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Straight Talk Technology

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Most IT budgets fall into one of three categories: the “last year plus x%”, the “make it fit”, and the “strategy and planning” budget. The “last year plus x%” budget is usually based on criteria set by executive management, while the “make it fit” budget requires CIOs to fit their budget into generic account classifications, and the “strategy and planning” budget attempts to convey the IT strategy in financial terms. Many CIOs are forced to “game” the budgeting system by either inflating their budget and accepting the inevitable cuts back to what they really wanted, or by "gaming" the system by hiding real expenditures behind generic account codes.

The troubling thing is that often the IT budget makes no sense to CEOs and the budget committee. Many executives have been heard to say: “I don’t know much about IT, but I do know it costs too much.” Line-of-business executives also shouldn't have to become IT experts in order to understand the IT budget.

The IT budget is less about financing IT and more about understanding. There needs to be a common lexicon where executives and CIOs can talk about all IT activities not only in business terms, but also in terms that encompass the arcane complexities that make up IT decisions.

In the Ovum report: IT Budgeting That Makes Sense, we present a model that has been shown to be understood quickly by business executives, but which covers IT operations, upgrades, refreshes, improvements, and differentiating developments. The model also covers that most troublesome IT project: compliance. The report is supported by a budgeting tool that helps CIOs prepare and present their budgets according to the model.

A CIO called us because he had been given a week to cut his budget by 20%. He knew he couldn’t do it but didn’t know how to explain this to the hardened budget committee. After a week, he presented his budget again using the IT budgeting model proposed in IT Budgeting That Makes Sense. One of the tenets of the model is that it ties IT operations and services directly to current business operations. He showed that a 20% cut would mean cutting back manufacturing capacity, reducing client interaction, and seriously constraining business capabilities in using technology.

The budget committee agreed that the business couldn’t afford to take the knock and allowed him to retain his original budget. Then one executive noticed that several areas in the budgeting model were blank and asked why. “That’s because,” said the CIO, “I’ve been cutting budgets for three years, and there’s no funding to do the things IT should really do to make the company secure and successful.”

The executive asked what the “proper” IT budget should be. The CIO had prepared for this and showed a budget that was 50% higher than his current funding. After some discussion the committee agreed to this extended budget. What changed? How did a 20% cut turn into a 50% increase? Executive understanding changed of what IT does, what it should do, and how it should be funded appropriately.

Straight Talk is a weekly briefing from the desk of the Chief Research Officer. To receive this newsletter by email, please contact us.

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