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the option to drop out. You’ve lost your one dollar, but you have not obligated yourself to the bitter end on what now appears to be a losing proposition. The game progresses with a series of options until you either opt to drop out, you win, or you lose.
The lesson here is to approve and analyze the business justification of projects in pieces. Put the riskier pieces upfront. When each piece is done, analyze your business justification based on what you know then.
Each time we roll out a new system, we should set benchmarks for its expected use, and we should ensure we have a way to measure our actual usage against those benchmarks. This should be included in and delivered by each project. For example, if we decide that an online employee evaluation system is valuable in that it would be used to create all evaluations, we should periodically check to make sure that it is being used. This can be done by counting the number of evaluations created or by comparing the people for whom evaluations were created against the employee list. To the extent that the system is not being used, we should contact management and develop management reports to provide the required emphasis. Or, management may decide to abandon the system.
As part of every project, we should establish metrics to ensure that the return on investment we anticipate is being attained.
As IT professionals, we should pride ourselves on undertaking projects that provide good business value. We should not use business value to justify our pet projects. To avoid this, we should implement best practices in arguing this justification. Then, we should provide a way to objectively measure and report on the system’s actual results against those justification arguments.
A project is a temporary effort to create a product or service. It is to be distinguished from operations, which are regular and systematic efforts to continue to provide products or services on an ongoing basis. While both projects and operations need to be systematized, the way they are systematized differs. Operations are routine and often repetitive tasks. While projects have repetitive steps, how these steps are completed differs from project to project and is not subject to formula. Nevertheless, there are best practices to consider in managing projects.
Budget
I don’t care too much for money—for money can’t buy me love.
—the Beatles.
This topic presents a practical overview of IT budgeting and cost containment practices for the IT director. In creating the department budget, the IT director must analyze a large number of variables and balance multiple competing priorities, while devising the most cost-effective approach for
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delivering mission critical services. Because of the impact the budget has on the IT managers ability to run an effective department, budget creation is one of the most important jobs an IT manager has. Exhibit 17.7 displays the amount of IT spending as a percentage of revenue by industry. As you can see, professional services is high. Exhibit 17.8 illustrates IT spending per employee. And finally Exhibit 17.9 shows the ratio of IT personnel to the total company population. The previous three charts can help you determine the approximate dollars you should be spending on IT.
To prepare for budgeting, collect in advance the following types of information to help streamline and improve accuracy of the budget:
• Actual operating, capital, and budget variance figures from the previous year
• Initial statistics on employment growth or decline at the company
• Initial statistics on profit and sales expectations for the company for the coming fiscal year
• Any changes to company operating policies
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7.0
6.0
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5.0
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3.0
2.0
1.0
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Media
vices
Retail
Banking
Utilities
Energ
Overall
Educa
Hospitals
Healthcare
InsuranceSer
Chemicals
Petroleum
Government
Electronics
Distribution
Transporta
Manufacturing
Food/bevera
tural resources
Finance/banking
tion technolog
Financial ser
Pharmaceuticals
Telecommunica
Consumer products
Professional ser
Hospitality and tra
Informa
Metal/na
Construction and engineering
Exhibit 17.7
IT Spending as a Percentage of Revenue by Industry
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The Back Office: Efficient Firm Operations
IT SPENDING PER
END USER ($)
Financial services
137,538
Insurance
34,721
Energy
25,365
Utilities
24,509
Telecommunications
20,002
Information technology
17,489
Banking
16,612
Healthcare
14,187
Manufacturing
13,652
Consumer products
13,510
Pharmaceuticals
13,270
Hospitality and travel
11,406
Chemicals
10,822
Media
10,006
Transportation
9,887
Retail
8,846
Food/beverage
6,884
Electronics
5,998
Metals/natural resources
5,846
Professional services
5,098
Construction and engineering
4,003
Overall
13,968
Exhibit 17.8
Sample Technology Inventory
Information Technology
457
IT EMPLOYEE
PERCENTAGE OF TOTAL
Financial services
19.90
Insurance
11.88
Information technology
7.56
Banking
7.35
Telecommunications
7.34
Media
6.58
Hospitality and travel
5.91
Utilities
5.47
Healthcare
4.53
Pharmaceuticals
4.37
Energy
4.23
Consumer products
3.61
Electronics
3.28
Chemicals
2.84
Retail
2.54
Professional services
2.39
Manufacturing
2.37
Construction and engineering
2.31
Food/beverage
2.16
Metals/natural resources
2.08
Transportation
1.90
Overall
4.63
Exhibit 17.9
Employees in an Organization as a Percentage
of Total Employee Population
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The Back Office: Efficient Firm Operations
• Any changes to major applications in the past 12 months affecting support or development
• Current approved IT project inventory and prioritization
• Estimation of current peer spending (see Chapter 3)
• Payroll statistics for the IT department
Following is an overview of the process:
• The budgeting effort is typically kicked off by the finance department in preparation for the next fiscal year.
• Most often the IT manager will be given the following information to get started:
—Detailed accounting reports of the prior 12-month IT spending.
—Template spreadsheet with budget categories already included and
calculation complete.
—Estimation of overhead line items to be allocated to the IT de-
partment.
• Complete a first draft—there are two different approaches to build the budget:
—Zero-based budget (recommended, but more difficult).
—Run-rate budgeting.
—These methods are outlined later in this chapter.
—The first draft should incorporate all known information on service level agreements and anticipated projects (see Chapters 7 and 15).
• Review the draft with CFO or other direct reporting relationship.
• Produce and present the second draft.
• Incorporate input and produce final draft.
• Final draft goes through approval with IT steering committee and senior management.
• Once approved, the final draft is sent to the accounting department as the “final new fiscal year” budget for IT.
• All actions for the subsequent 12 months will be judged against this final budget.
• At times there will be a quarterly and /or mid-year budget review sessions to adjust the budget to account for new known information.
Timing
The budget cycle usually kicks off between September and November, or one to four months before the end of company fiscal year. The budget, in most cases, needs to be finalized in the last month of the fiscal year.
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Managing to the Budget
The company, its officers, its employees, and its shareholders are relying on the IT manager to meet his or her budget. If the department overspends the budget, both the company and its employees may be adversely affected. The corporate budgeting process and its subsequent success is dependent on all budget managers managing their share of the overall corporate budget and performing according to plan.
There are a variety of approaches the IT manager can take to help manage the budget on an ongoing basis:
• Schedule a regular monthly meeting with the CFO, controller, or finance analyst to review actual versus budget numbers. During this session, variances should be investigated, and the IT director should develop a list of key actions to improve any negative variance. After the meeting, the director should delegate the action items and get them completed quickly, to experience the benefits in the subsequent month’s numbers.
• Give senior direct reports (usually operations and applications managers) budget responsibility for their areas and hold them accountable to hitting the numbers.
• When large variances occur, take fast action, as it takes time for changes to be ref lected in the numbers. For example, if a vendor agreement is modified, it may take 30 days to finalize the agreement and another 30 days for the charges to take effect.
• Dithering and delaying decisions and ignoring high variances is a recipe for disaster. The IT director has a fiduciary responsibility for the department and must make the necessary corrections to perform as prom-
ised to the rest of the management team. Delay may lead to senior
management or the IT steering committee making unilateral decisions
without the involvement of IT.
• If you are anticipating a large negative variance in the budget, enlist the CFO as soon as possible to work with you to help correct the situation and explain it to senior management and the IT steering committee.
Handling Out-of-Budget
Business-Unit Requests
After the operating budget is set, business-unit requests that might impact the operating budget need to be discussed in the face of other investment decisions the company is trying to make. While, as noted above, meeting the committed budget is important, over the course of the year budget assumptions may change and some common sense and f lexibility can be necessary.