Friday, July 1, 2011

IT Budgeting - More than meets the eye

As a CIO, one of the most common issues I have to address is how and why IT spends the money it has allocated (and then some). In previous posts I alluded to the term "Black Hole", which is a common moniker that seems to get applied to IT spend.  Almost everyone at the manager level and above has either said or heard some variation of this statement:  "When it comes to money, IT is like a black hole.  We keep feeding money into it and it only wants more.  Where does it all go??"

In order to address that question, I have to describe what the difference is between an IT budget and one that is more "operational".  Let me do a little compare-and-contrast.

Similarities
As you might expect, there are parts of the IT budget that are common to all business units.

1. Salaries - Labor costs are a big part of IT.  But please remember that in this context I am talking about internal, or FTE, labor.
2. Recruiting/Training/Travel - Pretty self explanatory.  Even now in the depths of the recession/depression, IT unemployment is around 5%.  We are always recruiting.
3. Facilities & Overhead - IT has to pay for space, power, A/C, etc.

Differences
Here are some categories within the IT budget that other business units usually don't have to address. (I said, "usually")

1. Depreciation - I'll save you the long, technical/financial explanation.  Basically, whenever a company buys software, computers, hard drives, networking gear, memory, and other pieces found in the data center there is a purchase price.  However, in subsequent years all of that material is depreciated.  That means while there is no more acquisition cost, about 20% of the original purchase price is charged to IT's budget.  No cash is actually spent but that amount is treated as a debit against the budget.  To put it in perspective, one year I managed a budget of $82 million.  Of that total amount, $24 million of it was depreciation!  Imagine asking for that kind of money at the yearly board meeting knowing that there will be *nothing* to show for it.  Remember if you are not in IT and you're buying IT hardware, while you will likely never see it, IT is going to be absorbing the depreciation for it into its budget.

2. License Costs - this is similar to depreciation.  Put simply, if you buy a professional software license for $100, the software company is going to be charging you/the company about 22% of the purchase price every year to provide support.  This item provides patches, upgrades, and phone help if you need it.  Almost nobody that I've spoken to about software licenses understands the ongoing costs that occur after the purchase.  In fact, a lot of software companies will be VERY generous on the purchase price of their software just to get your company locked into long-term maintenance contracts.

3. Contract Labor - IT work is almost always very specialized: programming, data bases, enterprise systems, project management, training.  Typically, IT has between 15% to 60% additional headcount in contractors or consultants.  Almost everything within U.S. companies is computerized these days and IT must continually, although temporarily, augment its staff to ensure that the proper skill sets are available.  Every additional program, system, or server that is brought into the company adds a fractional need for extra head count.

4. R&D (also known as the "gadget group") - If your CIO and IT team is properly servicing your organization, they will be constantly experimenting with new technologies to either accept or reject them.  You may not know it, but that is how Blackberries, tablets, iPhones/iPads, cell phones, and laptop computers probably came into your company.  There is so much technology out there today that we are all being exposed to and the marketing makes us crave it.  We're told, "If you don't have X, you are being outpaced by your competition." (Also, you're just not cool..)

As a CIO I can tell you that it is very, very difficult to go to the CEO/CFO to ask for money to experiment.  Yet, the R&D function is critical to identifying tech that will help position the company for future success. So, unlike anything other regular business unit, a good IT group is always allocated money to R&D.

This list is not all-inclusive but should give you a better idea of why IT budgeting is not always easy to understand or appreciate. 

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