IT Budgeting: Implications for Companies

by Bob Benson, Tom Bugnitz, and Bill Walton, Senior Consultants, Cutter Consortium

It takes a lot of work to do charge-out of any kind. From our perspective, a simple corporate cost center, one not allocated at the end of the year to business units, is surely easier than any alternative. This means that business units and IT never argue about allocation formulas or usage. It also means that budget negotiations each year are simple, involving only the corporate budget process. As Dennis Adams notes in his article (see "IT Alignment and Post-Traumatic Economic Downturn Budgeting," Cutter Benchmark Review, Vol. 6, No. 8), IT units have gone through a period of considerable squeezing of costs, and perhaps that's relaxing somewhat now. At the least, dealing with IT cost budgets has to be simpler with a single cost center and no allocation. Yet half the respondents of a recent Cutter Consortium survey (for more on the survey, see the August 2006 issue of Cutter Benchmark Review ) go through the effort of some form of allocation or charge-out. And the reasons for going through this effort, in our experience, range from political (get the users engaged) to financial (get the revenue sources to pay) and all kinds of combinations thereof.

Perhaps the answer lies in basic philosophy. At the risk of injecting some whimsy into the discussion, we have written the following, somewhat tongue in cheek:

Our interest in understanding company IT budget processes, reflected by this survey, is a surrogate for our interest in a more fundamental issue. This is the process companies use to manage IT costs and, by extension, IT benefits. A process that doesn't charge IT costs to business-unit management, by default, means that IT costs, resources, and decisions about benefits are managed centrally "for the good of the business" and "for the good of the user." We've occasionally remarked (in weak moments) that IT is the most Marxist of any business function: give to those (users) according to their need, charge (allocate cost) to those according to their ability to pay. No, it's even simpler: all IT resources are owned by corporate (the "state") at the center. So we don't provide transparency for costs, or allocate costs, or engage users in the management of costs, as the center will provide according to need.

In contrast, we're reminded of a core accounting principle: to assign the cost of producing revenue to the business component earning the revenue. And IT is certainly a cost of producing revenue. Just as a modest example, note that the vast majority of companies in this survey manage PC and laptop costs and resources centrally. Of course, there are valid IT management principles involved, like standards, reducing unit costs, achieving common good such as network connectivity, and so forth. (Hmmm. Marx was a CIO? Or more likely, a CTO?)

The Cutter survey does not study which IT budget category -- "cost recovery or allocation" or "no direct cost allocation" -- is better. We don't take a position one way or the other; it's largely an issue of the overall company philosophy. The implication for companies, however, is to be sure the philosophy for adopting one or the other of the IT budget categories is based on good business purpose.

We recommend a company consider the following two questions:

1. Why, or why not, do we charge or allocate IT costs to business units (the users)?

2. Is our reason for doing so consistent with the other ways in which we manage the company?

The survey suggests significant variability in IT budget methods between companies -- variability that isn't well correlated to other aspects of the companies, such as company size, size of IT, existence of central IT, and so forth. Given that costs and governance are both involved, it is important to understand why a particular approach has been adopted.

-- Bob Benson, Tom Bugnitz, and Bill Walton, Senior Consultants, Cutter Consortium