Special Feature
Part of a ZDNet Special Feature: Tech budgets 2017: A CXO's Guide

How to craft a winning IT budget

Budget reviews are inevitably a contentious process. Here are a few ways CIOs can get more out of it.

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Image: iStock/Ridofranz

Few CIOs relish the budget review process. It can be a cooperative and collaborative process at best -- or a contentious and even confrontational process at worst. Nevertheless, everyone agrees that budget-setting (and getting approvals for vital projects) are all part of advancing the technology enablement of companies.

By their very nature, budgets are an exercise in compromise. CIOs must come away with approvals for projects that are essential for the company's success, while being a champion for possibly non-essential projects their staff views as important. Advancing vital initiatives for the company while maintaining the morale and the faith of the IT staff can be a tough balancing act.

Put simply, a successful IT budget is one that gets the most return on investment. To accomplish that, IT investments must deliver tangible value to the company that everyone (not just IT) can see. Successful budgets shouldn't contain funds for projects that the IT staff can't work on in the next year. Over-procuring on a regular basis isn't viewed favorably by the the CFO and others.

Keeping these things in mind, the CIOs who create the most successful budgets do several things:

Set up budget contingencies and anticipate arguments

The first rule of thumb for anyone who creates budgets is that you will not get everything you ask for. The job of the CFO and other budget reviewers is to vet budgets, which they do by asking for justification of projects. CIOs should enter budget meetings with a 'best case' scenario that presents maximum IT spend options. They do this because they know they will be asked to reduce their budget. Their hope is that the final IT budget will actually align with what they realistically expect.

However, in years where revenue is down for a company, it's often necessary to budget IT more conservatively. In these cases, CIOs come up with a contingency plan. They know which projects they might have to cancel or delay, and which projects must absolutely move forward. CIOs who enter budget meetings with these contingency options in mind are more effective in getting what they need.

Collaborate with stakeholders before budgets are presented for review

The 'glass house' days of IT are gone in most organizations. Today, businesses recognize that IT is an enabler for strategies and operations, so best-of-breed CIOs actively collaborate on the technology budget with end users. These end users can be vital allies in budgetary reviews (for example, the Marketing VP can join the CIO in arguing the importance of establishing an analytics program for sales and market forecasts).

Gain a working knowledge of finance

To argue budgets with the CFO, strong CIOs understand the balance sheet and income statement ramifications of IT investments based upon how they are expensed (capital, longer-term investments that are amortized or operational expenses that are totally expensed within the year's operating budget). These CIOs also understand the cost of various financing options. When I was a CIO, I worked with a vendor that was able to furnish a very attractive lease through the vendor's own financing arm that gave our company lower payments and guaranteed a buyback of older technology so we would not have to amortize and depreciate it. The reduced payments and the 'old tech' buybacks were enough to gain funding for the project.

Cross-examine staff recommendations

I once questioned my storage manager on why we were investing in new disk drives when we would only be populating each drive to around the 33 percent level. He showed me a three-year projection (the length of the asset's life cycle) that extrapolated past corporate data growth and illustrated that by the end of year three, we would be near capacity on these drives. I was convinced. When CIOs get answers like this from their staff, they're better-prepared when they walk into budget negotiations.

Revisit aging assets

Making sure your house is in order is part of any budgetary process. What aging assets are coming off depreciation schedules? Will this have a favorable impact on budget formation? If these assets are coming off the books, do they also need to be replaced? Most IT departments keep track of the large assets -- but the tracking of old PCs, printers, and other equipment that might be collecting dust in the IT backroom or in remote sales offices, is often overlooked.

Determine whether expenses are operational or discretionary

Energy costs for the data center, lease expenses, and to a degree, core IT staff, are all ongoing operating expenses that the IT budget carries year after year. Then there is the discretionary part of the budget: the projects that are approved one by one, and that upon approval begin to incur costs for staffing, outside training/consulting, equipment, software, and so on. In formulating the budget, many CIOs first determine what the baseline of expenditures will be, and what portion of the IT budget should be projectized for either budget approval or disapproval. In cases where project work is vital, CIOs are aggressive and ask for funding that starts on day one of the new budget. For lower-priority projects, the choice is often to defer project work until a call can be made later in the budget year. CIOs with strong scheduling skills have a natural advantage in this phase of budget negotiation.

Challenge vendors

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IT vendors understand the budgetary challenges that CIOs face. Before pencilling in a project that involves the services or products of a given vendor, many savvy CIOs test the waters to see what types of financial flexibility the vendor can provide. In some cases, vendors offer free proof-of-concepts of their products to get the products in the door. These POCs can be instrumental in demonstrating business value to the CFO and other business executives. There are also vendors that offer buybacks of old technology that lightens the load on corporate balance sheets. In still other cases, vendors might offer deferred payments and attractive financing options--or subscription or per use pricing that gives you the ability to control your spending and avoid expensive capital investments. In still other cases, vendors allow you to pay by use or subscription, even if you elect to in-source a system that you run on premises.

The budgetary process can be complicated and exhausting, especially when it is time to secure buy-in and funding. But strong CIOs understand its necessity, and use a variety of strategies and tactics to acquire the annual resource pools needed to run IT and produce tangible investment returns for their companies. There are no 'magic bullets' in this process. It is usually a case of hard work, collaborating with others and making the best possible choices for IT and the company.

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