning revenues.
IT Budgeting Process Best Practice
With a more complete understanding for a budget being an operational plan and how to fund it, CIO’s should realize completing a fiscal year too far under budget is really just as bad if not worse than being over budget. It is true we focus more on the budget variance when it is an overage because it stands out as something having gone wrong in the budget planning process or in the execution of the planned work. The same is true when the budget variance is negative because it still represents either a failure in the budget planning process or in the execution.
Either way, both positive and negative budget variances should be explained each month and budget accuracy is a metric that should be tracked by every CIO for improvement. What makes this so important is that CIO’s should think of their operational budgets just like their capital allocations – the organization has set aside money to execute a specific plan in order to achieve particular results. So as CIO, if you don’t use all of the resources at your disposal to meet the needs of the organization or to accomplish the goals you set out to achieve, then you are simply tying up funds which produced no value that could have been used elsewhere.
To describe it another way, CIO’s should view every line item in their operational budgets as a specific proposal which should be able to support its own value proposition and ROI. That is the case for every business analyst or DBA in your budget and every hardware or software maintenance and support contract you have. Each and every operational expense requires an active ongoing assessment of its cost-benefit to the organization and the related risk-reward that comes with it – or simply the value of the planned expenditure.
IT Value Proposition
I prefer the more traditional concrete view when defining IT value proposition rather than some of the fuzzier ideas that are out there. Using IT value proposition in this way forces the thinking around how to make a demonstrable contribution to the organization in each of the following areas:
- Organizational strategy
- Product/service development
- Revenue production
- Process automation/improvement
- Cost reduction and efficiencies
- Compliance and regulatory performance
The connection of the IT value proposition to the IT budgeting process is most often made with IT capital as noted earlier. But it is equally applicable to the IT operational budget when focusing on strategies for adding value and goals for ensuring a sufficient ROI on operational expenses. To apply this concept, simply evaluate your budget, both capital and operational, against the categories of value creation to produce a breakdown.
Of course you can choose the categories that make the most sense to your organization. I have often done this same exercise using the major goals out of the strategic plan to show how the budget supports each goal and I have done this with quality improvement initiatives to show expenditures and hard dollar savings. So go ahead and make it fit your organization.
I prefer to start simple and encourage others to do the same. Take an initial pass at a high level breakdown of each cost center’s budget based on what percentage of the budget is for the required operations and maintenance (more on O&M later) and what percentage is discretionary spending using a simple table. This is what it might look like.
Using this very simplified approach you are just trying to get a reasonably good estimate, a SWAG, without committing a lot of time to it. This should be done with your management team. You’ll want to include them in part to gauge their awareness of the breakdown but more importantly to lay a foundation for what comes next.
Now that you have the big picture SWAG, ask each cost center manager to repeat the process using the line item detail of their cost center budget then review the results as a group. Now you can get a sanity check on how your management team views what is or is not “required” versus “discretionary” and the accuracy of their SWAG. More on required versus discretionary later.
No doubt you will be tempted to skip that simple approach and go right to a slightly more detailed breakdown which will require more thought. In this approach I recommend you repeat the same exercise with your managers only using different categories in the breakdown. This time you will want to use Gartner’s Run, Grow, and Transform as the basis for how your budget is allocated.
By applying the Run, Grow, Transform framework you now have a direct way to report to the organization the extent to which each function is tactical versus strategic and where you are overall from the roll-up. This approach also offers you a way to link budgeting for value creation directly to assessing performance and your portfolio resource allocation plan.
If you don’t mind doing both approaches, you will benefit from having a specific budget percentage representing the required O&M and for the discretionary spending as it supports growth and transformation. Again, if you don’t really like this approach you might try something from the demand management practice and use Maintenance, Enhancement, and New Functionality to show how your budget is allocated which comes with its own bonus of being able to map it to service desk tickets if you classify them in this way.
O&M and Required Versus Discretionary Spending
The percentage of an IT budget that is committed to O&M is an important metric. It reflects the burden of maintaining your technology portfolio in terms of what is needed to “keep the lights on”. O&M represents the “required” (re: mandatory) portion of the budget necessary to maintain existing service levels and the risk management goals with all other budget demands being treated as “discretionary.”
It is simple, but not easy. Mandatory in this case means only those expenses and projects required to stay on supported hardware and supported versions of software or those things required to maintain compliance and sufficiently mitigate technology related risk. The reason classifying budget items as required versus discretionary is not easy is that it exposes a lot of the IT driven initiatives as discretionary that IT often asserts as “must do”.
This is how you develop your base budget mentioned above – with no fat, nothing for your CFO to cut without compromising service delivery or increasing your institution’s risk profile. This creates the absolute floor of what IT costs and makes it possible to have the CFO’s bulls-eye moved elsewhere. This also means all discretionary capital and operational dollars can be set aside for use on strategic value creating initiatives or claimed for savings.
Using this approach all discretionary initiatives and budget requests compete with all other initiatives through the IT governance process based on the business case of each initiative. This can be especially powerful if you are of the belief that that are very few IT projects, only business initiatives supported by technology. If you can embrace this view, those discretionary requests would be championed by a non-IT sponsor who develops and owns the business case and ultimately delivering on it. If you have what seems like an IT initiative, then the CIO sponsors it and competes for funding against all other requests through IT Governance. Examples:
- You are currently on a supported version of your ERP that will be supported through next fiscal year, so upgrading in FY13 would be discretionary.
- Upgrading the SIS financial aid module for compliance would be mandatory, but upgrading the other modules would be discretionary.
- If your desktops are still OEM supported and will run Windows 7, refresh is discretionary.
- Deploying Windows 8, or VDI, almost certainly discretionary.
O&M as a Percentage of IT Operational Cost
Some years ago the O&M might have been as high as 80% with legacy systems consuming the bulk of IT spending. Today, you should be able to get O&M to below 70% without any effort. Using this approach in more than one organization has in one case resulted in a 32% reduction in ‘required’ capital spending, 69% reduction in ‘required’ operating expenses. The end result was significantly more of the IT budget being allocated to strategic initiatives and value creation, and some real savings.
Another benefit of this approach is the ability to use alternate resourcing models. These models support IT only maintaining resources for the O&M workload with some excess or reserve capacity. Resources for discretionary work would then be fully funded through the project proposal thereby ensuring the initiative can get done without resource constraints. This means you flex IT staffing up and down with the discretionary work to cover project resources or to provide back-fill so staff can do the project work. So when times are tough and funding is reduced you don’t carry a lot of overhead and you don’t have to lay off employees.
To be successful in this approach to budgeting and resourcing work, requires strong project portfolio management and solid IT governance. It also requires considerable trust between IT leadership and the rest of the organization. The results though are powerful. IT can be fully responsible for optimizing O&M and the IT governance function can control all discretionary work and ensure the institution’s strategic priorities are being attended to.