IT Budgeting

Here in the United States it comes to that time of the year when budgeting starts for the next fiscal year, which coincides with the calendar year. When I was working in Australia, the fiscal year would be July to June and we would do budgeting at the start of the calendar year. Regardless of the timing, I have always taken the same approach to doing this exercise, and I thought it would be good to share some of the practices and lessons I learned.

Budgeting for next year starts with taking a copy of the budget for the current year. I have always done budgeting in Excel, and grouped the budget line items by different categories: Software, Hardware, Services, Cyber Security, Professional Services, Telecommunications. In some of the businesses I worked for, I had to budget by business unit or by the client funding certain headcount, as there were multiple budgets in play for IT, or multiple routes of funding. In more governed or higher spend environments, it makes sense to look at SaaS budgeting platforms, as part of a Technology Business Management solution, but we are talking $100M budget and above for this overhead to make sense. We generally have separated the IT headcount budget from the IT services/BAU budget and one simple reason for that is the confidentiality on people's wages being sent in Excel files through email. Your HCM platform is a better place for managing headcount budget.

When talking with Finance teams, specifically FP&A teams, they appreciate and analyze details in the budget file. Therefore, my Excel budget file would have the following columns: Category (e.g. Software, Hardware, Services), Vendor, Product or Service name, Brief description of what the item is for, budget figure for this year, budget request for next year, budget variation (decrease/increase), comments (mostly on variations in budget figures, why IT is requesting more or less for the new year, or if it's a new line item, why there is a need for this to be introduced). This will avoid a lot of back and forth, as generally there is a Draft version which goes to double digits versions until it's approved. When entering the cost for existing services for the next year, a CPI increase is generally added. As a rule of thumb, I put 3%, however look at contractual agreements in place with vendors as some will do 5-8% YoY increases and I had instances were dramatic price increases happened, which you cannot really budget for and needs to be dealt with as a budget exception.

After I create a baseline budget, I look at new initiatives and hardware or platforms life cycle management. New initiatives generally have their own setup cost and budgeting as part of a business case or lean canvas, and the yearly budget file is generally for BAU. But if you take a new project to BAU in that year, you should capture the budget spend in the budget file. For life cycle management, I am looking at hardware devices which need to be replaced in the fleet and the cost of doing so, or platforms which need to be upgraded, replaced or decommissioned and capture estimated spend for that.

As a rule, I always try to create a budget bucket for external help, which is to protect from the unknown. This might be handy for situations were we have vacancies (although some of the vacancy savings cover for the external help cost), need to get something done faster or generally act as a 'tuck' for when vendors increase prices more than you expect or you want to try something new.

One last thing I want focus on is a general practice in corporate environments, whereby if you don't spend the budget available, you might get your budget reduced the next year. It's a problem if you go over budget and it seems to be a problem if you go under budget and create savings. I have always spent less than I forecasted and towards the end of the fiscal year, as a business we have looked at 2 things: can my savings in budget balance out overspend in other business units and then I would bank the savings for the overall interest of the business (with the caveat that I don't have my budget reduced) or we look at reinvesting the savings into R&D, new projects or hardware. There is also the option that the savings goes towards the bottom line and back to the owners of the business, but generally that might not serve the business long terms interest.

All in all, budgeting works great if you are across your spend and understand why you are spending it. Once the budget is locked in, the only way you can manage it is by approving most of the expenses yourself or delegating approval to some your senior team members within set limits.