If the last 25 years in the IT industry taught me one thing, it’s that people hate surprises, especially when it comes to ever-increasing technology spending.
Yet it seems like your IT team always has their hand out to upgrade this or replace that.
You’re left asking the same questions every time they ask to fund a new project:
- Why does this cost so much?
- How did we not see this coming?
- What do I need to do to make sure this doesn’t happen again?
There isn’t necessarily a one size fits all answer to these questions. The ever-changing nature of technology means there will always be some surprises, especially when it comes to spending. But you can minimize surprises with effective IT planning and budgeting.
As an IT company leader for the past 20 years, my budget conversations with other business leaders naturally focus on technology expenses. So, I’ll use IT budgeting as the context for this article, but the reality is that budgets are budgets. The IT planning and budgeting processes that we’ll cover are applicable and beneficial company-wide if you apply them to other areas of your business. These are some of the same budget lessons and practices we’ve adopted at Innovative.
Before we move on, though, I have a confession. I am sure, by the time you finish this article, I could convince you that I am an expert in IT budgeting and planning. That isn’t the case. My company turns 20 years old in January. The picture I painted above implies that we were super organized, strategic, and forward-thinking all along, but that simply isn’t true. It took us about 15 years of flying by the seat of our pants and dealing with surprises to finally figure out that we needed to be strategic with our company planning, and more importantly, with our budgets.
The path from no budgeting and planning/lots of surprises to perfect budgeting and planning/fewer surprises isn’t always linear and looks different for everyone. This article will give you the basic framework of where to start for businesses with no budget process. For companies with a budget process, you’ll learn how to verify that it includes IT effectively. From there, you’ll be able to add custom elements that are unique to your business or industry.
Merriam-Webster defines Nirvana as “a state of perfect happiness and peace.” Your planning and budgeting process is an effort toward IT Nirvana or that perfect state. Life and business are full of surprises, you’ll never avoid them all, but your business will be much more stable and profitable when you work toward Nirvana and eliminate as many surprises as possible.
Why are Technology Costs Unpredictable?
IT, in general, moves faster than other areas of business. It feels like IT is a constantly moving target – so it isn’t a huge revelation that technology can be full of surprises. When you struggle to be successfully reactive to IT changes, you’ll never be able to advance toward IT Nirvana.
Lacking a proactive approach to IT is almost always an issue of priorities, resources, or planning. For the sake of this article, I will assume that you already feel like IT is essential to your business and its future success. So, assuming priorities aren’t the issue, the rest of the article will focus on insufficient resources and not enough planning.
RELATED ARTICLE: Learn about the benefits of a proactive IT strategy.
The IT Budget: Solution to Unpredictable Tech Expenses
In my experience, the easiest way to address the resource and planning issues is to create a formal IT budget.
But I Have an IT Budget and Still Face IT Spending Surprises
You may already have a company budget, maybe even a specific IT budget. Great - I’m preaching to the choir and probably not teaching you anything you don’t already know about the importance of budgeting and planning. However, you could still end up with unforeseen surprises if you don’t involve your IT department or company in developing your IT budget.
If you don’t involve your IT resources in these discussions, ask yourself why. Either they aren’t asking to be involved, you don’t want them to have a seat at the budgeting table, or both.
Suppose you are reluctant to include your IT resources in budget discussions. In that case, you should re-evaluate why you have those people or companies in that role.
In the case of outsourced IT departments, businesses are hesitant to give a vendor a seat at the table for discussions that could result in “future sales” to that company. In that case, I strongly suggest you re-evaluate your partnership with that IT company (yes – even if it’s us). The only way outsourcing IT functions works in your favor is through the type of partnership that allows you to have those types of discussions while maintaining your fiduciary obligations to your company.
RELATED ARTICLE: This three-step guide to switching your IT company shows you how to improve communication and collaboration with your current IT company – so hopefully, you won’t need to switch.
In the case of internal IT departments, an IT leader must have a seat at the table with other key leaders. Either you need to take responsibility for IT leadership yourself, or you need an internal leader or outsourced resource to take on that role.
RELATED RESOURCE: This co-managed IT checklist is a document we use at Innovative to share IT roles and responsibilities between our team and a business’ internal resources. Companies often have the technical resources to manage day-to-day support and maintenance but lack “big picture” leadership capacity. If you can’t take on those responsibilities, you need someone who can.
A good IT leader, whether that’s an outsourced IT company or internal IT vendor, should make budget recommendations based on things like:
- Lifecycle management.
- Disaster recovery needs.
- Work from home/telework strategies.
- Application support needs.
- Licenses, warranties, and other renewal dates.
- Changing communication needs.
- Changing compliance requirements.
- Cybersecurity and risk mitigation best practices.
- Future changes in staffing.
- Changes in technology adoption within specific departments.
When you pair your existing budget and planning process with IT leaders who can predict needs based on their strategic understanding of your technology use, your set yourself up with the best chance of minimizing surprises.
What Does an IT Budget Include?
An IT budget is a document that tells you how much it’s going to cost to:
- Maintain your current technology
- Maintain data security and compliance.
- Purchase new technologies or additional resources necessary to meet your goals (i.e., adding new positions, opening a new location, expanding production capacity, offering a new service).
Here are some of the most common IT-related expenses to consider when building your IT budget.
Expenses to maintain your current IT hardware and line of business software investments.
Software is a commonly overlooked expense, as these costs sometimes lie within departmental budgets. For example, are you currently factoring your annual QuickBooks license into your overall IT expenses, or is it lost in your Accounting Department budget? Ultimately, IT will get the call when QuickBooks isn’t working. They need input in any decisions about necessary support and maintenance resources. This includes phone lines and internet access.
End-user support.
This might include training, an outsourced or internally staffed help desk, and is usually estimated based on user headcount. Your IT department or company should be able to tell you how much support costs (in tools and people) per end-user supported.
Telecommunications
This includes phone lines and internet access.
Consumables
These costs are often included in office supplies. When IT has a clear understanding of consumables’ costs, they can often impact efficiency and cost-effectiveness. Cost savings in paper, ink, and toner associated with managed print solutions are great examples of this.
Maintain cybersecurity, compliance, and disaster preparedness.
Cyberthreats are constantly evolving. Your threat prevention strategies must evolve with them, or your business is at risk.
Capital purchases to replace aging equipment, new technologies, or strategic initiatives.
This includes increases in headcount, changing job roles, changing work conditions (think about the massive shift we just made to work from home), and increased technology adoption.
Website and e-commerce infrastructure.
This is often included in the Marketing Department budget. Still, IT should be at the table to ensure sound security, compliance, and support practices, especially in the absence of a marketing technologist.
Personnel costs.
This includes a strategic leader or manager, employee payroll with benefits (or outsourced fees). Also, be sure to factor in possible travel if your company has multiple locations.
How Much Revenue Should You Allocate to IT Expenses?
The amount of revenue you should allocate to IT, and how you distribute that IT spending across the bullet points above varies from company to company. Flexera’s 2020 State of Tech Spending report shows how companies allocated and prioritized their IT spend in 2020. According to the report, companies spent, on average, about 8.2% of revenue on IT.
A formal IT budget, including the level of detail outline in the bullet points above, will shine the light on all the resources required to operate and proactively manage all of your technology effectively. Budgeting like this is the only way to move toward a truly forward-looking approach to IT with minimal surprises (remember, that’s Nirvana). The mere process of creating a detailed and formal budget, especially a multi-year budget, forces you to think into the future and speculate IT’s role in different areas of your business.
How Do I Get Started?
OK – you know your business needs a comprehensive IT budget, but you’re not sure how to get all the key players on board.
If you’re asking this question, you likely belong in one of these three categories depending on what position you have with your company.
- CEO/President, top-level decision-maker
- Controller, CFO, Director of Finance, or other accounting department head
- IT Director, Network Administrator, or technical resource reporting to the top-level decision-maker or financial decision-maker.
The strategies to get started on IT budgeting are different depending on each of these roles.
Budgeting as a CEO or President
First and foremost, if you are a CEO or President, or other top-level decision-maker, the good news is that it starts with you. You have to believe that the budgeting process will help you avoid surprises, and that now is the time to start doing things differently. However, you may not know where to start or may not have the skills to put together a budget.
That was me back in 2015, so I can completely relate. Depending on your company’s size, you may have someone on your team with budgeting experience, especially in your accounting department. You may also have a CPA that can work with you to get started on your first budget.
Calling a CPA or your accountant and asking if you can get help with a budget is music to their ears – they will be happy to help you and provide a framework to use in the future with less and less help each time. Your IT company or department should assist you with this budget process, especially with multi-year budgets surrounding major equipment purchases.
Budgeting as a Controller, CFO, or Director of Finance
If you are a Controller, CFO, Director of Finance, or other accounting department head, the good news is you likely already have the skills and experience necessary to create budgets. The challenge might be you don’t have the buy-in. I’ve heard many times over the years, “I wish we budgeted, but the owner doesn’t like it, or I can never get buy-in.” For those of you who are in this position, I’d recommend a few things.
First, you can still have an informal budgeting process, especially with a specific area like IT. You can create that budget and use it as a tool alongside your other management tools and start building a case for a more formal process. I don’t know any CEO or President (myself included) who LOVES surprises and doesn’t like future predictability.
A budget accomplishes both. Doing some of the work and showing the value it can bring to the company may reduce some of the objections you are getting on the budgeting process (You mean I need to watch what I spend and be held accountable too? No way!!) Show a good CEO or President a well thought out plan including the benefits vs. the negatives, and you’ll typically be able to win them over.
Budgeting as an IT Director, Network Administrator, or Technical Resource
Last, if you are an IT director, Network Administrator or another technical resource, it may be an even more uphill battle to get your company to agree to an IT budget or budgeting process. For those in this position, I’d recommend some of the same strategies that I outlined above for finance leaders, but in these cases, the value of your IT company could play an even larger role.
If you have a good relationship with your account manager or sales contact, often that person reports to or has a relationship with someone in their company who can help make the case for an IT budget with your upper management. It isn’t uncommon for the Vice President or President of an IT company to develop a relationship with the CEO, President, or CFO of a company with a dedicated IT resource.
In this case, you can leverage these relationships to help show the value of these types of initiatives and give more credibility to the request to develop an IT budget.
The Budget Process
Assuming your fiscal year aligns with the calendar year, October/November is typically when companies start their budgeting process for the next year. Now is the perfect time of year to get started with your budget. Or, if you have a budget process, you’re likely already in the thick of planning, and this is a great time to verify you have the right IT players at the table to project IT needs and costs accurately. No matter when your fiscal year begins, expect the budget planning process to take about two or three months.
If you’re new to budgeting, there are tons of free resources to help you start. Organizations like the Small Business Administration, SCORE, and your regional Small Business Development Centers are usually excellent resources.
Here are a few free budgeting resources available to small businesses through these organizations:
- How to Set Up and Maintain a Budget for Your Small Business – SCORE
- Budget Planning 101 – Free Online Training – Maryland Small Business Development Center
- US Small Business Administration Business Guide: Manage Your Finances
Whether you're new to budgeting or already have an established budget process, your budget planning starts with some sort of strategic planning and goal setting.
You won’t know how much income you need to generate or how many expenses you’ll accrue if you don’t know what you want to accomplish. Your strategic planning process may be as simple as stating that you want to maintain the status quo. You’ve been satisfied with the product or service you provide, the scale at which you provide it, and you just want to keep your head down and continue doing what you’ve been doing.
Larger, more complex businesses may set specific organizational, departmental, and individual strategic goals. These more complex strategic plans might include goals like expanding operations to a new market and specific professional development objectives for employees.
After you establish your goals, look at your profit and loss statement. Have an honest discussion (with yourself, your leadership team, and your financial advisors) about your current spending. Are you OK with how you’re spending? How do you feel about your expenses? Does your current spending align with your strategic goals and plan?
If you’re not OK with your current expenses, identify the areas you need to cut. Plan what costs are necessary and what expenses you’ll need to incur to meet your strategic goals. This is where your IT advisors come into play. When they’re aware of your goals and historical spending, they will help you more accurately project future expenses.
Get Your IT Budget in Place Now to Control IT Costs Next Year
An IT budget is a big part of the solution for unexpected IT costs and surprises. If you currently have no budget in place, no matter what the reason, there is no reason why you can’t get started today with something. Even if you start with a simple spreadsheet listing your anticipated expenses, when you think they will occur, and a few comments to explain the gist of the expense, it is still better than nothing. To be honest, that’s all a budget is – a spreadsheet of anticipated expenses, when they will occur, and a few comments to explain the gist.