Shining light on IT costs and budgets

This post sponsored by the Enterprise CIO Forum and HP.

One of the things I’ve always struggled with in the world of IT and technology is budgets and costing.  Its not the actual budgets/finance issues themselves but the way in which the IT world handles budgets and finance.

For those of you who’ve never been involved in IT budgeting…you are missing out on a world of creativity.

I use ‘creativity’ in the strongest possible meaning…there are some very creative ways that IT leadership deals with budgets. This creativity is found in every organization and in every group…its not just an “IT” thing.  That said…the IT professional brings their own sense of creativeness to budgeting.

This creative approach might be a good or it might be bad depending on the situation and the organization.  In most instances, its a good thing for the IT organization and IT projects as a creative approach to budgeting allows projects to get funded and completed.

Before we dive into a murky area, I’d like to step ovet the argument of whether ‘creativeness’ of the budgeting process is appropriate and even ‘right’ for now.  What i’d like to focus on, for this particular post, is the transparency issues that arise within the IT budgeting / finance process.

Myles Suer, has a good piece on the topic of transparency on the Enterprise CIO Forum. In an article titled Driving transparency for IT costs, benefits and risks, he writes about the need to bring more clarity to budgets and costs within IT. A few of the key points in Myles’ post are:

  • Being considered a cost center is a problem
  • IT finance is focused on the piece parts of IT
  • IT and the business need a universal communicator to explain IT costs

In three bullet points, Myles’ summed up the problems with IT budgeting/finance. The rest of the article is very good, be sure to jump over and read it.

Myles’ recommends that IT find a way to make IT costs more transparent.  His recommendation is to use Service Based costing methods.  He writes:

…with service-based costing, the gulf between the business and IT can be eliminated. In the budgeting season, the business and IT can talk about IT and its services from a value perspective. And even more important, IT can have a seat at the table and talk (as a boss of mine once said) like a businessperson. IT can ask: Why we are still investing in this service when only one person is using it and it’s costing us Xdollars?

Nicely said.

I’ve been involved in IT budgeting/costing for a number of years and I can say the process has been very non-transparent to the larger business.  the budgetary/costing process seems to invite ways to make things murky.  In addition, as Myles’ describes, its focused on ‘piece parts’ in most organizations.

IT and the business do need a way to communicate more transparently about costs.   Is service-based costing the answer? I don’t know.  I’m not an expert on service-based costing so I can’t argue whether it will solve any issues, but its one path to consider.

Other ideas for helping make this process more transparent:

  • Build budgets and/or cost models with business stakeholders – the first step in creating transparency is to  actually invite your stakeholders into the budgeting process. Open the kimono and let your stakeholders see how you are building the cost models for supporting their projects/technologies.
  • Work with the finance group and/or CFO to standardize IT cost accounting – In many organizations I’ve worked with, the IT group has a small finance team or a few people tasked with IT accounting. When the finance organization sits down with the IT finance team/people, there’s a real lack of understanding of how each team does what they do.  There shouldn’t be…but there is.  Work with the CFO to ensure the accounting/costing languages are the same.
  • Open the budgetary process – The murkiness surrounding IT costing/budgeting is created by the IT costing/budgeting process. Whether its on purpose or not depends on the people involved and the organization, but that murkiness is there. Open up the process to allow IT and Business to dig into budgets and costs without burying those costs in a language of obfuscation.

Of course the above aren’t the only approaches….just some ideas to get you thinking.  Whether you try any of these approaches or come up with your own, do what you can to add transparency and shine some light on your budgetary / costing process.

This post sponsored by the Enterprise CIO Forum and HP.

3 responses to “Shining light on IT costs and budgets”

  1. Jeff Cox Avatar

    I agree with Myles’ recommendation that IT needs to find a way to make IT costs more transparent and to use service based costing as a means to do that.

    If service costing is executed correctly I can see the value because it is easier to perform a ROI on a service – you spend 100k on Service A. Is Service A being used still or is it just sitting idle with no utilization or consumption – Can Service A be scaled down? However, one must look at the true costs of the service and not just a back of the napkin approach to receive the value. I view it as similar to car manufacturing – how much is it costing to build this model of car – are we making or losing money on it, but instead of a car – we are building a service.
    If you figure out you’re only spending 5k on a service and everyone is using it – do we need to spend more to expand the capabilities, i.e.- shift funding from the old dying service to the new low spend service.

    Thanks for posting about it.

    1. Eric D. Brown Avatar

      Thanks Jeff…nice quick description of service costing approach. Makes sense and now I wonder why more IT groups aren’t using this model.

  2. VirtChangesEverything Avatar

    Service-based costing can be difficult to implement, if those impacted by it don’t understand the benefits to them. Perhaps the best way to implement is to find an incremental business opportunity, utilize the cloud (either public, private or both/hybrid/converged cloud) and evaluate risks/benefits/opportunities of the model. Another barrier can be the fear factor associated with greater transparency, which can wrongly be considered a negative to some (perhaps the “Fanboys” Eric Brown talks about in another blog?). —

    Paul Calento