Eight Steps Toward Controlling Your IT Operating Budget

Controlling your Information Technology (IT) operating budget is the single most crucial element in the success of any new venture or initiative. It requires close attention to details and a genuine commitment to finding the most cost-efficient means of doing business.

Know the numbers. All the numbers. Any savvy IT manager should be able to provide an accurate operating budget figure incorporating these important business metrics include:

  1. Head count
  2. IT operating budget as a percent of revenues
  3. Cost of major projects
  4. Square footage of the data center
  5. Number of countries your business operates inThe more information you have at your fingertips, the more efficient you’ll be.
  6. Always know your operating budget number. An operating budget is fundamental to running IT. It may be a direct corporate overhead expense, it may be allocated back to operating divisions, or it may be a direct charge to operating overhead. From an accounting perspective, it is a charge to the P&L and appropriate to the reporting period (meaning expenses need to be accounted for in that reporting period).Typical operating budget expense items include:
  7. Salary
  8. Training
  9. Software (SW) and hardware (HW) maintenance
  10. Consulting
  11. Telephone expense
  12. Data circuits
  13. Equipment rentals
  14. Equipment leases and depreciation
  15. Know which items are controllable and which aren’t. Training is a controllable expense, often viewed as discretionary. Consulting is also controllable, usually treated as an expense if the consulting project is a study, research and investigation into technology or alternatives. If the consulting is specific to a project and directly contributes to the end result, it is normally capitalized.
    Internet expense can be controllable or not, depending on whether you have a contract with an Internet Service Provider. Many companies host their web servers externally. Breaking Internet services out into a separate expense category gives this rapidly growing area more visibility, especially useful when conducting year-over-year comparisons.Salary is a controllable item, in the sense that you can hire or fire staff, thereby raising or lowering this particular expense item. While salary is often the largest expense item, most IT shops aren’t always fully staffed, meaning managers will come in below budget as a result of open positions. This is called the “vacancy factor.”
  16. Offset vacancy factors with contractor expenses or see organizational effectiveness reduced accordingly. Some companies scrutinize the salary line and reduce it because of the vacancy factor, so it’s good to be prepared for and even proactive about this. For example, if there are 100 employees in your IT department and, on average, 10 openings at any given time, your vacancy factor is 10 percent — resulting in a 10 percent reduction in your salary line, spread evenly throughout the year. Be prepared. Fill vacancies with contractors until you can hire permanent employees.
    If you’re not allowed to budget for contractors when your salary line is decreased, then your organization’s effectiveness is reduced by 10 percent. That needs to be reflected in your day-to-day service levels, project plans, etc.
  17. Never enter into “evergreen” contracts. SW and HW maintenance expenses may or may not be controllable, depending on whether you have a maintenance contract in place. This is often an area for potential savings and sometimes the source of gross error.
    Do you have a maintenance contract for all or some of your SW and HW? If so, you should be aware of the terms of the contract, the cost, the start date and end date. An “evergreen” contract is automatically renewed unless the vendor is notified in writing 30/60/90 days in advance of the contract end date. I strongly advise that you ask to be notified when a contract is ending and that this responsibility should reside with the vendor.
  18. When in doubt, check with your finance department. Leased equipment is a controllable item, and a viable financing alternative to paying cash and capitalizing an asset. In some companies where cash is tight, leasing may be planned into the budget from the start. Other companies wish to focus on the best financing decision, so everything depends upon the economic conditions at the time the asset is acquired. In any case, some vendors offer very attractive leasing terms that can’t be ignored, even if your company is flush with cash.
    The decision to buy versus lease typically falls under the umbrella of the finance department. If, however, the decision is up to you, don’t be afraid to ask for guidance. Remember, leasing expense is usually viewed as an offset to depreciation.
  19. When dropping or adding vendor services, always put requests in writing. Once you’ve sorted your list of controllable/uncontrollable expenses by vendor or cost, you can negotiate new or better terms with these vendors — a significant opportunity to control major costs. For longer term contracts, you may be able to reduce rates. Also, there are provisions you can put into such contracts to protect yourself in the event of rate decreases or the introduction of new technology. The important thing is to get the terms you want in writing.
  20. Always know the cost for “keeping the lights on.” Ask yourself this question: “If I maintained the status quo, if I added no new staff, no new capital equipment, no new data circuits, etc., what would my operating budget be?” This “fixed cost” or “do nothing” number should be viewed both as a total (e.g., $10 million) and as a percentage of your operating budget (e.g., 75 percent). This makes it easier to track the effects of growth, expansion and/or the cost of inflation on your operating budget.
    Steve Heckler is president of Steve Heckler Associates, a Los Angeles-based firm providing management consulting and coaching services for CIOs and their organizations.

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