Written By: Contender Solutions
Your company’s information technology budget can have an enormous impact on organizational agility. In particular, it can play a vital role in ensuring that the organization has the IT resources it needs to detect and leverage key business opportunities or changes in the industry.
However, information technology budgeting can be incredibly difficult—especially when other leaders in the organization are constantly striving to cut costs in every department.
In this blog, we review some technology budget basics, the impact of budgeting for tech resources, and some IT budget examples that showcase some best practices to follow.
IT Budget Basics
Your IT budget is the allocation of capital resources towards the acquisition, maintenance, and management of your organization’s IT assets.
As noted by TechTarget, a typical IT budget includes several components, such as “compensation costs for IT professionals… Expenses related to building and maintaining enterprise-wide and so-called back-office systems… hardware expenditures… data center expenses and bills for cloud platforms.”
The TechTarget article does note that “Items that tend to fall outside the IT budget include applications deployed for and used by specific business units.” However, in some organizations, even these technology expenditures may be included in the IT budget.
While CIOs (or similar roles in the business) are usually responsible for assembling IT budgets, they aren’t usually the ones to appraise and approve the whole budget. Instead, other executives, directors, and board members typically have the final say on whether a budget is or isn’t approved—which is why it’s important to get buy-in from these execs.
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4 Benefits of Managing Your Information Technology Expenses Effectively
So, what are the business benefits and impacts of IT budget planning for your organization? How can information technology budgeting help you achieve organizational goals like increasing security or your business agility?
Here are a few examples of the potential benefits of effective budget management for IT:
1. Minimizing the Need to Justify Every Expense as It Happens
In an organization without a formal IT budget or plan, information technology expenses need to be justified on a case-by-case basis. This can be an incredible drain on IT team time as they have to craft countless proposals for every single expense.
2. Putting IT Spend into Perspective to Prevent “Budget Creep”
As noted by Tech Republic, “IT expenditures that were once simply spent as incurred, or justified with a 30-second hallway conversation, blossom into significant IT spending.” In other words, when you’re spending just a little at a time without some kind of overall picture of that spend, you may find yourself significantly overspending on IT.
This overspending can easily translate into funding shortages for critical business operations—which negatively impacts both business resiliency and agility. Having a set IT budget makes it easier to sort out critical and non-critical expenses and avoid overspending.
3. Streamlining Enterprise IT to Maximize Efficiency and ROI
With a comprehensive overview of the technology in the organization, what gaps exist in the organization’s IT, and what redundancies there are that can be removed, it’s easier to improve IT efficiency and ROI.
Having a comprehensive budget plan that looks at existing resources and needs is crucial for streamlining expenses and maximizing ROI.
4. Creating Breathing Room to Address Emergencies and Opportunities
In a well-made IT operations budget, there may be some room to set aside funds for covering emergency expenses and leveraging opportunities. This can help ensure that the business is able to respond when it needs to so it can make the most of a new opportunity (such as a new emergent technology) or minimize the impact of a major disrupting event (such as a data breach or service interruption).
Setting aside these funds ahead of time can make it easier for the business to react quickly when needed.
5 IT Budget Management Best Practices
So, how can your organization set an IT budget that works? It can help to follow some key best practices for IT budget planning, such as:
1. Conduct a Thorough IT Audit
To make a comprehensive and useful information technology budget, it’s important to have a solid grasp on what IT assets and resources you currently have first.
So, conducting a thorough IT audit is a must for any organization before setting a tech budget.
2. Look at Other Companies as IT Budget Examples
What are your peers in the industry spending on their IT operations? Where is their spending focused? What results have they generated?
Compare this information to your own past IT spend and results. Is your ROI for your spending outpacing the competition, or is it lagging behind? In either case, what are you doing differently from competitors that could explain this difference?
Having this information can be immensely useful for creating a competitive IT budget and revising your business objectives.
3. Make Data-Driven Decisions—Not Gut-Based Ones
Business shouldn’t be a guessing game. It’s important to collect information so you can make informed strategic decisions that will have a positive impact—not just following a “gut instinct.” While gut instincts based on past experience or intuition can be valuable in many settings, it isn’t reliable enough for long-term business planning.
There are articles going back decades on the unreliability of gut instincts. For example, as noted by Harvard Business Review:
“Researchers have shown that our unconscious desire to identify patterns is so strong that we routinely perceive them where they don’t in fact exist… The more complex the situation, the more misleading intuition becomes. In a truly chaotic environment—where cause and effect no longer have a linear relationship—the last thing you want to do is try to apply patterns to it.”
Rather than trying to guess what the businesses needs are from a shallow interpretation of basic facts, it’s important to collect and review as much data as possible to identify real gaps and opportunities so they can be addressed in the IT budget.
4. Plan for an Emergency Reserve
“Expect the unexpected” is a tired old cliché, but it’s also an important piece of advice for IT budget planning. There can be any number of unforeseeable events throughout the year that may require your organization to adjust its information technology expenses.
Take, for example, the COVID-19 pandemic of 2020. While many offices had been trending towards “work from home” policies for their cost-saving and labor accessibility benefits prior to the coronavirus outbreak, the lockdowns and risk of infection drove companies to adopt remote work solutions like never before.
In fact, journalistic sources such as Forbes go so far as to say that “The biggest impact of Covid-19 may be remote work.” A survey cited in the Forbes article noted that “by April, nearly 20 percent or more of respondents said they expected 40 percent or more of their employees to work primarily from home after the pandemic.”
Having a reserve in the IT budget can make responding to sudden large changes or other emergencies easier—improving business agility and providing a key competitive advantage when disruptions impact your industry.
5. Look for Opportunities to Consolidate and Standardize Tools
When setting the IT budget, it’s important to look for opportunities to streamline expenses wherever possible. One way to do this is to consolidate and standardize the tools used for different business units whenever possible.
For example, if your HR team is using one expense tracking tool for employee benefits, but your accounting team is on a completely different (and incompatible) software, this can create friction in the organization. This, in turn, can reduce organizational agility.
Finding an IT platform (such as ServiceNow) that combines all of the software your organization needs into a single cohesive whole can be immensely useful for;
- Streamlining software licenses (saving money);
- Standardizing processes across different business units (reducing friction); and
- Eliminating software compatibility issues (minimizing time spent on IT service requests).
IT Spending Trends to Know
What are some important spending trends to know for your information technology budget planning efforts?
To begin with, IT spend seems to take up a larger percentage of overall revenue in smaller organizations than larger ones. According to data from TechTarget, “Small and medium-sized companies often outspend larger ones. The average small company spends 6.9% of revenue on IT. Midsized companies spend 4.1%. Larger companies spend a miserly 3.2% of revenue.”
However, it’s important to note that while the percentage is larger, this may be because some baseline minimum expenses are simply a bigger burden for smaller organizations than for larger ones. The IT budget of an SMB is still likely to be dwarfed by that of a larger company.
For example, an organization with $1 billion in revenue spending 3.2% of that is still spending $32 million. Meanwhile, an organization with $10 million in revenue spending 6.9% of that is spending a total of $690 thousand—a budget that fits into the larger company’s IT spend 46 times over!
It should also be noted that simply spending more on IT doesn’t guarantee success. As noted in the TechTarget article, “the most successful small and medium-sized companies were more frugal than the average company when it came to spending as a percentage of revenue.” In other words, it’s important to spend smarter, not harder.
This is where having an IT consulting service that specializes in the platforms you use can help.
If you need help managing your IT budget or finding the best solutions to help you increase organizational agility while meeting other key business objectives, reach out to the Contender Solutions team today!