Matakuliah : A0774/Information Technology Capital
Budgeting
Tahun
: 2009
UNDERSTAND
THE REAL IT SPEND
Pertemuan 1-4
The key to budgeting for IT is not how much is spent,
But how wisely it is spent.
IT ASSETS
•
•
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Hardware
Software
Networks
Services
People
BUILD THE IT BUDGET
• Top Down
– How much money we have to spend, now how do we spend it?
• Bottom up
– These are the things we need to do in IT, and these are the
things we would like to do. Now how much will it costs?
Realistic forward looking IT budget can
be developed
• Define the specific technologies, systems, activities,
processes and people that will become part of the
budget that the CIO and the IT organization won or are
responsible to deliver on behalf of the company and
those that will be managed by others outside the IT
organization
IT Budgeting
• How much is currently spent on IT in the IT department’s
own budget, and how much is hidden away in businessunit operating budgets under IT or non IT line item. This
is called total spend analysis (TSA)
• How the drivers of this total spend will be allocated in the
future, what properly goes into the IT budget, and what
properly stays in operating budgets of the business units.
This involves deciding the ownership of the IT spend.
IT Budgeting
•
Who is responsible for executing the activities and tasks
associated with the spending. Sometimes the execution
is divided between the CIO’s organization and the
business unit. Sometimes it helps to have an outside
third party take on the responsibility for execution.
However, someone in the company, either in the IT
organization or in a business unit, must still assume
overall accountability for the spend.
IT Budgeting
• The IT budget for “must have” activities.
– The top down
• feasible to maintain all current IT activities at
current service levels
• to make trade off by eliminating activities
• reducing service levels.
IT Budgeting
– Bottom up or if there is money left over in a top down budgeting
exercise, after taking into account operation of all the must haves at
their current service levels or possibly even improving those service
levels, a company must rank the desires for future IT spending by all
constituencies.
• If the proposed budget exceeds the available funding,
hard decisions must be made collectively by the
business units, the IT organization, and corporate
executives about what stays in the budget and what
goes. This is often a highly emotional and politically
charged exercise. However, it must be done, and the
CIO must drive this process and directly involve
corporate and business unit leadership. This is called
ruthless prioritization.
IT Spending Categories
• The IT infrastructure
• PC specific functional and business unit software tools
• Server or mainframe based legacy functional or business
unit applications
• New functional and business unit applications just
coming online but not yet operational or mainstream.
• New functional and business unit application projects.
IT Spend Area
IT Infrastructure*
PCs
Basic PC software
Peripherals
Servers
Ownership of IT Spend
Drivers
Business
Unit
IT
√
√
Responsibility for
Execution of IT Spend
Business
Unit
Accountability for
Overall IT Spend
IT
Business
Unit
IT
√
√
√
Networks/telecom
Internet connectivity
Support/help desks
PC Specific Business Unit Infrastructure and Sotware Tools
√
√
√
√
√
√
√
√
√
√
Software
Additional hardware
Special support/help desk
Server/Mainframe-Based Legacy Business Unit Infrastructure and
Applications
Software Leases
Software maitenanct and
upgrade contracts
Dedicated servers
Special network/telecom/Internet support
Application-specific help desks
New Business Unit Infrastructure and Applications
Transition form legacy to
“new” costs
Software
Hardware
√
√
√
√
√
√
√
√
√
√
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Infrastructure
Project management
New Business Unit Infrastructure and Applications Projects
Software
Additional hardware
Special support/help deks
√
Why is it important that jointly managed assets owned
by the department or business unit be aggregated with
the spend for IT organization owned assets ?
• Aggregating the spend is the only way to get a clear
picture of those costs over which the IT organization
actually has control
– Changing mind set  “IT is a free service, always there, always
perfect” to “That service costs money and can be improved or
impaired depending on the amount of resources dedicated to it”
• Capturing these costs – especially the actual incremental
costs associated with operating legacy systems – helps
the IT organization to assemble business cases, when
appropriate, for upgrading hardware, software and
support.
• Finding what IT assets and resources are residing in
departments or business units helps the CIO create a
case for standardizing and consolidating purchases as
varied as PCs, help desk services, telecommunications
network access, and outside services, thereby driving
down the company’s aggregate IT spend.
Basic Principles Preparing The IT Budget
• A driver of the IT spend should be owned primarily by
the group that has the most effect on the driver.
• To the extent possible, maximum control over the spend
should be put in the hands of the people who are users
of the service, whether standard or specialized. If people
own the control and know that they are paying for that for
which they’ve asked, ultimately, they will help control the
spend.
• IT spend can be owned jointly by the IT organization and
the business unit or department, but a formal activity
based service level agreement (SLA) should be in place
for the cost drivers and service execution and delivery
levels.
• Total spend analyses covering all costs to the company
(rather than focused on point in time costs) must be
employed when analyzing IT costs and service level to
ensure full transparency
• Continuous dialogue and constant liaison between the IT
organization and the business unit or department must
exist to ensure that changes in either group that might
affect the SLA are discussed candidly and that all
options, costs, benefits and risks are fully transparent
• The keys to achieving full transparency in the IT budget
are to develop and use appropriate and relevant IT
performance and value measurements.
5 Major Spend Categories IT Budget
1.
2.
3.
4.
5.
Business unit driven IT costs
IT operations and management base costs
Business unit independent IT initiatives
Corporate wide initiatives
Emerging technologies
5 Major Spend Categories IT Budget
1.
2.
3.
4.
5.
Business unit driven IT costs
Independent/discreet business unit needs requested of and
addressed by the IT organization on behalf of a business unit,
including activities such as PC procurement, installation and
maintenance of dedicated servers, and special applications work.
This category if b far the largest in terms of costs, often accounting
for roughly 50% of a company’s total IT spend.
IT operations and management base costs
Business unit independent IT initiatives
Corporate wide initiatives
Emerging technologies
5 Major Spend Categories IT Budget
1.
2.
3.
4.
5.
Business unit driven IT costs
IT operations and management base costs
Primarily IT staffing costs and the structure necessary to support
IT staff, as well as the IT financial and performance measurement
process.
These include competitive compensation, continuing education
and skills development, the overall career model process, and the
budgeting/analysis processes.
Business unit independent IT initiatives
Corporate wide initiatives
Emerging technologies
5 Major Spend Categories IT Budget
1. Business unit driven IT costs
2. IT operations and management base costs
3. Business unit independent IT initiatives
Specialized and unique software and hardware
infrastructure dedicated to individual business units and
to their strategic objectives. These are often owned and
housed within the business unit.
4. Corporate wide initiatives
5. Emerging technologies
5 Major Spend Categories IT Budget
1.
2.
3.
4.
Business unit driven IT costs
IT operations and management base costs
Business unit independent IT initiatives
Corporate wide initiatives
Includes initiatives that can be leveraged across the
company. These typically include enterprises wide
applications, core infrastructure, networks, connectivity,
and other initiatives that benefit the entire company and
that are considered foundation elements
5. Emerging technologies
5 Major Spend Categories IT Budget
1.
2.
3.
4.
5.
Business unit driven IT costs
IT operations and management base costs
Business unit independent IT initiatives
Corporate wide initiatives
Emerging technologies
Costs associated with identifying, experimenting with,
and adopting emerging technologies, including direct
internal costs as well as costs incurred in partnering
with third parties or in engaging in other applied
research activities.
5 questions for the bottom up budgeter
1.
2.
3.
4.
5.
What is the service being provided?
What are the current services being provided?
Should the service level be improved?
Should services be added?
Are all services necessary and must they be provided
at the current service level?
4 question for the top down budgeter
1. How much money is available for IT services?
2. What services must be provide in that budget?
3. What level of service can be provided in the budget,
given the number of services that must be provided?
4. Who will provide the service (internal resources – the IT
organization, the business unit, or the department – or
external resources)? What are the cost differences?
IT Spend/Budget Drivers
Speed/availability of Service
Normal
Premium Speed
(Emergency Situations)
Basic/Standard/Commodity
On Demand
(24x7)
Lowest Cost
Higher Cost
Higher Cost
Highest Cost
Basic/Standard/Commodity
+
Business Unit Premium Special
Business Unit Premium
Unique/Custom
Measurement
Measurement
Class of User / Service
Focus on Total and Lifetime Spend
• The amount of that cost depends not only on the size
and complexity of the initiative being undertaken, but
also on the state of the current IT environment.
• Only by analyzing the costs of changes of changes to
the existing environment can the total cost of an IT
initiative truly be captured.
• IT budget needs to accommodate issues surrounding
lifetime cost. Not only for applications, but also for
hardware, networks, other IT infrastructure items, and
services.
Ruthlessly Prioritize Desires For Future IT
• Has as its fundamental objective a reduction in the
number of IT priorities and total IT spend to levels that a
company can afford.
• Focuses business units and users on living within their
means and dealing with austerity.
• Must be continued and institutionalized into the regular
IT planning process.
• With proper IT planning, budgeting, and spend-portfolio
analysis processes in place, ruthless prioritization simply
becomes a tactic that helps to infuse the organization’s
culture with the idea that wise IT spending must be
maintained.
The Bottom Line in Budgeting
1
An IT Budget will never be perfect, and it will
never be static
2
The CIO and the IT organization must have the IT budget
Baseline constructed in such a way that it is fully
Transparent to corporate and business-unit executives
Who need to make properly informed decisions
3
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