March, 20218 IN MY V EWIT budgets ­ just the mention of those two words are likely to make many business executives roll their eyes. There is a common perception, perhaps misconception, that Information Technology departments spend frivolously, manage inefficiently, and offer limited operational and strategic value. These common beliefs are in direct contrast to accepted industry analysis which clearly shows that IT investments have a robust, positive impact on revenue generation, talent retention, and profit enhancement.The United States Bureau of Labor estimates that 70% of United States productivity growth comes from Information Technology investment. What about revenue? The United States Bureau of Economic Analysis estimates that the "U.S. digital economy grew at an annual rate of 5.6% between 2006 and 2016 and accounted for 6.5% of current-dollar GDP." Furthermore, case studies have shown that Information Technologies economies of scale account for 30% of net income for the average S&P 500 company. With statistics like this, some may question why IT spending continues to be a hotly contested topic, and average Information Technology spends, as a percentage of revenue, is just 3.2%. One challenge continues to be the division of IT spending. Deloitte uses the categorization of Business Operations, Incremental Business Change, and Business Innovation. Gartner uses a slightly less verbose set of terminology, separating the spending categories into Run, Grow, and Transform. Whatever terminology best fits your corporate culture, the definitions are relatively similar. Business Operations/Run can be defined as the cost of doing business. These are the basic Information Technology functions to support business as usual.Business Change/Grow is defined as the cost to support business growth and improve existing capabilities, business models, and markets.Business Innovation/Transform is an investment in developing new business models, entering new markets, and delivering new business capabilities.Seems straightforward, right? The issue at hand is that spending is predominantly in the Business Operations or Run bucket. Deloitte estimates that 57% of all IT spending goes to this "keep the lights on" category, and it is often difficult for business executives to understand and derive value from operational spending clearly. The question then becomes, how can IT leaders best communicate and align Information Technology investment with business strategy and value? It starts with a clear, budgeting process.Let's start with an important distinction ­ capital budgets versus operational budgets. "According to Gartner IT Key Metrics Data, the ratio of total IT spending across all industries over the past ten years is 30% capital and 70% operating expense."Capital budgets, as the name would suggest, are planned investments that qualify for capitalization and subsequent depreciation over several years. Capital budgets are often easier for business executives to understand as they are typically tied to discrete projects and stated outcomes. An example of a capital project is the purchase of an on-site CRM solution - including the software, hardware to run the solution, and labour to implement. There are established capitalization rules that your Finance team will use to provide investment-type guidance. Expense budgets, on the other hand, tackle "everything else." If it isn't capitalized, it is put in the expense budget. Expense budgets include things like subscription services for cloud offerings, non-capitalized labour, travel, or software and hardware maintenance. As previously stated, expense budgets typically make up most of an Information Technology budget, including but not limited to salaries and benefits, hardware and software, telecommunications and connectivity, contracting and consulting, and depreciation expense.But categorization of budgets is just half of the equation. The second half is the approach to budgeting. There are several, but for simplicity, we will focus on just four. These USING IT BUDGETS TO DRIVE STRATEGIC OUTCOMESBY ERIC HANSON, VICE PRESIDENT INFORMATION TECHNOLOGY, HUSCO
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