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IT Has Changed, But IT Budgets Haven't

IT's role is shifting to focus more on innovation and driving revenue. So why are budgeting practices so stuck in the past?
How To Benchmark Chaos

It's easy for IT pros to feel like they're under-resourced. But are they? One part of the answer comes from benchmarking budgets against other companies. Yet three out of 10 IT organizations we surveyed don't compare their budget efficiency with other organizations'.

That's a lost opportunity. As more business units make their own technology investments, IT could provide expert services for tracking costs and calculating ROI.

The most popular budget efficiency metric with tech pros in our survey (cited by 37% of respondents) is IT operating budget as a percentage of the corporate operating budget, followed by IT operating budget as a percentage of revenue (31%), and cost per employee served per year (16%).

Sadly, "IT employees as a percentage of all employees" isn't dead as a metric; 13% of survey respondents said their companies still use it. Do you want a metric that can be gamed by using contractors instead of employees?

IT also has been doing more transaction budgeting--tracking IT costs on a per-unit basis. For example, the two big growth areas for this kind of tracking are calculating costs by work order (up 10 points to 24% of companies) and by IT personnel service hour (up eight points to 19%). Transaction-based budgeting looks here to stay: In 2010, 54% of companies said they did no budgeting that way, and this year, 37% say they do.

The practice of chargebacks to business units for IT services is always controversial. A means to achieve accountability, or needless accounting overhead? As in 2010, about 60% of companies represented in our survey charge back or plan to charge back for some or all of their IT services. The share that charges back 100% of IT dropped from 17% to 9%. Among those doing chargebacks, the majority charge back less than 40% of their total IT costs.

One survey respondent whose company is trying to go to a pay-for-service model says: "Some business units will disagree with this model, as they are used to receiving large amounts of data center services for 'free.'" Yes, but be careful. If you start charging per CPU hour, unless you have massive scale, you're going to get shellacked by Amazon's and Google's cheaper cloud computing rates. Hello, commodity! If internal IT's CPUs offer something those vendors can't, be ready to explain your cost premium.

Showback--whereby IT costs are reported to business units but not billed--is less controversial but still quite effective. About half of companies in our survey use this model, and of those only 8% say it's not worth it. There's no better way to connect IT with business activities and for business unit leaders to know if they're high utilizers. Sometimes being a high utilizer is just fine, and it'll highlight a vital business unit-IT tie. Letting business units see their costs compared with others is the most-cited benefit from a showback approach.

Unfortunately, showback and chargeback accounting are tedious to set up, and they come with an ongoing expense. Have a clear objective before going down this road. These activities are prone to misinterpretation, so have a process for discussing the results regularly with business units and acting on problems.

Even though this kind of measurement and transparency comes with risk, IT can't shy away from it, and should in fact push for more of it. As business units such as marketing and product development start spending more on technology, these kinds of budgeting approaches should be discussed openly to make them a strategic choice. If marketing's buying and running its own servers, make sure everyone's aware of it.

Given the budgeting changes that IT's changing priorities will require, IT looks a bit complacent: 60% are very or somewhat satisfied with their budget process. And yet four out of 10 survey respondents admit that there's tech spending outside of centralized IT that their company doesn't officially recognize. Half think their company's budget process isn't consistently flexible enough for changing business needs. Three-fourths don't have a formal way to address unforeseen expenses. And barely half think the company will add enough IT resources to meet business objectives as the needs change.

So, how can you take all of this and create a plan of action to improve business technology budgeting at your organization? Here's a short list:

>> Govern right: Build a governance model that's participative, not mother-may-I.

>> Display agility: You can't ask for budgeting flexibility if IT operations and project delivery aren't flexible.

>> Benchmark: Comparisons create credibility that will emphasize that budget requests are reasonable.

>> Tell a story: Executives are inundated with "IT is dead, just push it to the cloud" stories. They need to hear what makes your work special--from you and the business leaders you're partnering with on projects. Ongoing communications, including quarterly reporting, focus groups with business units, and other PR-type activities, convey essential information. This effort might seem far removed from the cold, hard numbers of budgeting, but a good story is part of any business case.

chart How is your technology spending outside of the centralized IT budget changing?

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6 IT Trends Tight Budgets Won't Kill

Editor's Choice
Sara Peters, Editor-in-Chief, InformationWeek / Network Computing
Pam Baker, Contributing Writer
James M. Connolly, Contributing Editor and Writer
Sara Peters, Editor-in-Chief, InformationWeek / Network Computing
Greg Douglass, Global Lead for Technology Strategy & Advisory, Accenture
Carrie Pallardy, Contributing Reporter