The different ways of allocating your IT budget
In our last entry, we explained how ITFM tools can help to facilitate cost control. Today we will go a bit deeper into the closely related topic of IT budgeting. While nobody would dispute the importance of proper budgeting, it is subject to debate what “proper” means in this case. There are different ways to allocate the IT budget and there sadly is no one-size-fits-all solution.
Budgeting decisions and project planning can differ widely from business to business. There are various reasons for that and no method is necessarily better by default. However, in general one can differentiate between three main approaches regarding IT budget allocation. Today we will have a look at each and assess their advantages and disadvantages:
The centralized approach
In this approach, the company has one centralized pot of money available for IT needs, demands, and projects. These funds are then allocated among the different departments until the IT budget is used up. The key advantage here is that project costs and IT resources can be quite easily monitored and administered. However, in the worst case the company’s growth can be severely hindered, because there will be no leftover money for further projects after the allocation.
The decentralized approach
Here things are tackled from the other direction: IT undertakings are pitched and judged on a case-by-case basis. This enables the company to favour IT needs that would increase value generation instead of mindlessly allocation the IT budget. The flipside of this coin is that an assessment of future budget needs is aggravated. Furthermore, those budget demands often exceed the available resources, since project costs are more difficult to foresee.
The iterative approach
This approach tries to marry the two methods above into a cohesive whole. First, an IT budget is determined akin to the centralized approach. Afterwards, this budget is allocated to different projects on a case-by-case basis, similar to the decentralized approach. Once the initial budget is depleted, there is an assessment of the remaining projects that show promise for value generation. Finally, the needed total budget is adjusted according to these assessments for a future cycle of IT budget allocation. On surface level, this seems to be the best approach out of the three. However, it is apparent that it requires more resources and effort when it comes to planning and execution. Furthermore, the company needs sourcing options to scale their resources properly, which is not necessarily conceivable for many companies.
One incredibly useful tool when deciding on a plan to allocate your IT budget is so-called scenario-based planning. anafee’s software suite enables you to change any of the parameters and variables of the IT budgeting process. This in turn allows you experiment with prospective budgeting decisions as well as plan for emergencies:
- What costs would acquiring asset XYZ cause? What value could be created through that acquisition?
- How would reducing the budget spend on any IT service effect the value chain?
- What if we use benchmark prices instead of unit costs for storage services? What would be the impact on service prices?
- What if supplier prices for a service or product increase unexpectedly? How can that be counteracted?
It is questions like these, that a tool for scenario-based planning enables you to prepare for. You will have more flexibility, insight, and foresight when it comes to value generation and future budgeting decisions and adjustments.
To better illustrate the capabilities of scenario-based planning we will give you a tiny but more concrete example: Imagine we would want to transfer 50% of your storage space into the cloud. First we refer to our plan scenario that is running the current numbers with regard to cost and budget allocations. Based on this plan scenario we create a derivative scenario in which we adjust the metrics to reflect the changes that would come with transfering our storage space into our cloud. The derivative scenario will then give us a prediction for what would change if we actually were to follow that plan, i.e. show us what it could mean for IT costs in regard to our customers and such. anafee makes it particularly easy to create and compare scenarios like these.
In summary, when planning IT projects consider the above approaches and act accordingly. Assess resources and take your company’s current business needs into account. Utilize scenario-based planning to flexibly react during the budgeting process.
While you are waiting for our next entry centered around allocating the IT budget for running and growing the business, feel free to download our white paper on IT cost control. See you next time.