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Tips for Collaborating with Finance on IT Budgets

By Tim Raiswell, Managing Director, CEB


Tim Raiswell, Managing Director, CEB

There are two types of budget that are used to manage investments in technology. These are the capital and the operating budgets, sometimes referred to as ‘capex’ and ‘opex’. Many of you seeking funding from your corporate finance department will see capex as ‘good’ and opex as ‘bad’ because of the perceived bureaucracy involved with the former; but if you understand what your finance partners are trying to accomplish and the methods they use to accomplish them, you can become more effective at getting budgets approved and dramatically improve the impact IT has on corporate profitability.

“The IT and Finance departments are collaborating closely on flexible budgeting models that ‘break’ many of the pre-existing rules”

The Conventional Wisdom

We tend to associate the capital budget with large expense items like physical assets: server farms, and factories for example. Because a capital budget features large capital outlays and, therefore, larger risks with stakeholder funds, it is generally subject to more scrutiny by executive officers. As such, it is often avoided for technology investments if possible. In contrast, the operating budget represents smaller, easier to access, funds that are used to manage the day-to-day operations of the business.

Changes to Budget Models

In a global economy fraught with fast-moving risks and opportunities many Finance and IT departments have realized the need to improve their support to business managers by increasing the clock-speed of resource allocation decisions. At the same time, Finance must ensure that funds - whether capital or operating - are not wasted and are aligned with the capabilities that will deliver competitive advantage to the corporation. This is a difficult tension to manage. Inside the companies that get this right, you will see the IT and Finance departments collaborating closely on flexible budgeting models that ‘break’ many of the pre-existing rules. For example, capital budgets that are reallocated outside the budget cycle to over-performing projects, and operating budgets that are checked for alignment with company-level strategic goals.

What the Best Companies Do

There have been three key shifts in capital budgeting methods.

First, the need for investment in ‘new capabilities’ in technology (distinct from maintenance spend) is pushing finance to be faster and more flexible in its allocation of funds to growth projects involving analytic capabilities. Second, there is more rigor in the evaluation of soft, non-financial measures like the “strategic fit” of projects. Third, more scrutiny of the lifecycle costs of a project. It’s not enough to explain the upfront costs. Finance needs details on the maintenance and upgrade costs of hardware and software.

Capex Tips

Here are some ways you can work with Finance to make the best of these changes to budgeting practice.

Tip #1: You have to be specific when you state that an IT investment will support an enterprise- or business-level goal. Take the time to review the language that your Strategy team uses to describe its goals. If the strategic goal is to increase sales team penetration in a new market, explain how your new cloud sales tool will do that. Will it generate more sales leads in that market? Will it contain mobile functionality that will help sales reps on the go in that market?

Tip #2: Normally we focus on the benefits of the investment: the upside. But some technology investments have a downside if we do not make them. For example, if moving to a single Enterprise Resource Planning solution improves financial data standards and helps reduce the risk of misstatements in financials, call out that risk. Finance leaders are risk-minded and will respond positively to having the opportunities and the risks called out in the business case.

Tip #3: Come to Finance with the fully-loaded costs of your project documented and you will buy yourself credibility and a friend for life.

Tip #4: Investments in analytic capability are of special interest to finance leaders who have been trying to improve their own function’s analysis for a few years now. If the benefits of your technology investment mean that decision makers are getting more insightful guidance, you need to call that out. When it comes to “selling” insight, focus on some of the following aspects of the information: who will consume the information generated and why? Will the investment improve the timeliness, actionability or accuracy of the new information?

Opex Tips

Because there is more scrutiny of overhead spends today in large corporations, operating budget reviews can become more like capital budget reviews. For example, we’ve seen some operating budgets put through strategic alignment tests in which expenses are bucketed into strategic categories like capital budgets. Large projects like a website upgrade with multiple expense items: software, consultants, designers etc. are aggregated into a single expense category and evaluated for strategic impact.

Another example of this kind of focus from Finance is when expenses are evaluated in the context of the work they support. CEB recently concluded a piece of research into operating budget management and found that the biggest driver of opex budget growth is ad hoc, judgment-based work like analytics and non-standard management reporting. To avoid unwanted budget creep finance teams are beginning to ask questions like: is this work, and are these projects worth it? Do they help the company achieve its goals?

Tip #1: First, as with our capital projects, we need to come prepared to discuss strategy, specifically how our investment supports it. At the operating budget level this can be trickier, especially if multiple expenses and projects are involved. If that is the case, aggregate expenses into larger categories so that budget owners and finance appreciate the larger intent of your purchase.

Tip #2: Second, technology investments can be confusing for the layperson who doesn’t know their Software-as-a-Service from their Infrastructure-as-a-Service. As such, describe the benefits of the technology investment in the language of the budget owner and the language of finance. For example, if software automates work, how much time does it save exactly? Which work does it automate? Who would benefit? The more you can describe the technology in action, the more you can make your business case more intuitive for finance and the business.

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