UNDERSTAND THE REAL IT SPEND

Pertemuan 1-4

Matakuliah : A0774/Information Technology Capital Budgeting

Tahun : 2009

The key to budgeting for IT is not how much is spent,But how wisely it is spent.

IT ASSETS

• Hardware• Software• Networks• Services• People

BUILD THE IT BUDGET

• Top Down– How much money we have to spend, now how do we

spend it?

• Bottom up– These are the things we need to do in IT, and these are

the things we would like to do. Now how much will it costs?

Realistic forward looking IT budget can be developed

• Define the specific technologies, systems, activities, processes and people that will become part of the budget that the CIO and the IT organization won or are responsible to deliver on behalf of the company and those that will be managed by others outside the IT organization

IT Budgeting • How much is currently spent on IT in the IT department’s

own budget, and how much is hidden away in business-unit operating budgets under IT or non IT line item. This is called total spend analysis (TSA)

• How the drivers of this total spend will be allocated in the future, what properly goes into the IT budget, and what properly stays in operating budgets of the business units. This involves deciding the ownership of the IT spend.

IT Budgeting

• Who is responsible for executing the activities and tasks associated with the spending. Sometimes the execution is divided between the CIO’s organization and the business unit. Sometimes it helps to have an outside third party take on the responsibility for execution. However, someone in the company, either in the IT organization or in a business unit, must still assume overall accountability for the spend.

IT Budgeting

• The IT budget for “must have” activities. – The top down

• feasible to maintain all current IT activities at current service levels

• to make trade off by eliminating activities• reducing service levels.

IT Budgeting– Bottom up or if there is money left over in a top down budgeting exercise,

after taking into account operation of all the must haves at their current service levels or possibly even improving those service levels, a company must rank the desires for future IT spending by all constituencies.

• If the proposed budget exceeds the available funding, hard decisions must be made collectively by the business units, the IT organization, and corporate executives about what stays in the budget and what goes. This is often a highly emotional and politically charged exercise. However, it must be done, and the CIO must drive this process and directly involve corporate and business unit leadership. This is called ruthless prioritization.

IT Spending Categories

• The IT infrastructure• PC specific functional and business unit software tools• Server or mainframe based legacy functional or

business unit applications• New functional and business unit applications just

coming online but not yet operational or mainstream.• New functional and business unit application projects.

IT Spend Area Ownership of IT Spend Drivers

Responsibility for Execution of IT Spend

Accountability for Overall IT Spend

Business Unit

IT Business Unit

IT Business Unit

IT

IT Infrastructure* √ √ √ √ √

PCsBasic PC softwarePeripheralsServers

Networks/telecomInternet connectivitySupport/help desks

PC Specific Business Unit Infrastructure and Sotware Tools √ √ √ √ √

SoftwareAdditional hardwareSpecial support/help desk

Server/Mainframe-Based Legacy Business Unit Infrastructure and Applications

√ √ √ √ √

Software LeasesSoftware maitenanct and upgrade contracts

Dedicated serversSpecial network/telecom/Internet supportApplication-specific help desks

New Business Unit Infrastructure and Applications √ √ √ √ √ √

Transition form legacy to “new” costsSoftwareHardware

InfrastructureProject management

New Business Unit Infrastructure and Applications Projects √ √ √ √ √ √

SoftwareAdditional hardwareSpecial support/help deks

Why is it important that jointly managed assets owned by the department or business unit be aggregated with the spend for IT organization owned assets ?

• Aggregating the spend is the only way to get a clear picture of those costs over which the IT organization actually has control– Changing mind set “IT is a free service, always there,

always perfect” to “That service costs money and can be improved or impaired depending on the amount of resources dedicated to it”

• Capturing these costs – especially the actual incremental costs associated with operating legacy systems – helps the IT organization to assemble business cases, when appropriate, for upgrading hardware, software and support.

• Finding what IT assets and resources are residing in departments or business units helps the CIO create a case for standardizing and consolidating purchases as varied as PCs, help desk services, telecommunications network access, and outside services, thereby driving down the company’s aggregate IT spend.

Basic Principles Preparing The IT Budget

• A driver of the IT spend should be owned primarily by the group that has the most effect on the driver.

• To the extent possible, maximum control over the spend should be put in the hands of the people who are users of the service, whether standard or specialized. If people own the control and know that they are paying for that for which they’ve asked, ultimately, they will help control the spend.

• IT spend can be owned jointly by the IT organization and the business unit or department, but a formal activity based service level agreement (SLA) should be in place for the cost drivers and service execution and delivery levels.

• Total spend analyses covering all costs to the company (rather than focused on point in time costs) must be employed when analyzing IT costs and service level to ensure full transparency

• Continuous dialogue and constant liaison between the IT organization and the business unit or department must exist to ensure that changes in either group that might affect the SLA are discussed candidly and that all options, costs, benefits and risks are fully transparent

• The keys to achieving full transparency in the IT budget are to develop and use appropriate and relevant IT performance and value measurements.

5 Major Spend Categories IT Budget

1. Business unit driven IT costs2. IT operations and management base costs3. Business unit independent IT initiatives4. Corporate wide initiatives5. Emerging technologies

5 Major Spend Categories IT Budget1. Business unit driven IT costs

Independent/discreet business unit needs requested of and addressed by the IT organization on behalf of a business unit, including activities such as PC procurement, installation and maintenance of dedicated servers, and special applications work. This category if b far the largest in terms of costs, often accounting for roughly 50% of a company’s total IT spend.

2. IT operations and management base costs3. Business unit independent IT initiatives4. Corporate wide initiatives5. Emerging technologies

5 Major Spend Categories IT Budget1. Business unit driven IT costs2. IT operations and management base costs

Primarily IT staffing costs and the structure necessary to support IT staff, as well as the IT financial and performance measurement process. These include competitive compensation, continuing education and skills development, the overall career model process, and the budgeting/analysis processes.

3. Business unit independent IT initiatives4. Corporate wide initiatives5. Emerging technologies

5 Major Spend Categories IT Budget

1. Business unit driven IT costs2. IT operations and management base costs3. Business unit independent IT initiatives

Specialized and unique software and hardware infrastructure dedicated to individual business units and to their strategic objectives. These are often owned and housed within the business unit.

4. Corporate wide initiatives5. Emerging technologies

5 Major Spend Categories IT Budget1. Business unit driven IT costs2. IT operations and management base costs3. Business unit independent IT initiatives4. Corporate wide initiatives

Includes initiatives that can be leveraged across the company. These typically include enterprises wide applications, core infrastructure, networks, connectivity, and other initiatives that benefit the entire company and that are considered foundation elements

5. Emerging technologies

5 Major Spend Categories IT Budget1. Business unit driven IT costs2. IT operations and management base costs3. Business unit independent IT initiatives4. Corporate wide initiatives5. Emerging technologies

Costs associated with identifying, experimenting with, and adopting emerging technologies, including direct internal costs as well as costs incurred in partnering with third parties or in engaging in other applied research activities.

5 questions for the bottom up budgeter

1. What is the service being provided?2. What are the current services being provided?3. Should the service level be improved?4. Should services be added?5. Are all services necessary and must they be

provided at the current service level?

4 question for the top down budgeter

1. How much money is available for IT services?2. What services must be provide in that budget?3. What level of service can be provided in the

budget, given the number of services that must be provided?

4. Who will provide the service (internal resources – the IT organization, the business unit, or the department – or external resources)? What are the cost differences?

IT Spend/Budget Drivers

Class of User / Service Speed/availability of Service

Normal Premium Speed (Emergency Situations)

On Demand(24x7)

Basic/Standard/Commodity Lowest Cost Higher Cost

Basic/Standard/Commodity+

Business Unit Premium Special

Business Unit Premium Unique/Custom

Higher Cost Highest Cost

Measurement

Measurem

ent

Focus on Total and Lifetime Spend• The amount of that cost depends not only on the size

and complexity of the initiative being undertaken, but also on the state of the current IT environment.

• Only by analyzing the costs of changes of changes to the existing environment can the total cost of an IT initiative truly be captured.

• IT budget needs to accommodate issues surrounding lifetime cost. Not only for applications, but also for hardware, networks, other IT infrastructure items, and services.

Ruthlessly Prioritize Desires For Future IT• Has as its fundamental objective a reduction in the number

of IT priorities and total IT spend to levels that a company can afford.

• Focuses business units and users on living within their means and dealing with austerity.

• Must be continued and institutionalized into the regular IT planning process.

• With proper IT planning, budgeting, and spend-portfolio analysis processes in place, ruthless prioritization simply becomes a tactic that helps to infuse the organization’s culture with the idea that wise IT spending must be maintained.

The Bottom Line in BudgetingAn IT Budget will never be perfect, and it will never be static

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The CIO and the IT organization must have the IT budgetBaseline constructed in such a way that it is fullyTransparent to corporate and business-unit executivesWho need to make properly informed decisions

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