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ITIL and ISO 20000 Budgeting and controlling Part I – Know your business

I can describe my first budgeting as – confused and lost. I know that many people in IT share my experience. What is it, how does it work, who sends what to whom, where are the inputs and, finally… why? A few simple questions, yet almost no answers.

And I applied the well-known saying “go with the flow.” Honestly, I didn’t have any choice, either.

Budgeting – it’s for financial people, isn’t it?

Maybe some of you remember that we already spoke about the Financial Management process in ITIL (to refresh your memory, read the article Financial Management for IT services – theory and practice) where we defined the basic concepts of financial management and budgeting. Since budgeting is, according to ITIL, “The activity of predicting and controlling the spending of money,” I will start with the “predicting” part.

Let me first clarify one thing. Budgeting, as a process, is usually owned by a financial department or CFO.  IT is just a part of the budgeting process, which encompasses the whole organization. But, budget as a list of all items on which your organization wants to spend money (and receive money if you are selling your services to external customers), is IT’s responsibility. If you think it’s complicated – wait, there is more. Budgeting has a “twin sister” – controlling.

What do we predict?

Can you imagine a kid who asks his parents for some money: do the parents just take out their wallets and give it? Most probably, they will first ask what the kid needs the money for. The kid has to have a “budget” to answer this question. It’s the same with IT. If we need money – we have to know why and how much. Budgeting is there to help.

Consider your IT organization, i.e., your IT services (and try to keep in mind that we are watching through “financial glasses”). They consist of people, HW/SW and application infrastructure, real estate (data center and other communication premises, offices, etc.), third parties like suppliers, various overheads (e.g., management costs, utility costs, etc.), or some other parts. They all cost money. And I don’t know anyone who has an unlimited budget. Therefore, IT has to know how much money is needed and what for.

Pyramidal process

Depending on the organization’s size, a tool or spreadsheet can be used for the budgeting process. I have seen some very useful spreadsheets used for budgeting, and that really works. The organization’s size dictates when the budgeting takes place. Smaller companies have fewer problems with that since the organization is rather flat. But, bigger companies, particularly multinational ones, need to start very early. I used to be part of such an organization, and budgeting started 6 months before the fiscal year end. Smaller companies can start in the last quarter and they will be on time.

Distribution_of_responsibilities1.pngFigure 1. Distribution of responsibilities

Corporate finance (or similar financial department) will dictate generalities of the budgeting process like time schedule (start/end date or milestones), tools, or responsibilities (e.g., who submits historical data – last year’s budget and controlling sheet).

The IT department is responsible for creating the budget. To have someone (inside IT) who is involved in controlling is very useful – controlling people are skilled with numbers and spreadsheets. The budgeting process inside IT will require involvement of a complete organizational and functional structure. This means that everyone who is involved in projects and/or IT services has to contribute to filling in the budgeting data. This is also valid for managers leading people in their groups, teams, or departments.

People managing services or projects should submit data about the resources needed to run services or implement projects. On the other side, people involved in the organizational structure will submit data regarding employees they manage (e.g., salary data, training requirements, etc.) and resources they need (e.g., telecommunication resources like mobile phones, internet access, etc.).

Once these data are gathered on an IT-organization level, they will be submitted to the finance department (the other departments like Human Resources or Logistics will do the same). The financial department will consolidate the data and prepare for review by management, who confirms the corporate budget. That’s how the IT budget fits into the corporate budget. If you are a multinational company, the process goes on. It could be that regional data are consolidated first, and afterward for the whole company.

Budgeting_and_controlling.pngFigure 2. Budgeting and controlling takes place on all levels

Moment of truth – controlling

Controlling is a process of comparing budgeted data and achieved data. For example, if you plan to spend $1000 on something (e.g., employee training) and by the end of the year you’ve only spent $500, that’s valuable information. Maybe you missed out on some training or you don’t have accurate information about training costs.

The point is that if you miss your budget data – your mistake is built into someone else’s budget. That could be, e.g., a technician’s hourly rate who is paid by your customers. His hourly rate includes overhead cost. IT is usually overhead cost inside the company. If your overhead costs are high – these costs are included in costs that you must recover on the market (e.g., that technician’s hourly rate). Controlling will tell you where you are.

Competence revealed

My experience with budgeting is – be careful. It will show how efficient you are and how well you understand the business perspective of your company. And that could influence your personal budget, too.

You can also check out this free preview of the  Budgeting and Controlling template to become familiar with the budgeting and controlling concept.

Advisera Branimir Valentic
Branimir Valentic
Branimir is an expert in IT service management (consultancy, training and tools), IT governance (training and consulting), project management and consultancy in IT and telecommunication. He holds the following certificates: ITIL Expert, ISO 20000, ISMS Lead Auditor and PRINCE2.