Best Practices Of IT Budgeting V1.0-E-P - Template
Best Practices of IT BudgetingVersion 1.0Date: 04/06/2007The Saudi e-Government Program (Yesser) has exerted its best effort to achieve the quality, reliability, and accuracy of theinformation contained in this document. Yesser assumes no liability for inaccurate, or any actions taken in reliance thereon.Yesser encourages readers/visitors to report suggestions on this document through the “Contact Us” .
Best Practices of IT BudgetingTable of Contents1. Executive Summary . 42. Introduction . 62.1. Purpose. 62.2. Document Structure. 63. Financial Management for IT Departments . 74. What is a Budget . 95. Why to Budget ?. 106. Elements of a Successful Budget . 116.1. Budget Structure. 116.2. Budget Properties. 137. The Budgeting Process . 167.1. Setting the Budget . 177.2. Monitoring the Budget. 227.3. Governance and KPIs. 268. Practical Approach – Budget in the Government of Saudi Arabia . 288.1. Fiscal Year in the Kingdom of Saudi Arabia. 288.2. Organization of the Budget . 288.3. Variance Orders ( )ﻣﻌﺎﻟﺠﺔ ﺗﺠﺎوز اﻻﻋﺘﻤﺎدات . 298.4. Yearly Instructions ( )اﻟﺘﻌﻠﯿﻤﺎت اﻟﺴﻨﻮﯾﺔ اﻟﺘﻔﺼﯿﻠﯿﺔ . 298.5. Areas of Improvement . 299. Famous Methods of Cost and Budget Estimation . 309.1. Total Cost of Ownership (TCO) . 309.2. Return on Investment (ROI). 3210. Success Factors. 3411. Appendix I – Practical Example of Budget Allocation . 3611.1. Scenario Description. 3611.2. Identifying and Estimating Cost Elements (TCO) . 3611.3. Mapping the Cost Model to the Budget Structure. 3812. Appendix II – TCO Example. 4012.1. Option 1 Characteristics . 4012.2. Option 2 Characteristics . 4112.3. Conclusion. 4213. Appendix III – Examples of ROI e-Government and e-Commerce Projects . 4314. Appendix IV – Glossary of Terms . 46e-Government Program (yesser)-2-
Best Practices of IT BudgetingList of TablesTable 1 Capital Cost Types and Elements in an IT Budget. 11Table 2 Operational Cost Types and Elements in an IT Budget. 12Table 3 Sample Capital Budget Estimation Sheet . 13Table 4 Sample Operational Budget Estimation Sheet . 14Table 5 Proposed KPIs for the Budgeting Process. 26Table 6 Sample TCO Model . 31Table 7 Obvious and Hidden costs to be considered in TCO. 32Table 8 Services in the datacenter example. 36Table 9 TCO model for hardware and software . 36Table 10 TCO model for network & connectivity and security. 37Table 11 TCO model of other cost elements . 38Table 12 Complete TCO Model. 38Table 13 Mapping between the TCO model and the Budget structure. 39Table 14 TCO cost model for Option 1 . 41Table 15 TCO cost model for Option 2 . 42Table 16 Glossary of Terms . 46List of FiguresFigure 1 IT Financial Management and its relation to IT Management. 8Figure 2 Relation between Setting and Monitoring the Budget . 16Figure 3 The process of Setting the IT Budget . 20Figure 4 Sample flowchart for spending approval procedure . 24e-Government Program (yesser)-3-
Best Practices of IT Budgeting1.Executive SummaryIT Budgeting is an important subject for IT managers and CIOs aroundthe world. This importance comes from its’ being a decisive factor in thesuccess of the IT department by ensuring that sufficient financialresources are available for the sustainability and the growth of the ITdepartment and its services.A Budget is defined as an itemized forecast of an organization’s incomeand expenses for a futuristic period. The budget can be structured inmany ways based on the organization’s (or the country’s) standards. Oneof the widely adopted approaches for structuring the budget is to build thebudget on the basis of two main categories:-Capital cost: concern the purchase of assets intended for longterm use within the organizationOperational cost: day-to-day costs that are not associated withtangible production resourcesThe Budgeting Process is the process of ensuring that the correctfinance is available for the provision of IT Services and that during thebudget period they are not over-spent. The budgeting process is acornerstone of the IT Financial Management process which is responsiblefor the identification, calculation, monitoring and onward allocation ofcosts for the IT Services.The budgeting process is split into two separate but related processes;setting the budget and monitoring the budget. The process of settingthe budget is mainly concerned with preparing the budget for the comingfiscal year or period. The process of monitoring the budget is concernedwith ensuring that the budget of the current fiscal year is spent properly.Monitoring the budget is also concerned with foreseeing and reportingany deviations from the allocated budget.It is important to establish the governance of the IT department over allIT-related budgeting in the organization; this is the only way to establishfull accountability on the IT assets and resources. In more practical terms,no department should be allowed to allocate IT-related cost in theirbudgets. Departments must request any IT spending from the ITdepartment. Without achieving this, IT departments will not be able tocontrol IT assets in the organization.In the Government of Saudi Arabia, each governmental organization isrequested to follow the standard budget structure and its guidelines forreporting their yearly budget. The standard budget structure is meant tobe generic in order to cater for the different needs of the governmentdepartments regardless of their nature.However, it is noted that currently there are no clear IT-related categoriesor elements in the budget structure of the Government of Saudi Arabia.This fact creates difficulties for the government organizations in allocatingthe IT budget properly and tracking the IT spending. For example,hardware items such as personal computers and laptops are normallyplaced under Element 221 of the Second Category which concernfurniture and office equipments.e-Government Program (yesser)-4-
Best Practices of IT BudgetingThese issues should be addressed on the highest levels to update thebudget structure in a way that serves the purpose of properly setting andmonitoring IT Budget.There are some key success factors that facilitate the budgeting processand help the department in allocating sufficient budget for the fulfillment ofits goals and objectives:-Having a long-term IT strategy: an IT strategy reflects thoughtfuldecisions that are made based on experience and long termcommitment rather than reactive and random decisions-Alignment to the business requirements: this does not happenwithout making the effort from the IT department to properly alignwith the business, not just by fulfilling its requirements but even tobecome a success factor and an enabler for the business-Defining success measures and performance indicators:When success measures and performance indicators are set andreporting on them becomes a habit then budgeting for the futurebecomes easier and more appreciated since it is built on tangiblefacts that reflect the true state of the organization-Succeeding in previous budgets: there is nothing more helpfulin negotiating the budget than showing that the previouslyobtained budgets were utilized successfully-Continuous and stable growth: reflecting continuous and stablegrowth in each budget period will reflect stability and maturity inthe IT department and show that expansions are made based ondetermined and well-studied planse-Government Program (yesser)-5-
Best Practices of IT Budgeting2.IntroductionThis document provides guidelines / recommendations on how to goabout developing and monitoring the IT budget. It will help with an overallorganizational budget as well as with a budget for a specific project. Itincludes methods for estimating costs as well as tips for ensuring that thebudgets are successful2.1.PurposeThe purpose of this document is to provide guidance for IT managers /Directors in preparing the budgets of their departments.The document targets the IT managers / Directors as the main audience,because they make the decisions regarding the budgeting.This document is based on best practices; it is greatly inspired by theFinancial Management component of the IT Infrastructure Library (ITIL)which represents a widely accepted best practice of IT ServiceManagement (and soon to become ISO standard – ISO 20000).2.2.Document StructureThis guide aims to help effectively meet the challenge of constructing andmonitoring budgets in IT departments, it has been written as clearly aspossible to help the reader gain the most comprehensive understandingpossible.The document can be navigated from one related subject to another,simply by clicking on the hyperlinks on the main dashboard. The mainsections of this document are:-Financial Management for IT Departments: a general description ofthe concept of Financial Management for IT from best practicesperspective-What is a Budget: basic definition of what a budget is, and what isthe meaning of budgeting process-Why to Budget: the benefits gained from budgeting, an thedisadvantages of not-budgeting-Elements of a Successful Budget: describes the anatomy of abudget in terms of how is the budget organized, what are the itemsthat appear in an IT budget, and what are the properties of theseitems-The Budgeting Process: describes the budgeting process in details-Practical Approach – Budget in the Government of Saudi Arabia-Methods of Budget Estimation: describes two famous methods ofbudget and cost estimation that are deployed and used widely by ITorganizations-Success Factors: provides some guidelines and advices forsuccessful budgetinge-Government Program (yesser)-6-
Best Practices of IT Budgeting3.Financial Management for ITDepartmentsIT Services are usually viewed as critical to the organization. Theincrease in user numbers, demand for new technologies and complexitiesof systems has frequently caused IT Services costs to grow faster thanother costs. As a result, organizations are often unable or unwilling tojustify expenditure to improve services, or develop new ones, and ITServices may become viewed as high-cost or inflexible.IT managers are often faced with questions about the poor quality of ITservices compared to their cost, or about the justification for the largebudget spent on a certain service, or about the reasons behind the failurein providing a certain critical service. They often do not succeed inproviding persuasive answers to such questions; their answers are often“we are doing the best we can with the money that we have.” or“surprises always happen.” or “we faced many challenges that we couldnot control within the forecasted budget.” which they often do notsucceed to prove.To understand whether an IT organization is doing the best that it can andto demonstrate this to its customers, it has to both understand the truecost of providing a service and manage those costs professionally. To dothis, it is usual to implement IT Accounting and Budgeting processes andoften to implement Charging processes as well, these processes are themain building blocks of the IT Financial Management.IT Financial Management is the sound stewardship of the monetaryResources of the organization. It supports the organization in planningand executing its business objectives and requires consistent applicationthroughout the organization to achieve maximum efficiency and minimumconflict1.Financial Management is responsible for the identification, calculation,monitoring and onward allocation of costs for the IT Services. By creatingcost awareness, Financial Management influences the behavior andperception of the business owners (senior management in governmentdepartments) to the true cost of providing IT Services and optimum usageof available funds.IT Financial Management within an IT organization or department isvisible in three main processes2:--Budgeting is the process of predicting and controlling thespending of money within the organization and consists of aperiodic negotiation cycle to set budgets (usually annual) and theday-to-day monitoring of the current budgetsIT Accounting is the set of processes that enable the ITorganization to account fully for the way its money is spent(particularly the ability to identify costs by Customer, by service,1ITIL Definition – IT Service Delivery Book v1.0 – published by The Stationary Office for OGC (Office ofGovernment Commerce – The United Kingdom) - 20012 ITIL Definition – IT Service Delivery Book v1.0 – published by The Stationary Office for OGC (Office ofGovernment Commerce – The United Kingdom) - 2001e-Government Program (yesser)-7-
Best Practices of IT Budgeting-by activity). It usually involves ledgers and should be overseen bysomeone trained in accountancyCharging is the set of processes required to bill Customers for theservices supplied to them. To achieve this requires sound ITAccounting, to a level of detail determined by the requirements ofthe analysis, billing and reporting processesIT Service Planning- Service Level Management- Capacity Management- Availability ManagementBudgeting- Ensure having sufficient funds to run IT services it requires- Ensure that IT Service Levels can be maintained throughout the year- Follow financial targetIT FinancialManagementAccounting- Cost Effectiveness (cost analysis, cost model)- Plan and Budget with confidence- Provide information to justify IT ExpenditureCharging- Charging policy- Influence customer behavior (when appropriate)- Plan for investment based on cost recovery and business benefitsFigure 1 IT Financial Management and its relation to IT Managemente-Government Program (yesser)-8-
Best Practices of IT Budgeting4.What is a BudgetA Budget is defined as an itemized forecast of an organization’s incomeand expenses for a futuristic period.It is a tool for allocating resources and implementing strategic plans. Itcharts a way of allocating and maximizing the use of resources and,ideally, identifies financial problems that could arise in the coming year.The Budgeting Process is the process of ensuring that the correct financeis available for the provision of IT Services and that during the budgetperiod they are not over-spent. It is also the means of delegating controland monitoring performance against predefined targets3.Budgeting can be split into two main activities, Setting the Budget andMonitoring the Budget.Setting the BudgetIn most organizations the budget is set on an annual basis. This activitycovers forecasting what financial resources IT will require in theforthcoming year.IT spending can be classified in three key areas:---Strategic Development – These are IT development initiatives andprojects which are aligned to (and often essential for) theorganization’s strategic plan (such as launching a new service)Tactical Development – These are IT development activitiesdesigned to make the organization more effective and/or efficientin its ongoing operations (such as expansion or improvement ofcurrent services)On going spending – This is the cost of running the existing ITservicesMonitoring the BudgetAll organizations need to monitor the actual amount of money spentagainst the forecast. Any significant changes to the forecast need to beexamined and actions taken.Changes to forecast can happen for a number of reasons, such asunexpected changes in business volume or false budget forecastassumptions. Monitoring the budget is key requirement to ensure thatsuch cases are highlighted and resolved in the right manner and time.3ITIL Definition – IT Service Delivery Book v1.0 – published by The Stationary Office for OGC (Office ofGovernment Commerce – The United Kingdom) - 2001e-Government Program (yesser)-9-
Best Practices of IT Budgeting5.Why to Budget ?In the public sec
- Capital cost: concern the purchase of assets intended for long-term use within the organization - Operational cost: day-to-day costs that are not associated with tangible production resources The Budgeting Process is the process of ensuring that the correct finance is available for the provision of IT Services and that during the
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