February 27, 2014

Donny Shimamoto

Community IT Innovators Webinar Series

IT Budgeting for Nonprofits

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About Community IT

Community IT Innovators partners with nonprofits to help them solve

their strategic & day-to-day IT challenges.

StrategicProactive approach so you can make IT decisions that support your

mission and grow with you

Collaborative Team of over 40 staff who empower you to make informed IT choices

Invested We are committed to supporting your mission, and take care of your IT

network as if it were our own

Nonprofit focus Worked with over 900 nonprofits since 1993

About the Presenter

Donny Shimamoto

Founder & Managing Director

IntrapriseTechKnowlogies

donny@intraprisetechknowlogies.com

@donnyitk

February 27, 2014

Community IT Innovators

Presented by

Donny C. Shimamoto, CPA.CITP, CGMA

IT Budgeting

for Nonprofits

v1.3

Speaker Biography

Donny C. Shimamoto, CPA/CITP, CGMA

Donny Shimamoto, CPA.CITP, CGMA, is the founder and managing director of IntrapriseTechKnowlogies LLC, a CPA consultancy focused on organizational development and advisory services for the middle market and nonprofits. Donny is a recognized national expert in IT management and international author/speaker on business intelligence initiatives. Donny helps many nonprofits by bridging accounting and IT to strengthen organizational governance and risk management, improve business processes through technology, and increase the effectiveness of decision through business intelligence and evidence-based management.

Donny was a member of the AICPA Governing Council and is the chairman of its Information Management & Technology Assurance Executive Committee. Donny was recognized as one of 2013’s Top 100 Most Influential People in Accounting by Accounting Today, Top Thought Leaders in Public Accounting by CPA Practice Advisor in 2012, 2013 and 2014, received the 2009-2010 President’s Award from the Hawaii Society of CPAs, was named to CPA Technology Advisor’s 40 Under 40 list in 2007 & 2009, and was also a Hawaii Top High Tech Leader in 2004.

Audience Polls – Demographics

Organization Type/Size

– Small Organization

– Medium Organization

– Large Organization

– Government

– CPA Firm

Part of Organization

– Accounting/Finance

– Information Technology

– Line of Business, Programs/Departments

– Consultant or Auditor

Role in Organization

– Lead Executive

– Executive Leadership

– Dept Director/Manager

– Dept Staff

– Auditor or Consultant

Choose one from each set of options that best matches how

you view your organization and your role at work.

A Systematic Approach to IT Budgeting

Anatomy of an IT Budget

– Types of Expenditures

– Categories of Expenditures

– Classes of Expenditures

IT Asset Lifecycle Planning

– Tying IT Risk to Hardware Refresh Cycles

– Software Licensing Explained

Understanding Managed Service Providers

Adding some Cloud into the Budget

– Comparing Cloud vs. On-Premise Solutions via the Budget

Summary

A Systematic Approach to IT Budgeting

Challenges with IT Budgeting

– Personnel knowledge challenges

Accounting doesn’t understand IT

IT doesn’t understand Accounting

– Many IT decisions have multi-year impacts, but many IT budgets focus on only one year at a time

IT costs incurred at varying times and recur in multi-year patterns; single year focus can result higher long term cost

Not just standard personnel and non-personnel costs

May not be the same from year to year

– Unable to distinguish mandatory and discretionary IT costs

Often all intermingled and inseparable

– Apples-to-apples comparison often difficult due to lack of consistency in vendor quoting and technical nuances

Let’s deconstruct the anatomy of an IT Budget to see how we can address the above challenges

Anatomy of an IT Budget – Types of Spend

Types of IT Spend

– Personnel

Salaries & Benefits – employees and associated costs

– Non-Personnel

Hardware – equipment and other fixed assets, installation costs, maintenance contracts, warranties

Software – licenses and support contracts

Subscriptions – could be associated with hardware, software, training, cloud computing and managed service providers

Services – advisors, consultants, service providers, auditors, legal counsel

Once you identify the Type of Spend then you ask the right questions to better understand the cost

Anatomy of an IT Budget – Personnel

Personnel Budget Questions

– Are there any anticipated changes to salaries?

– Are there any anticipated change to benefits/benefits eligibility?

– Are there any licenses/certifications to add/maintain/end?

Do any of those have training associated with them?

Do any of them have exam or license renewals?

– Are there any terminations / layoffs planned?

Which positions and when?

– Are there any new hires anticipated?

Is this a full-time or part-time position?

What benefits would the person be eligible for?

Is there any training that needs to be budgeted for?

Competitive Analysis Question:

– How does our compensation package compare to market?

Anatomy of an IT Budget – Hardware

Hardware Budget Questions

– What hardware is at end-of-life?

– How long will new hardware last?

– Are there any maintenance or support contracts needed?

– Are there any subscriptions associated with the hardware?

– Which costs have to be capitalized?

Additional Hardware Questions

– Do we have enough computers for planned new hires?

– Are there any other dept plans that will require hardware?

– Are there any projects that may impact current hardware?

Competitive Analysis Question:

– What is our competition doing—what HW are they using?

– Have we considered virtualization or cloud-based alternatives to hardware/infrastructure?

Anatomy of an IT Budget – Software

Software Budget Questions

– Are there any software licenses that need to be renewed?

– What period is the software license valid for?

– Are there any subscriptions associated with the software?

– Are there any installation costs?

– Which costs have to be capitalized?

Additional Software Questions

– Do we have enough software licenses for new hires?

– Are there any other dept plans that will require software?

– Are there any projects that may impact current software?

Competitive Analysis Question:

– What is our competition doing—what SW are they using?

– Have we considered cloud-based alternatives to software?

Anatomy of an IT Budget – Services

Services Budget Questions

– Is the service level adequate for our coming needs?

– Are the services provided still needed?

– Are there additional services needed?

– Has our volume of services changed? Impact to price?

– Does the service have a required period associated with it?

Additional Services Questions

– Are there any other dept plans that will require services?

– Are there any IT projects that may impact current services?

– Have services associated with projects been isolated from operational costs?

Competitive Analysis Question:

– Have we considered outsourcing non-core IT functions?

– Have we considered managed service providers?

Anatomy of an IT Budget – Subscriptions

Subscriptions Budget Questions

– What is the level of usage of the subscription?

– Should we renew at a different subscription level?

– Does the subscription have a period required by contract?

– Are there any installation costs?

– Which costs have to be capitalized?

Additional Subscriptions Questions

– Do we have enough subscriptions for planned new hires?

– Should we convert any software to subscriptions?

– Have all subscriptions associated with hardware and software been included in the budget?

Competitive Analysis Question:

– Have we looked a new subscription offerings/pricing models to validate that we are optimizing our software and subscriptions cost?

Anatomy of an IT Budget – Types of Spend

Types of IT Spend

– Personnel

Salaries & Benefits – employees and associated costs

– Non-Personnel

Hardware – equipment and other fixed assets, installation costs, maintenance contracts, warranties

Software – licenses and support contracts

Subscriptions – could be associated with hardware, software, training, cloud computing and managed service providers

Services – advisors, consultants, service providers, auditors, legal counsel

Remember to focus on the coming year and also on future periods that may impact purchase decisions

Anatomy of an IT Budget – Categories

Categories of IT Spend – Defined

– Capital – expenditures that will need to be considered as part of the capital budget (usually needs to be capitalized)

Hardware and large software license purchases usually here

Significant repairs, parts replacements, upgrades

– Operating – expenditures that are related to operations

Subscriptions, maintenance, support for HW/SW usually here

– Project – expenditures that are tied to a discreet effort

May or may not need to be capitalized

May be required or discretionary expenditures

Consider allocating personnel costs among these categories to better understand how IT personnel resources are being deployed

Anatomy of an IT Budget – Categories

Categories of IT Spend – Considerations

– Capital – expenditures that will need to be considered as part of the capital budget (usually needs to be capitalized)

Has a greater cash flow impact, but may also be eligible for financing from vendors or banks

Consider impact to the financial statements

– Operating – expenditures that are related to operations

Usually “required” expenditures related to day-to-day ops

Usually somewhat of a fixed cost; focus usually to minimize

– Project – expenditures that are tied to a discreet effort

May have associated capital or operating expenditures

Usually discretionary, but not executing may have impact too

Timing may be adjusted for cash flow

Proper categorization can help to analyze impact to cash flow and financial statements

Anatomy of an IT Budget – Classes

Classes of IT Spend (Run – Optimize – Innovate)

– Run – activities and projects that keep the organization running at its current level of service/operations

Most Operating expenditures fall here

Project expenditures related to support and maintenance of the IT infrastructure also fall here

– Optimize – projects and initiatives that help to improve organizational efficiencies and effectiveness

Many Project expenditures fall here, particularly when they are related to business improvement activities

Many Capital expenditures fall here

– Innovate – providing new capabilities, products, or services

Also thought of as ‘Research & Development”

Some Project and Capital expenditures fall here

When trying to “tweak” the IT budget, Run usually should be kept, Optimize and Innovate should be prioritized

Anatomy of an IT Budget – Classes

Classes of IT Spend – Analyzing your budget

None of these spending patterns are “wrong”.

They just represent different types of IT roles/investment.

IT Budget Entity C(Laggards)

Entity B(Mainstream)

Entity A(Leaders)

YourOrg?

Run 80% 60% 50% ??

Optimize 20% 30% 30% ??

Innovate 0% 10% 20% ??

Audience Poll

Which entity are you most similar to?a) Entity A (Run = 50; Optimize=30; Innovate=20)

b) Entity B (Run = 60; Optimize=30; Innovate=10)

c) Entity C (Run=80; Optimize=20; Innovate=0)

d) Other

e) Not sure

Remember

None of these spending patterns are “wrong”.

They just represent different types of

IT roles/investment.

IT Asset Lifecycle Planning

What is an “IT Asset Lifecycle”?

– IT Assets follow a general “life” pattern

From Acquisition (“birth”)

To Disposal/Discontinuance (“death”)

– IT Assets have different timelines for their life cycles

Hardware – 3-5 years

Software – depends on license agreement

Subscriptions – usually monthly to annually, depends on agreement

Services – depends on contract

Understanding the IT Asset Lifecycle helps to

– Identify the total cost of an IT Asset over its life

– Identify points in time with option to change cost structure

– Identify future impact of current decisions

– Ensure the IT decisions balance short & long term value

IT Asset Lifecycle Planning – Hardware

Acquisition costs usually capitalized

Costs in other phases usually expensed

Option to Repurpose usually forgotten/skipped

Acquire Maintain

Replace

Repurpose

Dispose

Tying IT Risk to Hardware Refresh Cycles

How often an organizations refreshes its hardware depends on its level of risk tolerance

– Different IT Assets have varying risk of failure as they age

– Consider the criticality of the IT Asset to operations

– Consider the ease of replacement in the event of failure

Risk of Failure

Laptop DesktopVirtual

TerminalServers Firewall

Low <2 yrs <3 yrs <6 yrs <3 yrs <4 yrs

Moderate 2-3 yrs 3-5 yrs 6-8 yrs 3-4 yrs 4-6 yrs

High 4+ yrs 5+ yrs 8+ yrs 4+ yrs 6+ yrs

Ease of Replacement

Moderate Moderate Easy Hard Moderate

Tying IT Risk to Hardware Refresh Cycles

Consider repurposing servers and workstations into a lower risk role (e.g. login/DNS/file/print server, etc.) when they reach a Moderate risk of failure

Acquire Maintain

Replace

Repurpose

Dispose

IT Asset Lifecycle Planning – Software

Acquire/Replace costs may be capitalized

Maintain/Renew/Dispose costs usually expensed

Upgrade costs might be capitalized

Replace/Renew/Upgrade is a key decision point usually tied to the software license agreement

Acquire Maintain

Replace / Renew

/ UpgradeDispose

Software Licensing Explained

Types of License Programs

– Outright Purchase

“retail” software license – one time cost

– Defined Period

One time cost; Only valid for a defined period

– Defined Period + Subscription

Usually large one time cost, plus subscription

– annually usually 15-20% or original purchase price

Only valid for a defined period, subscription = renewal

– Subscription

May have one-time activation cost

Usually has regularly recurring payments (annually/monthly)

Usually has a defined period with renewal option

Upgrades usually included / available

Software Licensing Explained

Types of License Programs – Impact to Budget

– Outright Purchase

One time expenditure in year of acquisition

– Defined Period

One time expenditure in year of acquisition

Potential renewal cost at end of period

– Defined Period + Subscription

One time expenditure in year of acquisition

Recurring subscription cost in subsequent years

– Subscription

May have one-time expenditure in year of acquisition

Recurring subscription cost in subsequent years

When analyzing a purchase decision be sure to look at the costs in out years / total cost

Software Licensing Explained

Microsoft License Programs

– OEM = provided with purchased equipment

Only valid for that equipment (can’t be moved/transferred)

Can’t transfer to virtualized environment

No previous version rights

– Retail = purchased from a “store”

Can be moved/transferred between equipment

Can transfer into virtualized environment

No previous version rights

– Open License = purchased from a “retailer”

Can be moved/transferred between equipment

Can transfer into virtualized environment

Rights to use previous versions with Software Assurance

Has a license period, may be treated like a subscription

Software Licensing Explained

Microsoft Open License

– Open Business

Two-year periods, pay upfront

Software Assurance optional

– Open Value / Open Value Subscription

Three-year periods (one-year allowed for subscription)

Pay upfront or pay annually (subscription)

Must include Software Assurance

Can purchase Online Subscriptions, but must pay annually

Microsoft Online Subscriptions

– Priced monthly, pay monthly

– Different plan levels with different costs

– Annual contracts, increases allowed at any time, decreases only at annual renewal point

IT Asset Lifecycle Planning – Subscriptions

All costs usually expensed

Replace/Renew/Upgrade is a key decision point usually tied to the subscription agreement

Increases usually allowed at any time

Decreases usually only at Renew point

Acquire Maintain

Replace / Renew

/ UpgradeDiscontinue

IT Asset Lifecycle Planning – Services

Capitalize/expense depending on type of work

Lifecycle depends on contract with service provider

Managed Service Provider contracts often behave like Subscriptions; and may have software associated with it

Acquire Maintain

Replace /

RenewDiscontinue

Understanding Managed Service Providers

Managed Services is the practice of transferring day-to-day related management responsibility as a strategic method for improved effective and efficient operations inclusive of Production Support & lifecycle build/maintenance activities.

– Source: Wikipedia, http://en.wikipedia.org/wiki/Managed_services

A Managed Services Provider (MSP), is typically an IT services provider, who manages and assumes responsibility for providing a defined set of services to their clients either proactively or as they (not the client) determine that the services are needed.

– Most MSPs bill an upfront setup or transition and an ongoing flat or near-fixed monthly fee, which benefits clients by providing them with predictable IT support costs

– Source: Wikipedia, http://en.wikipedia.org/wiki/Managed_services

Could bookkeeping be considered a managed service?

Understanding Managed Service Providers

Benefits of a Managed Service Provider (MSP)

– MSP usually specializes in the services provided

– MSP usually incorporates best practices into their service model

– Services automatically provided as needed within scope

E.g., when there is a problem applying a system patch, MSP will automatically go in and fix it; without additional cost

Considerations when using an MSP

– Usually requires that you conform to their model / software suite

Works well for standardized environments

– When IT staff are employed by organization

Usually shifts non-value-added tasks to MSP

May not decrease staffing cost, but allows staff to focus on more value-added activities

Understanding Managed Service Providers

Impact of an MSP to the IT Budget

– Usually increases predictability in service costs

– Usually setup cost, then recurring monthly payments

Cost driven by number of supported devices

May have software licenses included in cost

May offer reduced cost of hourly services w/ higher level plan

Higher level plans normally include more managed services

– Usually higher recurring cost

But total cost can be less depending on level of incidences

Total cost may be higher if there is variability in the environment

– Review the MSP contract to determine

How much flexibility you have for increases/decreases

Renewal points and plan levels (options/service levels)

MSPs aren’t right for everyone, requires a leap of faith

Adding Some Cloud to the Budget

Cloud Computing / Software-as-a-Service (SaaS)

– Reduces the need for equipment purchases

Vendor is responsible for server equipment / infrastructure

However, may require bandwidth/network equip upgrade

– Reduces up-front implementation costs

Don’t need to pay for setup/config of hardware

Don’t need to incur full platform install/setup

Sometimes user setup is included with subscription fee

– Reduces on-going support & maintenance costs

Vendor is usually responsible for system operations, patches, backups, business continuity, software upgrades

Don’t need to worry about hardware lifecycle risks

– Reduces cost of Replacement phase

Don’t need to incur costs of server upgrade/replacement

Don’t need to incur costs of software upgrade/install

Adding Some Cloud to the Budget

Impacts of Cloud / SaaS to the Budget / Cash Flow

– Usually reduces overall cost of acquisition

Implementation costs usually expensed

– Usually follows subscription lifecycle model

Many vendors allow monthly payments

Many vendors offer discount for annual payment up-front

Budget / Cash Flow Considerations

– No “asset” created, so usually not eligible for financing

– What is the impact to funding eligibility if cost is spread over time instead of up-front?

– What is the impact to the financial statements (and related performance incentives) if expensed?

– Does a conversion to a cloud/SaaS solution reduce costs in other areas?

IT Asset Lifecycle Planning

Understanding the IT Asset Lifecycle helps to

– Identify the total cost of an IT Asset over its life

– Identify points in time with option to change cost structure

– Identify future impact of current decisions

– Ensure the IT budget decisions balance short and long term value

Create a multi-year IT Budget to analyze total cost

– Note replacement / renewal points and costs

Remember to include any associated services with changes

– Remember to determine if there are disposal costs

– Balance risk and cost over time

– Consider the use of an MSP for cost management and better IT staff utilization

– Consider the impact of Cloud Computing to funding, cash flow, and financial statements

Now you have your IT budget created…

After completing the entire budget, go back and look at the big picture that it shows

Use multiple versions of the IT budget to do “what if” scenarios

– Compare costs of physical vs. virtual servers

– Compare costs of on-premise vs. cloud solutions

Creating the budget the first time can be a big endeavor

– Maintaining it usually required less effort

Call to Action – IT Budgeting for Nonprofits

CEOs/EDs, CFOs/Controllers, and Dept/Program Managers should work with their IT Manager or Service Provider to develop an IT Budget that

– Ensures alignment of IT with business strategy & mission

– Balances both short-term and long-term IT costs

– Balances IT-related risks, costs, and value

– Helps with organizational planning for cash flow, funding sources, and financial statements

Separates discretionary from non-discretionary IT costs

– Enables informed decision-making for IT projects

A good IT budget is both a planning and decision-making tool that can help to maximize the benefits of your IT investments

and enable your organization to better achieve its mission

Donny C. Shimamoto, CPA/CITP, CGMA

IntrapriseTechKnowlogies LLC

email: donny808@cpa.com

voice: (808) 735-8324

twitter:@donnyitk

Thank you for your attention and participation!

Any Questions?

See also March 2012 Journal of Accountancy article:

“A Strategic Approach to IT Budgeting” @ http://www.journalofaccountancy.com/Issues/2012/Mar/20114439.htm

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