March, 20219 approaches will be titled as Incremental, Activity Based, Value Proposition, and Zero-Based. A brief description of each type follows."Incremental budgeting takes last year's actual figures and adds or subtracts a percentage to obtain the current year's budget." This budgeting model is popular because of its simplicity but can also perpetuate inefficiencies. In this model, there is no requirement to optimize spending. If a manager, for example, gets a 5% budget increase each year, there is a risk that they will take that increase without optimizing spend to deliver greater value. Adding to this point, it offers the opportunity for "budgetary slack". Because a budget may naturally rise, it provides the temptation for a manager to overstate their budget requirement so that they can post a favourable budget position, each year. Finally, this budgeting model may ignore many external factors such as inflation, changes in regulation, tariffs, or other external pressures, constraints, or opportunities."Activity-based budgeting is a top-down budgeting approach that determines the amount of inputs required to support the targets or outputs set by the company." For example, a company may set a revenue target of 500 million dollars. Using the activity-based model, the leaders of that company will then budget for the activities that will deliver on the stated revenue target. Activity-based budgeting is popular because it better aligns planned to spend with organizational strategy."Value Proposition budgeting is a mindset about making sure that everything that is included in the budget delivers value for the business." This budgeting strategy aims at negating budget inefficiencies. In this model, budget owners start by asking themselves a few important questions:"Why is this amount included in the budget?""Does the item create value for the customers, staff, or stakeholders?""Does the value of the item outweigh its cost."The final budgeting model is Zero-based budgeting. "Zero-based budgeting starts with the assumption that all departmental budgets are zero and must be rebuilt from scratch." Each budget owner must be able to justify each component of their budget. There is no automatic approvals and only budget items deemed crucial to successful and profitable operations are approved. This model is good when there is an "urgent need for cost containment." However, this model can be more complex and challenge essential operating expenses rather than evaluate discretionary expense.Even with a clear distinction between Capital and Expense budgets, categorization of Run, Grow, and Transform, and even with a clear budgeting process, it is sometimes hard for IT leaders to make sure that other business executives view the IT investment through a value lens. For this reason, it is recommended that you divide your operating budgeted into distinct IT business services. This means "defining IT services in business terms" ­ without the technical jargon often associated with IT. So, what exactly is an IT business service?Gartner defines this as "a collection of actions performed by IT professionals that provides a measurable benefit to a consumer outside of the IT organization. The consumer must clearly understand and value the benefits of each IT business service and must control the level of consumption." An IT business service is developed by developing an IT BOM (Bill of Materials), so that a standard cost may be established for each service offering. These services can and should be benchmarked against external sources to ensure an appropriate price to value ratio. Importantly, the business now controls consumption. They consume as much of the IT business service as their business dictates and effectively control their cost of IT.IT business services have proven to be effective in tying together good budgeting process, budget management, and value delivery. When done correctly, it can change the conversation around IT spend and allow Information Technology teams to become a strategic partner focused on delivering improved business outcomes. Eric Hanson
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