Often, the IT budgeting process is a detailed, line-item-driven exercise that fails to align with enterprise

objectives. CIOs and IT leaders can increase the value that IT delivers by integrating the IT budgeting
process with the enterprise strategic planning process.

Overview
Key Challenges

CIOs and IT leaders often prepare the IT budget in isolation, without a clear understanding of
enterprise or business unit strategies and objectives.

IT budgets often focus on individual general ledger line items, rather than on ensuring that the
right investments are made to support enterprise goals and objectives. The IT budget is often
viewed as "fixed" and often lacks flexibility to fund the right things required to enable the
success of the enterprise.

Investment decisions are too often driven by whether the spend is operating expenditure (opex)
or capital expenditure (capex).

Recommendations

View IT budgeting as part of the overall enterprise strategic plan. Work closely with business unit
(BU) leaders to understand how they will execute on the objectives that come from the
enterprise strategic planning process.

Make IT budgets flexible and agile. This generally requires shifting fixed costs to variable costs,
over time, and focusing on the prioritization and alignment of key initiatives, not individual line
items of spending.

Leverage a solid business case process to ensure that all investments across the enterprise are
driven by value to the enterprise and not whether a particular spend is opex or capex.

Introduction
The IT budgeting process often takes too much time and delivers too little value. Worse yet, the
allocation of the IT budget is often misaligned with the overall strategic objectives of the enterprise.
Many of our clients report that IT budgeting is a four-month process, and it can be longer. While some
enterprise strategic planning processes suffer from similar challenges, it is essential for CIOs and IT
leaders to understand what a typical enterprise strategic planning process entails, and how IT can align
its own planning and budgeting process with the enterprise to deliver the most value. While, often, the
CIO doesn't have direct influence over the enterprise strategic plan, the CIO still should be aware of the
potential for a disconnect between the enterprise planning process and IT budgeting, and should attempt
to close the gap by making enterprise leaders aware of the investment "lead time" that IT needs to
support strategic objectives.

The main focus of any budget process is to ensure the effective cross-functional prioritization and
alignment of key initiatives and projects. It should not be an exercise that focuses primarily on individual
line items of spend. In other words, the goal of a budget process is to ensure the right business
decisions are being made, in-line with the corporate strategic direction.

Analysis
Ensure That Enterprise Strategic Planning Drives the IT Budgeting Process
The enterprise strategic planning process is an annual exercise, typically done in the quarter preceding
the start of the new fiscal year. It has four key elements:
1.
2.
3.
4.

Setting the corporate strategy

Setting expectations for revenue during the fiscal year (assuming a for-profit enterprise)
or constituent value (for the public sector)
A review and realignment (if necessary) of the financial model of the business
The setting and communication of financial expectations (to investors and the board) or
to stakeholders and citizens in the public sector

The enterprise strategic planning process is driven by the top leadership of the organization, and it
involves assessing the state of the business what has changed, what is working, what is not working,
what has evolved and so on. Based on that assessment, top leaders of the organization determine the
strategic goals to give to the business unit leaders. The next step is to determine what new programs or
initiatives will be launched as a result of the assessment and the strategic assignments.
The enterprise strategic plan typically has the following components: the corporate plan, a contingency
plan, the business unit plan, a capital spending plan and a cash-flow plan. All of these plans need to be
aligned at the enterprise level by the top leaders of the organization. So, it is essential that IT leaders
understand these various plans, and align the IT strategy with these enterprise-level plans.
To facilitate the alignment of the IT strategy with the enterprise strategy, CIOs need transparency into
the enterprise strategic plan as it is being developed. Otherwise, the funding of IT may be inconsistent
with the enterprise strategic goals. CIOs who lack a so-called "seat at the table" must work around the
challenge by developing informal channels and direct communication with the CFO to stay apprised of
shifts in the enterprise strategy. The sooner the CIO knows of changes in strategic direction, the better
the chances are that the IT budget will be funded and allocated in such a way to support these shifts.
The annual operational planning and budget process for the enterprise as a whole is a key component of
the enterprise strategic planning process. Objectives are then outlined and agreed on for the next fiscal
year. Ongoing review and analysis of performance versus expected results allow for adjustments to the
strategic and operational plans, including the budget, to ensure success.
The financial model of the enterprise will determine budget targets for example, a company may have
75% to spend for every incremental dollar of revenue across all business units, including IT. The
business units need to decide how best to spend the incremental 75%. IT should work with the business
units to ensure that the projects and services that IT delivers can be funded by the business. Every IT
leader should have a grasp of the enterprise's financial model, the most critical element of which is
understanding how much of any new revenue can be reinvested in the business.
Typically, the CEO or CFO will not make the decisions on what is and is not spent on specific items,
although this can happen for unusual or extremely large expenditures. Generally, the business leaders,

including CIOs, have the authority to make reasonable trade-offs. Since much of IT spending is delivered
based on business needs, it is critical that IT understands any unplanned changes in the business before
they happen. Often, such insight comes from the CIO's direct interaction with the BU heads.
Finally, most business leaders keep a contingency fund to protect against potential issues. IT leaders
should work with the business proactively to ensure that IT can deliver any unplanned work in case the
business has the financial ability to fund additional projects and services.

Do Not Focus Solely on Line Item Details in Your IT Budgeting Process

Most budgets are typically done at the line item or general ledger (G/L) account level. This is a great
foundation for building an IT budget, but you shouldn't stop there. Simply budgeting and presenting only
the "G/L- or asset-based" view (as shown in Figure 1) will not meet the enterprise strategic planning
requirements of ensuring investments are made in the right things.
We suggest augmenting this view with an "investment planning" view that details the initiatives you are
doing that are linked to enterprise strategy and drive value. This requires dividing your costs and even
staff into categories like those presented in Gartner's Run, Grow and Transform Model (see "A Simple
Framework to Translate IT Benefits Into Business Value Impact").
Many organizations opt for an even simpler approach that combines grow and transform expenditures
into a single category, often referred to as "change," "build" or "invest." Figure 1 shows a simple way to
illustrate the G/L view of the budget, along with an investment view (which this example shows as "run
vs. change").
Figure 1. Sample IT Budget With G/L and Run vs. Change Views

Source: Gartner (March 2014)

The goal of the investment planning view is to show the things that IT is delivering that provide new
capabilities and how they are aligned to the enterprise strategy. In addition to simply showing the costs
in an investment view, you will need to communicate the details of the initiatives and how they support
the enterprise strategy. We suggest creating an IT budget slide deck that is simple and that focuses on
the big picture, while putting detailed slides in an appendix.
One suggestion is to include key budget slides in an executive-focused presentation, incorporating an
approach similar to the one outlined in Table 1 (which comes from "The Keep-It-Simple Approach to
Reporting on IT Value").
Table 1. IT Budget Slide Deck to Demonstrate IT Value
Six Key Slides to Include
1

List a half dozen of the most important enterprise strategies and objectives growth in certain markets, new
product introductions, customer retention and so on.

Table 1. IT Budget Slide Deck to Demonstrate IT Value

Six Key Slides to Include
2

For each objective, list the initiatives that are intended to achieve it.

Describe what IT is doing in support of each of those initiatives.

Describe what IT is doing to improve its own operational excellence.

Raise any issues related to IT's involvement in enterprise initiatives that must be resolved by the executive
team.

Say "thank you."

Source: Gartner (March 2014)

Build a Detailed, Fact-Based IT Budget, but Allow for Flexibility

The challenge in building any budget, including the IT budget, is determining how detailed to make the
budget. If you overinvest in too much detail and too many iterations, the cost of the budgeting process
will outweigh the benefits. Conversely, if all you do is simply extrapolate each cost category at a high
level, based on last year's spend (often referred to as "run rate budgeting"), you will not have enough
detail to manage your spend properly during the year.
Creating a flexible, efficient budgeting process captures the needs of the business, but allows for
changes during the course of the year. Zero-based budgeting, in which all investments are rejustified
each year, can be a useful approach to budgeting, but only when it adds value to the process and aids in
decision making during the fiscal year.
One way of attaining alignment is to express your opex budget in an IT business services view (see "The
Fundamental Starter Elements for IT Service Portfolio and IT Service Catalog" and "Manage Four Views
of the IT Budget"). This approach allows for IT to express the cost and quality of the services that IT
delivers in terms that the business side understands, and then have the business make choices to pay
for these services.
Essential line items, such as maintenance and outsourcing contracts, should be planned in detail to
provide flexibility, and therefore, zero-based budgeting is useful. Other line items that are relatively
minor or are hard to project at a detailed level (for example, travel, training, dues and supplies) should
not be zero-based. Rather, they can be modeled or extrapolated based on prior years' spend.
For exceptions to the IT budget, an approval process can be built that allows for unfunded items if
another planned item is not required, or if the business can fund additional projects or services from
unplanned or excess funding sources. This will ensure that the right things get done during the year,
whether they are budgeted or not.
Table 2 shows best practices for budgeting, which can enhance your IT budgeting process (for more
information, see "Top 10 Guidelines for IT Budgeting").

Table 2. Top 10 Budgeting Guidelines

Budgeting Guidelines
1

Develop a baseline budget prior to material changes.

Use zero-based budgeting where it makes sense.

Create detailed opex and capex budgets.

Ensure all known IT costs are budgeted.

Benchmark your IT spending and staffing.

Provide effective transparency via multiple views of the IT budget.

Drive a common view of value with business leaders.

Enlist the business stakeholder.

Budget by business services.

10

Understand the politics.

Source: Gartner (March 2014)

Leverage a Solid Business Case Process, Not Focus on Capex vs. Opex
The decision to consider an expense as a capital or operating expense is an accounting issue. It is not a
business driver in most cases. The most important point is to make the right business decision first, and
then let accounting make the decision on whether the expense is opex or capex. Rarely will a CEO or
CFO make a decision to invest or spend because something is capex vs. opex.
Capital expenditures do provide some short-term financial benefit to profits; however, there is no cashflow difference between capex and opex. Good investment decisions are typically made by focusing on
the value and cost. For most investment decisions, the value is often measured in financial terms such
as ROI, net present value (NPV) and payback period.
A solid business case process is required that captures both value and total cost of the investment over
time (including implementation and support). This can be done using a simple ROI calculator like the one
found in "Toolkit: A Model for Justifying Business Case Value and Returns." However, an effective
investment decision process doesn't approve business cases solely based on financial returns. It also
includes other factors, such as strategic and technical fit and operational risk. Each category should be
weighted and assigned a value so that investments can be scored and prioritized to aid in the decisionmaking process (see Figure 2).
Figure 2. Sample Investment Evaluation Criteria

Source: Gartner (March 2014)

Additional research contribution and review: The analysts who authored this research would like to
acknowledge Gartner CFO Chris Lafond.