How to Accurately Plan Your Agency's IT Budget: A Workshop Synopsis

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How to Accurately Plan Your Agency's IT Budget:
A Workshop Synopsis

IT budgeting can't be that difficult, right? You just add up the cost of your computers. Simple.

Oh – and factor in the cost of software. So it's still a piece of cake.

What about staff training? Did you remember to account for that? How about repairs? Tech support? Consulting fees?

Maybe there's a lot more to developing an IT budget than you originally thought. How are you going to anticipate those costs with any degree of accuracy?

You're Not Alone
On October 9, 2002, 100 nonprofit IT managers and agency leaders who were facing this very task gathered at United Way of New York City (UWNYC) to attend a TechConnect workshop on IT budgeting for nonprofits. The workshop was co-hosted by TechFoundation and UWNYC, and sponsored by IBM.

The happy participants learned that there is a logical, methodical way to approach IT budgeting that allows agencies to develop a thorough blueprint with accurate numbers. Dr. Maxine Rockoff, Director of the Division of Information Management for the New York Academy of Medicine, led the presentation. She explained that accurate budget projections could be achieved by working through six easy steps. First, you must establish a budget baseline. Second, it's necessary to outline the agency's technology vision. The third step is the actual development of the budget. After this is done there are three additional steps that Dr. Rockoff refers to collectively as "the sanity check."

The Baseline

First things first: establish the budget baseline for your agency. The baseline is an assessment of your current IT costs. This step is vital in determining your future IT budgeting needs.

The Total Cost of Ownership gives you a window into your future IT expenses.

As you are creating the baseline, be mindful that your IT costs are not just the obvious "hard costs" of training, personnel, and software. You also have "soft costs," which are much harder to measure, such as the amount of time users spend wrestling with an application for which they haven't received sufficient training.

It's also important to recognize that a system costs money not just when it's purchased, but over its lifetime of use by the agency. This figure is called Total Cost of Ownership (TCO); it's the amount the technology will cost over the time period your agency uses the system. If you break down this number by year – as you spend money on training or on hardware and software upgrades, for instance – you will have a detailed picture of your agency's tech spending for each year of that system's useful life.

The Vision
Once you've established your baseline, you need to involve members of your staff in the development of the agency's strategic technology vision. Bring in the Executive Director, members of the board, and your program staff and ask them to identify their tech priorities. What role do they see technology playing in realizing the agency's mission? Their input will allow you to budget for new initiatives while continuing your current operation. You can then "go beyond just maintaining what you already have," said Dr. Rockoff.

Armed with the IT vision and a profile of your current tech costs, you can now develop an accurate budget.

The Budget

Before jumping in, it's important to familiarize yourself with the various processes you can use to develop your budget. These processes will help you develop realistic numbers that will come in handy should you have to defend your budget to an Executive Director looking to cut costs.

There are five potential approaches, and each has its pros and cons. There is no single, perfect way to develop a budget, and your best results will likely come out of a combination of these methods.

There are five different methods you can apply when building your IT budget.

Process 1: Project from current expenses. You can do this by using your baseline as a starting point and then adding inflation and the estimated cost of any new projects you are planning. This is a popular and accurate method of budgeting, but it does have drawbacks. Projections make it easy to avoid analyzing the effectiveness or value of your current tech practices. Dr. Rockoff provided an example of this problem with the scenario of calculating telecommunications costs for an entire office. When applying the projection method to project a telecommunications budget for next year covering 55 people, and using this year's budget for 50, "You're not thinking, 'Gee, maybe I could buy a switch and manage the telecommunications for 55 people at a much lower cost'," said Dr. Rockoff. By focusing strictly on the numbers you may neglect to consider the efficacy of your system. Given this, projection from current expenses should not be relied on as the sole means of budgeting.
Process 2: Total Cost of Ownership. The cost of operating a PC is much higher than its initial purchase price. The computer requires ongoing maintenance, and by its third or fourth year it will probably need hardware upgrades as well. TCO anticipates for the future by taking these costs into account. This method is thorough, but can be problematic because many of the numbers have to be guessed (for example, it would be difficult to anticipate how much your agency will have to spend on maintenance and repair of machines in the fourth year after the initial purchase).
Process 3: Consider the IT life cycle. If your agency has been utilizing (and budgeting for) technology for some years already, you may be able to apply this third strategy of budgeting from the IT life cycle. The life cycle is the process a system goes through from beginning to end – from purchase and installation to decommissioning when the system is no longer useful. The problem with this method is that the cost of taking a system through its life cycle is difficult to estimate if there is no IT life cycle history from which to draw.
Process 4: Benchmarking. This is looking at agencies similar to yours and budgeting based on their experience. This is a realistic approach that doesn't involve much guesswork, but it can be difficult to obtain the necessary information. Even if you do get it, there is a danger that you will overlook key differences when comparing another agency's IT system and budget to yours.
Process 5: Mission-driven, top-down planning. This method has the advantage of budgeting toward agency goals rather than focusing strictly on the technology. If your agency's tech vision has been clearly delineated, than this approach can be quite useful. Mission-driven planning ensures that technology is integrated with the agency's work. The primary drawback of this method is the very real challenge of translating agency goals into concrete technology plans.

As you are considering these five methods while developing your budget, be sure to include figures for new projects as well as for maintenance. Be very specific. Create separate line items for hardware (PCs, servers), software (licenses and applications), services (outside tech support and service contracts), labor (payroll for your IT staff), training (books and classes), telecommunications (data and phone lines), supplies (cables and paper), and environment (rent, security). Besides giving you more accurate numbers, specificity will enable you to defend your budget to your agency's leadership. Dr. Rockoff emphasized, "doing the detail really does make a powerful statement."

The Checks
So now you've done it. You've applied your agency's technology vision and your baseline to create a detailed and accurate IT budget. But before you bring this budget to your Executive Director and board, do yourself the favor of performing the three-step "sanity check." First, compare your budget results against your TCO. Second, compare the results against your IT life cycle plan. Finally, if possible, compare your budget results against the IT budgets of your peer agencies.

If you're in the same ballpark as the agencies that perform services similar to yours, then your budget is probably realistic. And, to paraphrase the MasterCard commercial: Knowing that your budget numbers make sense? The cost: "Priceless."

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