Authors Note: As many of you have probably surmised, I write my own blogs. Blogs are often authored by a service and then replicated, especially in IT. Instead, I like to choose the topics that might be of most interest to our clients and write to them – you – directly. While it does take a little more time to write my own content, it does mean that I am well versed in the subject I send to you. So please always feel free to reach out to me if you have any questions or comments about anything I write. Thank you. – Robert Hood
Being August, it’s time again to think about budgeting for the next year. For most businesses, IT may just be a one- or two-line item on the budget. But that can lead to IT actuals being substantially off budgets. This isn’t because of bad management, but due to the changing nature of IT, especially if all its various aspects aren’t considered.
There are many approaches to IT budgeting, each of which can produce drastically different results. I have gone over those in previous TekTalk videos (see https://youtu.be/FcrW0_o5wsY). But here I’ll review our recommended budgeting approach.
The 6 Areas of IT Budgeting:
- Sustaining Labor
- Subscription/Support/Maintenance Renewals
- Hardware/Software Refresh Needs
- Operational Improvements
- Strategic Initiatives
- Project Labor
Let’s go over each of these in more detail.
1. Sustaining Labor:
This is the labor to keep your current operations running at the status quo. This could be internal employees, contractors, or the recurring service provider fees. As such, it’s an easy value to budget if you know your current spend, especially if the business is fairly mature and stable.
Some baseline comparatives for this, based on what we’ve observed, a company generally spends about 3% of its revenue on IT labor. Of course, this can vary wildly. For a stable company, we see IT labor needs of around 1 hour per employee per month. But for an expanding or rapidly changing company, it can go as high as 10 hours per employee per month.
2. Subscription/Support/Maintenance Renewals:
These are all your ongoing recurring hardware and software expenses. Subscription examples include items like Microsoft 365, telecom/IPS, web delivered services, and Azure/AWS cloud services. Support/Maintenance are items like firewall and server warranties, perpetual software support renewals, etc. Don’t forget that some of these are monthly, some annual, and some may be bi-annual or longer between renewals, depending on your chosen option.
One good approach to calculating this is to look at all renewal expenses for last year, and then add renewals for anything that was purchased last. Of course, be on the lookout for anything that may need renewal from a bi-annual or longer contract. Good accounting practices can also really help you identify these.
Reviewing this area also allows you a great opportunity to see if you should change your service levels on any of these renewals, and then mark in your calendar when to take action.
3. Hardware/Software Refresh Needs:
Things get old, break, or just don’t meet your needs anymore. For this area you look at any hardware or software that needs replacing and budget it out. You need to consider the upfront costs, as well as the ongoing costs related to warranty and support for the product. These are typically 2 different line items.
Hardware that is going End-of-Life (EoL) with the manufacturer is a key area of concern. These typically should be replaced. There is often an inclination to keep hardware that is “working” actively in service; but doing so can put your organization at a higher risk of security vulnerabilities or suffering a prolonged outage to repair a failed component. In line with that, hardware that is beyond EoL or without a support contract, and is failing or has failed, should also be up for replacement.
Other things to consider on these refreshes are things such as
- Should it be replaced with the same or similar product?
- Does it need to be scaled up or down?
- Will the contract renewal trigger anything like pricing or service level changes?
- Can the product be replaced with another service, such as moving your physical servers to the cloud?
- Are there new capabilities or features that make moving up or down levels more attractive?
Don’t include the labor costs of implementing these new refresh items. We’ll consider that later.
4. Operational Improvements:
You also need to budget for the IT costs associated with operational improvement, which are tactical changes within the organization. These may be to support expanding staff, a new office location (or shifting to home offices), increased performance needs, and new features or functions that are needed in current applications.
Any such operational improvements will typically involve associated labor, software, hardware and subscription/warranty/support costs. For this area, don’t include the labor costs. We’ll get to that below.
5. Strategic Initiatives:
Strategic Initiatives include foundational changes to the business that involve completely new processes for most or all your existing staff, or whole new business units that need infrastructure built for them.
Examples of this are complete or substantial digital transformations of your IT infrastructure from on-premises to cloud based or lift and shifting of your accounting or CRM/MRP/ERP systems. Likewise, setting up a new business unit is going to require fundamental changes or additions of IT infrastructure to support the new unit. These usually take considerable resources over a long period, including IT resources.
When calculating these costs, include everything other than the IT labor.
6. Project Labor:
At this point, you should have a list of your projects from the previous 3 areas. This should give you a high-level view of your projects, and their priorities and interdependencies. From that, you can look at the skills that are needed, and a timeline of those needs.
Next, you need to decide how you are going to roll these out. Do you have capacity with your current IT resources? Do you want to bring in professional services of your key vendors to orchestrate and implement their new roll out? Or do you want to bring in an outsourced project management team to manage and execute the implementations? If you have a lot going on here, project management software can really help with the layout and organizing projects, tasks, staffing and dependencies between them.
With that, you now have the estimated cost of each project task. You can feed that back into their respective areas to get a break down of costs by area or project. If you followed the above process, you now have the side benefit of the timeline or sequence of each implementation.
By identifying the costs, and budgeting for each of them, you can transform your IT spending into a predictable, effective competitive advantage rather than a reactionary, inefficient cost center.
If you want more details, including a step-by-step process to implement the above, you can checkout our TekTalk video at https://youtu.be/FcrW0_o5wsY. If you are one of SpotLink’s Carefree Computing® TruBlue clients, help with IT budgeting is included with your services. For our other clients, we are also happy to help with your IT budgeting. In either case, just give us a call and we can schedule an IT budgeting session with you.
CEO & Founder