A Better Way to Budget Enterprise IT Expenses

by Bruce Skaistis

THE PROBLEM

I recently read an interesting commentary in a leading enterprise IT magazine. The commentary concluded that CIOs are not doing a good job of convincing other C-level executives that enterprise IT can produce real value for their organizations. I had to agree with the conclusion, because, while value may be considered in evaluating specific IT investments, value is rarely considered in developing overall enterprise IT budgets.

Recently, I was interviewed for an article on 2007 enterprise IT budgets. During the interview, I expressed my concerns about IT budgeting processes in general. I said the IT budgeting processes in many organizations are designed to control enterprise IT expenditures by imposing spending limits tied to percentage changes (increases or decreases) from previous years, percentages of revenue, or some other arbitrary guideline. I went on to say IT spending levels were too often determined by how effectively the CIO or other enterprise IT leaders were able to “sell” their budget requests.

I don’t think I provided much insight for the article on budgeting; but the interview reinforced my conviction that the enterprise IT budgeting processes in many organizations are ineffective and should be scrapped. It may be too late to do much about enterprise IT budgeting for 2007, but this is a good time to start thinking about how enterprise IT budgeting should be done in the future.

THE SOLUTION

Two positive forces are working to change how we manage enterprise IT resources. The first force is the topic addressed in the commentary I mentioned earlier – the growing focus on the importance of using enterprise IT to create value. The economic definition of value is “the monetary worth of something” or “relative worth, utility or importance.” In other words, value determines what someone is willing to pay for something. A seller can set a “price” – but a buyer determines “value.”

The second force is an ongoing effort to make enterprise IT more businesslike. To be more businesslike, enterprise IT has to reposition itself as a “seller” of services. If enterprise IT provides high quality services on a cost effective basis that enable its customers to compete successfully, the value of its services will be relatively high and demand for its services will increase. On the other hand, if enterprise IT provides poor quality or expensive services, the value of its services will be less and demand for its services will decrease.

To maximize enterprise IT value and to make enterprise IT operate more like a business, we have to radically design the enterprise IT budgeting process. Instead of forcing CIOs and enterprise IT to try to determine what an organization should be spending on IT, we need to let enterprise IT’s customers drive the budgeting process based on their perceived value of enterprise IT.

Building on basic Activity Based Costing (ABC) concepts, here is an approach for creating a value-based, customer-driven enterprise IT budgeting process:

Help Customers Determine What They Want
If enterprise IT was operating as a standalone business, the first step in developing a budget for next year would be to find out what services its customers want. Enterprise IT cannot just ask what its customers want, because they probably don’t know. That’s why standalone companies have sales and marketing people – and it’s why enterprise IT has to learn how to use “consultative selling.”

Consultative selling is defined as a selling technique that emphasizes customer needs and meeting those needs with solutions. A consultative salesperson typically provides detailed instruction or advice on which solution best meets these needs. During the prospecting phase of selling, where a customer’s wants are examined, the salesperson pays close attention to economical and high-quality solutions for the customer; ideally making sure the prospect receives more value from the product or service they have purchased than they have paid to ensure a positive return on investment (ROI). Responding to the expectations of the prospective buyer is the essence of providing consultation based selling.

I used the entire definition of consultative selling because it provides a good explanation of how enterprise IT needs to work with its customers to determine how they can use enterprise IT capabilities to produce value. Consultative selling requires a highly interactive, partnership relationship between enterprise IT and its customers.

At this point, enterprise IT is trying to determine everything it can do to help its customers produce value, so the focus is on developing a “wish list” of customer “wants.” That means enterprise IT is not talking to its customers in terms of cost while identifying wants.

After identifying its customers’ wants, enterprise IT works with its customers to quantify the potential benefits or “value” associated with the wants. The value will be used as the basis for justifying inclusion in the enterprise IT budget.

Determine What It Will Cost To Meet Customers’ Wants
The next step is for enterprise IT to determine what it will cost to meet its customers’ wants. This is similar to what standalone IT services companies do in responding to a Request for Proposal (RFP).

Before developing estimates for each customer, enterprise IT needs to determine the best way to meet the collective wants of its customers. This macro level view addresses infrastructure, security, outsourced services and other shared enterprise IT requirements. Figuring out how to handle these expenses on an equitable basis requires some creativity – but it can be done.

After addressing macro requirements, enterprise IT develops specific estimates for each of its customers wants.

Let Customers Decide What They Need
Enterprise IT presents the cost estimates to its customers. Still using the consultative selling approach, enterprise IT and its customers work together to prioritize customers’ wants based on the potential value and estimated cost of each want. Customers decide which wants they can justify as “needs” in the enterprise IT budget. In some cases, customers may decide they can justify all their wants in the budget, and, in other cases, customers may decide to drop some of their wants.

Develop Budget Based on Customers’ Needs
After enterprise IT’s customers decide what they need in the budget, enterprise IT pulls together the overall budget.

The budget is pulled together with two views. One view is a customer view with budgets for specific customer needs. The second view is a typical enterprise IT department/function budget. The department/function view should provide a direct link to the customer view so the two views can be reconciled.

Customers and Enterprise IT Work Together to Get Budget Approved
Instead of having to "sell" the enterprise IT budget to the rest of the organization, enterprise IT partners with their customers to obtain required approvals. Since the budget is built on meeting customers’ needs, customers have a vested interest in getting approval for the budget.

Having enterprise IT and its customers participate together in the budgeting process makes the approval process easier, because customers can address questions about the potential value associated with budget requests, while enterprise IT can address cost and other IT issues. Having enterprise IT and its customers partner in the budgeting process also creates a shared commitment to achieving targeted values and meeting budget projections.

Track Actual vs. Budget
As mentioned earlier, there will be two views of the budget, a customer view and an enterprise IT department/function view.

The customer view, with actual/budget comparisons, makes it easy to charge back enterprise IT expenses to customers – but you don’t have to. The key is being able to tie enterprise IT expenses to customers and customer activities so you can determine if enterprise IT resources are being used to produce the most possible value for the enterprise.

Enterprise IT uses the customer view and the enterprise IT department/function view of actual vs. budgeted expenses to monitor enterprise IT financial performance.

Do It Better Next Year
Completely changing the way enterprise IT budgets are developed is not going to be easy. It’s going to require a lot of thinking, a lot of work, and a lot of communicating. As with any new management process, the process is probably going to require fine tuning. The good news is the second budget will be easier. By the third year, you will be wondering why you didn’t flush the old enterprise IT budgeting process sooner.

THE MORAL

I know enterprise IT budgeting is not a very exciting subject, but there are three reasons why I believe value-based, customer-driven enterprise IT budgeting can dramatically improve enterprise IT: One of the primary challenges of enterprise IT governance is ensuring enterprise IT efforts are properly aligned with the enterprise’s overall objectives. With value-based, customer- driven enterprise IT budgeting, it will be almost impossible for enterprise IT to not be tightly aligned with the enterprise’s objectives.

Another enterprise IT governance challenge is optimizing the value and performance of enterprise IT resources. Value-based, customer-driven budgeting helps to ensure enterprise IT value and performance is being optimized by making it easier to see exactly what an organization is getting for the money it spends on enterprise IT.

Value-based, customer-driven budgeting forces enterprise IT to operate more like a standalone business.


About the Author
Bruce Skaistis is the founder of eGlobal CIO. He began his career as a consultant with Arthur Andersen and was CIO of a large bank group before forming his own management services firm. He has extensive enterprise IT management, process optimization, and action facilitation experience.


Copyright ©2007 Global CIO, Inc. All rights reserved. Used by permission.

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