IT Budget Checklist: Planning Technology Investments for 2023

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Information technology, much more than an isolated department in a company, is a cross-cutting area to other areas of an institution, often being the core business of companies in different segments, such as the financial, insurance, retail, and other sectors. During the process of defining an IT budget, it is common to overlook certain expenses, which can lead to budget conflicts between areas and often fail to consider external variables, such as legal and market issues. Therefore, we see the importance of a checklist that ensures all aspects of IT budget planning are covered.

The IT budget is a process that involves the consideration of various stakeholders within a company, demanding reflections from CIOs, CTOs, Directors, Managers, and IT Coordinators, as well as other leaders in technology, innovation, and products, such as Product Owners and Squad Leaders. Assessing the current activities developed by the company that interface with technology teams, as well as considering new IT projects to be developed and implemented, are examples of variables that should be included in the checklist when planning your technology investment.

Depending on the company’s strategic directions, the IT budget may have a more or less strategic character, but in general it must ensure a real contribution to the business, taking into account market changes, customer expectations, cost and process control, and the ability to anticipate future changes.

‍According to Gartner, the IT budget typically represents between 1% and 9% of a company’s total budget, depending on the industry. With the increasing dependence on computerized systems and IT professionals, the trend is that over time there will be a significant increase in this share of the budget.

Some examples of average investment relative to a company’s total budget with technology are:

• Financial Services, Banking: 9%
• Telecom: 5.5%
• Consulting and Services, IT: 4.5%
• Electronics, Healthcare, Insurance, Transportation: 3.5%
• Automotive, Chemical, Consumer Goods, Energy: 2%
• Construction, Distribution: 1%

These figures are highly variable, depending on the industry, region, and company size. One of the challenges most companies face is the uncertainty about allocating the IT budget by business area or for the company as a whole. In this case, greater autonomy is given for areas to define their budgets so that the invested value ensures continuity and evolution of each area’s projects.

IT Spending Worldwide Continues to Grow

‍According to Gartner, global IT spending is expected to total US$4.5 trillion in 2022, a 3% increase from 2021. Although IT spending is growing in 2022, the pace of this growth is much slower than in 2021 due to end-user hardware spending cuts, causing spending on devices such as PCs, tablets, and phones to decrease by 5%.

Inflation is one of the factors behind this result. Central banks worldwide are focused on combating inflation, with the expectation that general inflation rates will be reduced by the end of 2023. However, the current levels of volatility observed in inflation and exchange rates should not prevent technology leaders’ investment plans for 2022. Organizations that do not invest in the short term will likely fall behind in the medium term and risk not existing in the long term.

Price increases and delivery uncertainty have accelerated the shift in purchasing preferences among CIOs and companies in general, from ownership of goods to access to services – driving cloud spending to a growth of 18.4% in 2021 and an expected growth of 22.1% in 2022. The demand for cloud services is not only reshaping the IT services sector but also driving server spending to a growth of 16.6% in 2022.

Data center systems spending is expected to experience the strongest growth of all segments in 2022, at 11.1%. Cloud consulting and implementation services and cloud management services are expected to grow 17.2% in 2022, from US$217 billion in 2021 to US$255 billion in 2022, helping to drive the overall IT services segment to a growth of 6.2% in 2022.

The critical shortage of IT labor worldwide is expected to decrease by the end of 2023. However, in the short term, CIOs will be forced to take measures to balance the increasing demand for IT and the decreasing levels of IT personnel. The technology job market remains tight, making it difficult to attract and retain talent. People management research has shown that compensation is the main factor in attracting and retaining IT talent. Technology service providers are increasing IT prices to allow competitive salaries. This is generating an increase in software and services spending through 2022 and 2023. Global software spending is expected to grow 9.6%, to US$806.8 billion in 2022, and global IT services spending is expected to reach US$1.3 trillion.

Additionally, CIOs are using more IT services to help with the shortage of qualified IT staff. Tasks requiring smaller skill sets tend to be outsourced to managed service providers to relieve team time, while critical strategy work, which requires high-level skills unattainable by many companies, will increasingly be performed by external consultants, such as the case of Zappts.

IT Budget Checklist – What Cannot Be Missed?

The IT budget does not only take into account the amount of money spent on systems, information technology services, and developers, but also the research and development of new technologies and the modernization of processes that may or may not have a direct interface with IT.

An IT budget comprises many components, such as operational issues, capital, and present and future projects. There are various types of investments, such as software, hardware, subscriptions, services, and teams. Assessing and negotiating an IT budget is a crucial skill for managers who intend to get the most out of technology.

IT leaders who manage IT resources in companies work to ensure project delivery by managing teams, expectations, and resources. In a context where digital is essential, the IT leader must maintain focus on generating value for the business, and this will only be possible if they understand the ongoing strategy and are customer-focused (customer centricity).

It is also possible to include in the budget the TCO, Total Cost of Ownership, which is a method of assessing IT investments in the long term, making a forecast of the company’s IT project investments. It, in turn, covers the acquisition of hardware and software licenses and expenses with the operational structure and others, such as:

• Team training;
• General maintenance;
• Costs resulting from system failures and interruptions;
• Energy consumption;
• Quality assurance;
• Decommissioning costs.

What Are the Steps in the IT Project Budget Process?

Typically at the beginning of the last quarter of the year, the General Management and the Administrative and Financial Management launch the budget preparation process. The process is guided by the budget directive with specific variants by department. The objective for departments will be to present a budget for the next year that reflects the company’s strategic guidelines. Depending on the organization, this process ends in November/December with the validation (or voting) of the consolidated budget. Among these milestones, the highlights are:

• Inventory of ongoing project work, remaining available funds, and re-estimation of the budget to establish the budget needed to finalize projects currently in progress.
• Overview and update of the “business continuity” assessment to establish recurring costs.
• Inventory of business line requests to estimate budgets for projects pending decision.
• Inventory of specific orders to estimate budgets for “performance” projects pending decision.
• Decision making and discussion with stakeholders
• Budget negotiation with General Management

Who Is Responsible for the IT Budget?

Budget construction is obviously a collective task. This makes the exercise even more complex, as it requires numerous interactions among many stakeholders.

Decision-making stakeholders:

• The General Director – validates the strategic alignment of the budget
• The Financial Manager – validates alignment with financial forecasts
• The “Business Line” Managers – validate projects to be launched
• The Information Systems Director – validates capacity and availability alignment

Operational stakeholders:

• The project manager and their project leaders – prepare budgets to finalize current projects and investment requests for future projects
• Infrastructure / Business Continuity Managers – establish estimated expenses for operationalizing corporate activities
• Management control – prepares feedback, audits, ROI monitoring, and assists in accurate budget provisioning
• Financial representatives (budget management, management control) – monitor budget execution

As mentioned, this work must be carried out in close collaboration between IT teams and other company departments. This process of company reflection on its IT must allow it to answer questions such as:

• What value is produced by the Information Systems Department?
• Do information systems (IS) drive or hinder growth?
• Does IS encourage innovation and competence management?
• Are operations truly limited to what is useful for the company?
• How do our costs compare to external services?
• Where can we cut costs?
• Are we meeting all our stakeholders’ expectations?
• How can we better communicate our performance internally?
• Are we attractive enough to attract the skills we need?
• Are our IS investments profitable?
• How does IS promote consideration of customer needs?
• How does IS give meaning to the data obtained and consumed by the company?
• How can IS help with customer experience?
• Are the company’s assets and operations properly protected?
• Are the main risks to the business controlled?

This preparation phase is essential for success in developing your IT budget. The best advice is to initiate IT cost benchmarking. This allows the information system to be analyzed from the perspective of costs vs. value created for your company.

The acceleration in the adoption of agile methodologies and DevOps, for example, is impacting projects and operational business lines, increasingly encouraging infrastructure automation and “software-defined” approaches. It should not be forgotten that knowing how to analyze data means having the valuable ability to anticipate and predict. Therefore, this new direction allows not only managing the economic performance of IT but also measuring the level of transformation of areas in these new strategic issues. Zappts helps companies in this regard.

IT cost benchmarking will provide external reference points, develop learning partnerships, motivate your team of project leaders, legitimize your objectives, and allow you to implement a new approach to development in your company. The success factors of the benchmarking process are based on the area’s commitment, continuous improvement, and respect for business ethics. Based on the various observations, you will be able to produce IT investment estimates.

This project costing is based on the return on investment approach. To assess investment efficiency, it is important to produce cost-benefit premises with the calculation of IT ROI ([(Generated Margin – Investment Cost) / Investment Cost] x 100).

The next step is to obtain objective costs that will serve as the basis for presentation and negotiation with your General Management. For this, we recommend choosing the cost evaluation table method. This method will allow you to enter the negotiation phase more easily, as you will have listed all possible calculation hypotheses.

If necessary, you can also adjust the variables of your new IT projects throughout your negotiation. This budget cost estimation method prepares you for negotiation, as you have listed several cost hypotheses. If your General Management says “it is too expensive,” you can present another hypothesis to offer a cheaper proposal.

An important point that should not be forgotten when drawing up the costing is obviously maintaining your cost-benefit ratio. During this reflection process, one should think about the allocation of human resources and equipment for the new project. The following three questions serve as a guide for this moment:

• What are the technical requirements to develop this project?
• What are the human resource skills and how are they available?
• What are the tools used to develop this project?

‍You can use tools such as:

• The responsibility matrix and the organizational chart
• A capacity planning (or resource workload plan)
• A workload histogram
• A skills forecast

‍Then, it is useful for the project leader to estimate workloads:

• Labor / Service
• Software acquisition and licensing costs
• Technical infrastructure
• Team training
• Software inspection and correction

Creating an IT budget is a challenging task for most companies, but it is also vital for managing a successful organization. The process requires the participation of various stakeholders and usually requires the implementation of budgeting software that can track development, define spending limits, and finally, help you manage your company more efficiently.

Since 2014, Zappts has been delivering business results through technology, delivering highly relevant cases using agile processes, development best practices, and software quality, with an unparalleled ability to understand and solve the day-to-day pain points of technology development projects.

We cover solutions for all phases of digital solution development, from discovery processes to solution support. With defined processes and agile management, our deliveries are always based on expectation alignment, quality, and technical robustness.

Get in touch by clicking here, and learn more about Zappts.

Continue your studies, check out our material on “How to Achieve Greater Predictability in Your Digital Deliveries: The Definitive Guide to Flow Metrics”.

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