The I.T. department is often the most expensive area of many businesses. For a large department, the salary budget alone can be in the tens of millions of dollars.
It’s a common occurrence every year during budget season: You stare at a blank spreadsheet, wondering how to translate your IT department’s needs into numbers that will make sense to the board.
Sound familiar? Don’t worry – you’re not alone. Creating an IT budget and financial plan can feel like trying to predict the weather a year in advance.
I have had to create budgets many times each year for a department of over 100 professionals and it was always painful.
Let’s break my process down into manageable steps and hopefully, it will help you a bit. Also, I created an IT Budget template that may help you when crafting your IT budget.
Table of Contents
1. Start with a Reality Check
Before diving into the numbers, step back and assess where you are.
What worked well last year? What didn’t? Did you overspend in some areas and underspend in others? This isn’t about pointing fingers – it’s about learning and improving.
Talk to your team, other department heads, and even end-users. Their insights might surprise you and will certainly inform your planning.
2. Align with Business Goals
Your IT budget isn’t just a wish list of cool tech gadgets. This is a strategic tool to drive your company’s objectives, and it especially helps your CFO do his/her job better. Accuracy is important.
Sit down with other C-suite members and understand the big picture. Is the focus on expansion, cost-cutting, or innovation? Your IT investments should reflect and support these goals.
I often review all feature and project requests in my department backlog during this step to see what may help the most.
3. Categorize Your Expenses
Break down your budget into clear categories. Here’s a starting point:
- Operations and Maintenance
- Infrastructure and Cloud Services
- Software Licenses and Subscriptions
- Security and Compliance
- Innovation and New Projects (Having a well-documented product/project roadmap is critical here. Don’t forget about cleaning up technical debt also.)
- Training and Professional Development
This structure helps you and other stakeholders quickly understand where the money is going.
4. Don’t Forget the Hidden Costs
Remember that shiny new software everyone was excited about last year? Now might be the time to consider purchasing it if the ROI is good. Remember to include the costs of purchasing, ongoing training, customization, and integration. Factor in these often-overlooked expenses.
They can be budget-busters if you’re not careful since they are often overlooked.
5. Build in Flexibility
If Covid taught us anything, it’s that change is the only constant. Build some wiggle room into your budget. Consider allocating a portion (say, 5-10%) for unexpected opportunities or challenges.
Remember – there will ALWAYS be unforeseen situations that pop up. So plan for them.
6. Embrace the Cloud (but Watch Those Costs)
Cloud services can offer flexibility and scalability, but they can also lead to bill shock if not managed properly.
Review your cloud usage regularly and optimize where possible. I’m a huge fan of the cloud but you can be sure that the bill will increase slightly every month. It just happens, so prepare for it.
Also, cloud services are changing all the time. Whether you’re using AWS, Azure, Google, or another service, you may need to allocate some time for training.
7. Security Is Not Optional
In an era of increasing cyber threats, skimping on security is like leaving your front door unlocked. Allocate sufficient resources for cybersecurity measures, including training for your staff (Read How to Create a Capacity Planning Document).
Important
Security budgets are like a dark closet for people outside of I.T. They will probably completely rely on your expertise to tell them what is needed here. Be prepared to defend your choices with data to show why something is necessary. Non-I.T. executives may adopt the thinking “It can’t happen to us, so let’s allocate the money elsewhere”.
Also, correlating ROI to added security costs is not always possible, so explain worst-case scenarios. Reverse the equation to show the cost of a successful hack attempt.
Remember, the cost of prevention is often far less than the cost of a breach where customers can be lost.
If you’re overruled on this budget area, at least you did your job and spoke up.
8. Don’t Neglect Your Team
Your technology is only as good as the people operating it. Budget for training and development to keep your IT team sharp and motivated. It’s an investment that pays dividends in productivity and innovation.
We would allocate a certain amount of training for each I.T. employee. LinkedIn Learning and Udemy are all good online course providers.
9. Measure and Communicate ROI
Return on Investment (ROI) is a critical metric for evaluating the efficiency of IT spending. It helps justify investments to stakeholders and guides future budget allocations. Here’s how I approach measuring and communicating ROI for IT projects.
Define Clear Metrics
For each major IT investment, establish specific, measurable outcomes before the project begins. These metrics should align with business objectives.
Examples:
- For a new CRM system: Increase in sales productivity, reduction in customer churn rate
- For a cloud migration: Reduction in infrastructure costs, improvement in system uptime
- For a cybersecurity upgrade: Reduction in security incidents, decrease in incident response time
Calculate ROI
Use the standard ROI formula: ROI = (Net Benefit / Cost of Investment) x 100
Let’s break this down with some examples:
Example 1: CRM System Implementation
- Cost: $500,000 (including software, implementation, and training)
- Benefits:
- Increased sales: $400,000
- Reduced customer service costs: $200,000
- Total benefit: $600,000
- ROI = ($600,000 – $500,000) / $500,000 x 100 = 20%
Example 2: Cloud Migration
- Cost: $1,000,000 (including migration services and new cloud costs)
- Benefits:
- Reduced hardware costs: $500,000
- Improved uptime value: $300,000
- Increased productivity: $400,000
- Total benefit: $1,200,000
- ROI = ($1,200,000 – $1,000,000) / $1,000,000 x 100 = 20%
Consider Intangible Benefits
Some benefits are harder to quantify but still valuable. Include these in your ROI communications.
Example: Cybersecurity Investment
- Tangible benefits: Reduced breach costs, lower insurance premiums
- Intangible benefits: Enhanced customer trust, protected brand reputation, client retention
Use Visualizations
Present ROI data in easy-to-understand formats like charts or infographics.
Example: A dashboard showing:
- Project costs vs. benefits over time
- Comparison of projected vs. actual ROI
- Breakdown of tangible and intangible benefits
Timing Matters
Some investments take time to show returns. Use projected ROI for initial justification, then track and report actual ROI over time.
Example: Data Analytics Platform
- Year 1 ROI: -10% (initial investment phase)
- Year 2 ROI: 15% (as efficiencies begin to materialize)
- Year 3 ROI: 40% (full benefits realized)
Benchmark Against Industry Standards
Compare your ROI to industry averages to provide context.
Example: “Our cloud migration ROI of 20% exceeds the industry average of 15% for similar projects.”
Communicate Regularly
Don’t wait until the project’s end to discuss ROI. Provide regular updates to stakeholders.
Example: Quarterly ROI reports showing:
- Progress towards ROI goals
- Any adjustments made to improve outcomes
- Lessons learned and best practices identified
Link to Strategic Goals
Always tie ROI back to broader business objectives.
Example: “The 20% ROI from our CRM implementation directly supports our strategic goal of improving customer retention by 15% this year.”
By following these steps and using concrete examples, you can effectively measure and communicate the ROI of your IT investments. This approach not only justifies your budget but also demonstrates IT’s value as a strategic partner in driving business success.
10. Review and Adjust Regularly
Your budget shouldn’t be a “set it and forget it” document. Review it quarterly, if not monthly. Be prepared to make adjustments as business needs change or new opportunities arise.
I would have a standing meeting every month or so with my CFO and Controller to make sure everything was on budget and adjust if necessary.
Conclusion
Creating an IT budget and financial plan (Free Template) doesn’t have to be a headache-inducing ordeal.
Follow these steps and always keep communication open with your team and fellow executives. You can develop a plan that not only meets your department’s needs but also drives your company’s success.
Remember, a well-crafted IT budget is more than just numbers on a spreadsheet – it’s a roadmap for your organization’s digital future.
If you have any questions, I’d be happy to help you. Thanks!
