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Journal2011Fall-2.The IT Budget Makeover

ITFMA Journal

The IT Budget Makeover

Nick Goss, Consultant, Azzarello Group


These are edited excerpts from Nick Goss’s presentation at the ITFMA Financial World of Information Technology Conference August 2010


This article focuses on "how to do it.” It focuses on increasing the IT department’s credibility with business leaders, overcoming the organizational hurdles and identifying the right data sources.

IT budgets typically describe hardware, software license, communications and staff costs. The problem is that no one in the business cares. What they do care about is attracting and retaining new customers, days sales outstanding, and reducing enterprise costs. This results in a very big item on the company budget called "IT” that doesn’t use any business terms AND contains a very big number. This type of IT budget has little business credibility and can result in across-the-board costs. This article describes in practical terms how to restate the IT budget in terms of the business outcomes being delivered. It offers a pragmatic means of establishing transparent communication with the business about investment priorities and value delivered.

IT has credibility challenges build in itself. The business does not understand IT, IT costs a lot of money, and the business leaders "forget” that last year "must have” projects still cost money this year to run. There also is cost for keeping the lights on and providing strategic projects, required service levels, and user support. IT touches the whole company, one way or another.

If IT isn’t communicating with the business, it isn’t talking properly, BUT MORE IMPORTANTLY, it isn’t listening properly. At its heart, the often quoted problem of "aligning IT with the business” is about how IT frames what it does and how it communicates. This inability to talk business with the business folks is what leads to many of IT’s credibility problems. The credibility of the IT department hinges on your ability to make it relevant to the goals of the individuals and departments. This means no more "80% is keeping the lights on, 20% are strategic projects.” You have to talk the language of the business for ALL IT activities. This requires that you understand the top overall business initiative, re-educate your organization through the Profit & Loss, and make the business goals the basis for the IT budget.

Relevance is NOT about "teaching the business IT.” If you have to teach them your terminology, you are not relevant. To be relevant, you have to be speaking their language and objectives. For example, your phone bill does not list the charges in terms of your share of the backbone network, your use of cell towers, or your "last mile” charges EVEN THOUGH this is how telecommunications companies view their costs. No, your phone list charges for calls and texts because that is what YOU value.

These were CEO’s stated top ten business priorities from a 2009 Gartner study:

  • Business process improvement
  • Reducing enterprise cost
  • Improving workforce effectiveness
  • Attracting and retaining new customers
  • Increase usage of analytics
  • Creating new products and services
  • Targeting customers and markets more effectively
  • Managing change
  • Expanding current customer relationships
  • Expand into new markets

These priorities are business-focused, of course, and prioritized from top to bottom. You can see how their achievement would drive a business forward.

These were CIO’s top ten priorities for the same year:

  • Business intelligence
  • ERP and enterprise applications
  • Virtualization
  • Modernizing legacy applications
  • Collaboration technologies
  • Networking, voice and data communications
  • Technical infrastructure
  • Security
  • Service oriented architecture
  • Document management

Where is the business focus? What would the effect of being the CIO and walking into the CEO’s office and saying, "these are my priorities?” Are CEOs supposed to have been born with the knowledge that "virtualization” supports "reducing enterprise costs?” When talking about IT outside the IT department, it is hugely important that you use your "external voice” – no jargon unless it is business jargon.

The following Gartner chart of revised top ten priorities illustrates how a CIO lets the CEO know that they "get it.” Just grouping the IT priorities under the business priorities is a huge step forward in credibility and relevance.

Efficiency & Cost Reduction
Revenue Growth
  • Business process improvement
    • ERP and enterprise applications
    • Modernizing legacy applications
    • Security
  • Reducing enterprise cost
    • Virtualization
    • Networking, voice and data communications
  • Improving workforce effectiveness
    • Virtualization
    • Collaboration technologies
    • Document management
  • Attracting and retaining new customers
    • Business intelligence
  • Increase usage of analytics
    • Business intelligence
  • Targeting customers and market more effectively
    • Collaboration technologies
    • Technical infrastructure
  • Expanding current customer relationships
    • Collaboration technologies
  • Expand into new markets
    • Service oriented architecture

Imagine a CIO that walks into each monthly senior staff review and starts talking about his or her IT success measures with this chart of IT business objectives (initiatives):

Business Initiative IT Results
  • Decrease DSO in North America
  • Improve profit margin on wholesale
  • Improve post-season inventory reduction
  • Expand market in Eastern Europe
  • Completed SAP rollout
  • Completed implementation of partner data management system
  • Increased ease and speed of transitioning to sale pricing
  • Completed prototype for sales forecasting and order entry on time

How wonderful, but the first step is to start the IT-business conversation in terms the business understands. Before you talk about the IT activities, frame them in terms of business outcomes that you are supporting (see IT Results in the above chart).

It is VERY important to realize that a budget is a communication tool. You use it in negotiations to communicate WHY you should be spending money. This requires your external voice – no-one in the business understands or cares about an IT budget in terms of IT’s internal divisions or resource categories such as hardware depreciation, hardware maintenance, software licenses, R&D amortization, development personnel, consulting services, etc. If you present the budget in terms of data centers, staff and maintenance, the business leaders don’t see the value. There is a finite amount of money to spend, they want to reduce your budget because it is a big number, so they pick the biggest number(s) in the budget and ask, "Why is that so high?”

The first step in making over the IT budget is to change the left column of the budget. Group the items into initiatives that the business cares about, such as Process Improvements, Strategic Business Initiatives, Customer Relations, etc. This has to include both "keep the lights on” work as well as new projects. When making over the left-hand column, use the actual words that the business leaders use. Keep ITIL terminology inside the IT department. Let the businesses choose the names and the groupings, e.g., cycle-time reduction, supply chain management, employee services may all be seen by the business as "Process Improvement.” The fact that they all use different systems is your framing, not theirs.

The next step is to make over the column headings by framing them in terms that enable business decisions. What MUST we do? What will it cost if we CHANGE NOTHING? What will it cost if we add the NEW INITIATIVES? What will it cost if we add in the high level corporate STRATEGIC INVESTMENTS? In these cases, the headings are:

  • Musts
  • Change Nothing
  • New Initiatives
  • Strategic Investments

The total IT budget is still the same, but it is now made up of business deliverables, and the options are presented more clearly. The budget conversation is now collaborative with your business peers, not combative. Your IT budget now is a communication tool that enables real business decisions to be made. They can readily identify their "must succeed” items and groupings.

Once the business leaders have identified the services, you need to map those business services to the underlying technical services, and then apportion the costs of those technical services. The mapping follows the following flow:

  • Desired outcome – identify service units, cost of service units, and expected volume of service
  • Allocate direct costs that are wholly consumed within a single service
  • Allocate indirect costs based on consumption or utilization whenever data is available, e.g., helpdesk cost
  • Overhead includes true shared resources like data centers
  • Assets include applications, databases, operating systems, servers

Summary

  • Make over the IT with a business focus
  • Be a translator and communicate IT’s value in terms the business understands and values
  • Let the business create the services and measures that they understand and value
  • Structure the project with CIO and CFO support
  • Interview stakeholders and review business plans
  • Identify "left column” business services to model
  • Identify underlying technical services and create cost models
  • Develop a communication plan
  • Focus on the big levers

 

Copyright © 2011 by the IT Financial Management Association.

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