IT budget : What are the stages of the IT Project budgeting process ?

IT budgeting requires some thought with regard to the current activities on the one hand, and to new IT projects to be implemented on the other.
This should enable the General Management, the Chief Information Officer (CIO) and the Administration and Financial Department (AFD) to construct a sustainable proposal for the IT function together.
Depending on the strategic directions, it should guarantee a real contribution to Business, take into account customer expectations, control costs and processes, and anticipate the future.
The ISD must manage its budget in such a way as to actively contribute to maintaining or creating value for the company at all times. The IT budget is a budget which “infuses” through the entire organisation. Why has this become a strategic issue?

What is included in an IT budget?

IT budget is the amount of money spent on an organization’s information technology systems and services.

An IT budget comprises many components, such as operating, capital, and project categories. And types of spending, such as software, hardware, subscriptions and services.

Assessing and negotiating an IT budget is a fairly difficult art.

The Chief Information Officer (CIO) is responsible for managing the company’s IT department. They act as the lead IT expert and manage and recruit computer scientists. In a context where digital is increasingly important, the Chief Information Officer must manage the equipment and human resources.

What is a typical IT budget?

First of all, it aims to balance the ISD activity between expenses and services. The expenses are totalled per type of expenditure (infrastructure, operation, support, maintenance, projects, etc.).

The services are valued per business line department according to their actual consumption of work units. An economic model is used to assess the costs of the ISD activities and the services provided.

The budget of a ISD represents between 1 and 9% of a company’s budget, depending on the business sector.
The trend is towards an increase in this budget share.

Some examples of the maximum ratio of ISD expenditure related to the turnover per sector:
– Financial services, Banks: 9%
– Telecom: 5.5%
– Consultancy and services, IT: 4.5%
– Electronics, Health, Insurance, Transport: 3.5%
– Automotive, Chemistry, Consumer goods, Energy: 2%
– Building, Distribution: 1%

Caution: These ratios are extremely variable, depending on the sector and the size of the company. One of the difficulties lies in the uncertainty as to whether all of the company’s IT costs are taken into account: those managed directly by the ISD and also those which are less visible, as they are diluted in the budgets of the ISD’s customer business lines. Further information

 

What do companies spend the most money on?

It is as unique as this department, which is at the same time a:

  • Support department: the ISD offers services to the other departments
  • Production department: IT is now present in all production processes and in almost all a company’s offers.
  • Performance department: the ISD relays the opportunities provided by the technology and becomes a core competence in the performance of organisations

The cursor between these three roles depends on the company’s activity and digital maturity. The budget, and therefore the allocation of resources, will be structured and scaled in proportion.

Illustration:  Two companies in the same business sector with two different approaches, on the one hand Airbnb, a community platform for renting and booking accommodation, and on the other hand the Accor Group (Novotel, Mercure, Adagio, Ibis, HotelF1, etc.), which owns, manages and franchises hotels, resorts and holiday residences.

Total room capacity: Airbnb: 1,500,000 advertisements and Accor Group: 704,000 rooms

Accor Group manages a booking platform + hotel construction + the reception and cleaning payroll, whereas Airbnb only bears the cost of its ISD, passing on the other costs to its users.

 

The ISD is considered as a cost centre:

Even if it is not the direct beneficiary of the services it offers, the latter are financed from its budget. The services and human resources committed in order to set up these services are often re-invoiced within the company. It is sometimes considered as a profit centre – it may even sell its know-how outside the company.

It is an engineering department. Its human resources, whether they are internal or the purchase of services, are its major budget item – 46% according to KLC, CIGREG and the CEGOS observatory.

It is a technical infrastructure department, a concept which is undergoing a paradigm shift. Admittedly it remains a basic infrastructure, with internal and external networks, user workstations, storage, etc.

However, this is profoundly affected by cloud offers, SaaS software solutions, telecommunications in the middle of an “internet” transformation and user “multi-desking” (IOT, smartphone, tablet, BYOD, etc.).

This has a direct impact on the ISD budget, particularly with budget items which switch from investment – CAPEX to operation – OPEX.

The ISD is a “project” department and which provides business continuity for “project deliverables”. Like the new digital stakeholders, it is becoming a purveyor of “platforms” which are embodied in a catalogue of services. Constituting and maintaining the catalogue of services is what needs to be budgeted.

 

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What are the stages of the IT Project budgeting process ?

At the end of the first half-year, the General Management and the Administrative and Financial Department launch the budget preparation process. The process is driven by the budget guideline with specific variants per department. The aim for the ISD, like for the other departments, will be to put forward a budget for the upcoming financial year which will reflect the company’s strategic directions in “euros”. Depending on the organisation, this process closes in November/December with the validation (or voting) of the consolidated budget. Between these two milestones, the highlights are:

  • Inventory of the project work-in-progress, the remaining available funds and the budget re-estimation to establish the budget needed to finalise the projects currently in progress
  • Overview / update of the “business continuity” assessment tables to establish the recurring costs
  • Inventory of business line requests to estimate the budgets of projects awaiting decision.
  • Inventory of requests specific to the ISD to estimate the budgets of “performance” projects awaiting decision.
  • Decision-making and discussion with the stakeholders
  • Negotiation of the ISD budget with the General Management

 

Who is challenging the IT budget decisions ?

Building the budget is obviously a collective task. This makes the exercise all the more complex, as it requires numerous iterations between many stakeholders. It is frequent to have up to seven budget shuffles to finalise the ISD budget.

The stakeholders making the decisions:

  • The Managing Director – validates the strategic alignment of the budget
  • The Financial Manager – validates alignment with the financial forecasts
  • The “Business Line” Managers – validate the projects to be launched
  • The Information Systems Director – validates capacity alignment

The operational stakeholders:

  • The study/project manager and their project leaders – draft the budgets to finalise the current projects and cost project requests
  • The Infrastructure / Business Continuity Managers – establish the estimated expenditure
  • Management control – prepares feedback, audits, ROI monitoring and assists with accurately provisioning the budget
  • The financial representatives in the ISD (budget manager, management controller) – monitor budget execution

For the Study/project manager, Programme director or PMO, the process to construct the IT budget is an important managerial time with their team of project leaders and users of the IT tools:

  • Consideration of their organisation mode
  • Focus on new goals
  • Consideration of the resources needed to achieve them
  • Launch of new IT projects

 

IT budget: How can it be anticipated?

Budget preparation is based to advantage on upstream elements such as:

  • The strategic plan
  • The IT master plan, which is an operational reflection of the company strategy extending beyond the financial year.
  • The guideline
  • The project inventory structured in:
    • Ongoing projects
    • New projects:
      • “Restricted” by obligations, in particular legal obligations
      • “Improvement” of the existing situation or performance
      • “Value creation”
    • The completed amount in terms of resources and expenses
    • The cost assessment tables, particularly for business continuity
    • Feedback or project reports

 

As stated, this work must be completed in close collaboration between the IT teams and the other departments in the company. This thought process in the company on its IT must enable it to answer questions such as:

  • What value is produced by the Information Systems Department?
  • Do the information systems (IS) boost or hinder growth?
  • Do the IS encourage innovation and skills management?
  • Are operations really limited to what is useful for the company?
  • How do our costs compare to external services?
  • Where can we cut costs?
  • Do we satisfy all the expectations of our environment?
  • How can we better communicate our performance internally?
  • Are we sufficiently attractive to attract the skills we need?
  • Are our IS investments cost-effective?
  • How do the IS foster consideration of customer needs?
  • How can the IS help us be more responsive?
  • Are the company’s assets and operations properly protected?
  • Are the main risks for the business controlled?

 

What are the steps in preparing an IT budget?

This preparation phase is essential to succeed in developing your ISD budget.

The best advice is to initiate benchmarking of the IT costs. This allows the information system to be analysed from the point of view of costs vs. value created for your company.

ISDs are undergoing substantial changes and it is essential to understand the ISD from an economic performance angle. Why? Because we are witnessing the gradual switch from On-Premises infrastructures to Cloud offers.

The acceleration in the adoption of agile approaches and DevOps is impacting projects and operation business lines by increasingly encouraging infrastructure automation and “Software Defined” approaches.

It should not be forgotten that knowing how to analyse data means having the valuable ability to anticipate and forecast (Data is a real accelerator in companies’ digital transformation).

Therefore, this new direction not only makes it possible to manage IT economic performance, but also to measure the level of ISD transformation on these new strategic issues.

Benchmarking IT costs will provide you with external points of referencewill develop learning partnerships, motivate your team of project leaders, legitimise your goals and enable you to implement a new approach to the development of new know-how.

The success factors of the benchmarking process are based on the commitment of the department, continuous improvement, and respect for business ethics.

Based on the various observations, you will be able to produce IT investment estimates.

This project costing is based on the return-on-investment approach. To evaluate the efficiency of the investment, it is important to produce cost-effectiveness assumptions with the calculation of the IT ROI ([(Margin generated – Cost of the investment) / Cost of the investment] x 100).

 

New project budget envelope:  How is it costed?

The next issue is to obtain objective costings which will be a basis for presentation and negotiation with your General Management.

To do so, we advise you to choose the cost assessment table method. This method will enable you to enter the negotiation phase more easily, as you will have listed all the possible calculation hypotheses.

If necessary, you will also be able to adjust the variables of your new IT projects over the course of your negotiation.

This method of estimating budget costing prepares you for negotiation, as you have listed various costing hypotheses. If your General Management says, “it’s too expensive”, you will be able to put forward another hypothesis to present a cheaper offer.

An important point that should not be forgotten when lowering the costing is obviously to maintain your cost-effectiveness.

During this process of reflection, thought should be given to the allocation of human and equipment resources to the new project. What are the:

  • Technical needs to develop this project?
  • Human resources skills and how are they available?
  • Tools used to develop this project?

You can use tools such as:

  • The responsibilities matrix and organisation chart
  • A capacity planning (or resources workload plan)
  • A workload histogram
  • A forecast per skill

Then it is useful for the project leader to estimate the workloads:

  • Labour / Service
  • Cost of software acquisition and license
  • Technical infrastructure
  • Team training
  • Software inspection and correction
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