This is the first installment of a series on IT Budgeting.  Over the next few weeks we will discuss various aspects of budgeting from the perspective of both Accounting and the IT Department.

Most businesses run on budgets.  And it’s a safe assumption that all successful businesses use a budget.  There may be dozens or hundreds of expense categories in your organization’s budget, but we’ll focus on the Information Technology section.

The problems start when you try to decide how much should be spent in a given area, like IT.  You can buy or download surveys and budgeting models for any industry, but using a generic, average model will create a generic, average company.

Revenue Based Model

Revenue Based budgeting is pretty self-explanatory.  Take revenue, decide on a percentage, and that’s the budget for an area.

Let’s say your company makes totem poles. IT spending averages 2.5% of revenue for all totem pole manufacturers.  If you were to increase that to 3% or 10%, you could invest in fresh ideas in manufacturing and marketing. Or you may have a need for IT that others in your industry don’t have.

Another wrinkle in the process is different departments have various needs.  What if you decide to create a division to manufacture teepees?  Maybe the teepee industry averages 3% of revenue for IT costs.  Would your percentage of revenue be the average or something else?  What happens if your revenue mix starts favoring the teepee division (i.e. teepee sales become 80% of revenues)?  How will that impact the IT budget as a percent of revenue?

Run, Transform, Grow

Some CIOs are turning to a model built around Run, Transform, Grow (RTG).  With RTG, expenses are categorized based on the goal they trying to achieve.  “Run” expenses are the general day to day expenses of keeping the IT infrastructure running.  “Transform” costs are those projects that create more efficient systems or ones that take advantage of newer technology, and “Grow” are expenses for expansion of services or growth of the company.  If you isolate the Run component, you can match the Transform and Grow projects to business objectives and justify those expenses more accurately. Another benefit of RTG is scalability.  RTG expenses can categorize the entire budge, or specific items such as IT.

A recent Gartner survey stated that 66% of IT costs were Run expenses while most CIO’s have a goal of 50%.  By presenting the IT budget as being tied to the goals and objectives of the organization rather than just as a relationship to revenue, expenses can be monitored and justified as an investment rather than a cost.

Next time we will look at some of the nuts and bolts of accounting for IT Expenses and why the accountants do what they do…