Typically, the organization structure is, managers, project managers & senior manager will be reporting to director in an IT organization. Directors will have a functional responsibilities like sales & marketing, customer service, finance and etc. Managers and senior managers are responsible for the managing the project, lights on and enhancement. For a zero based budgeting, managers of each application area will be required to come up with forecast. The skills required for each managers to come up with forecast are given below.
- Understanding of over all business process
- Understanding of their respective business strategy and their current annual business plan. For ex. if a manager supports call center systems, then that manager must understand customer and service business area’s plan for that year.
- Understanding of external market condition
- Understanding of work load in their area in the past and correlation with business strategy and its annual business plan
- Understanding of technological obsolescence and flexibility of their systems
- Trend analysis
The above skills will be used to develop the forecast for keep the lights on, discretionary and projects spend for their respective systems, infrastructure, shared service.
Each manager will have set of systems to support. Logical group of the system are assigned to an internal order number. Each internal order number will have a set of systems. The light on, discretionary and project spends are allocated for each internal order number.
Only the department level cost center and general ledger (GL) number level cost will be submitted to the controlling office and eventually in to the enterprise financial systems like SAP or Oracle Financials. The cash budget will have line items only GL level (like employee, contractor, and etc) , director level consolidation of GLs and department level consolidation of GLs. The rest of classification like lights on , enhancement, internal order number and etc are just allocation within the ITM budget for better understanding and reporting.
This step completes the creation of budget for the IT organization. The next step is to track the actual and report to stakeholders. The next part will focus on tracking the actual cost and reporting it to the various stakeholders.
Understanding how the IT budget process fit into the overall corporate finance is essential to grasp the big picture. The following figure illustrates how the IT G&A operating budget fits into the over all corporate finance.
IT organization must decide the technique suitable for the budget cycle. To select the best suited techniques the organization must make them self familiar with the available options. Let me list the various widely used technique available to create the IT G&A operating budget.
- Static Budget – Presents one forecast for a given time frame and does not change for budget cycle
- Flexible Budget – Budgeted Revenue and cost are adjusted during the budget cycle
- Incremental budget – Previous year actual are taken as the base line and added or deleted additional cost for current year
- Zero Based budget – Begins from ground up
- Top Down budget – Each directors are given a budget task to align to CIO budget target
- Participatory Budget – Developed as a collaboration with all directors (generally very difficult to make it practical)
There are other budgeting technique like activity based budgeting, Kaizen budgeting and etc. Kaizen is a type of incremental budget with cost effectiveness target are given to each directors. To make the framework complete, I understand the widely used budgeting technique must be captured and it will eventually.
For this version 0.1, I want to start with zero based budget since I like the concept. It is very practical and gives an opportunity to each director or even senior manager or manager level to challenge every activities and look for some level of business case. Zero based technique can be used if it is top down budget and budget task are given by CIO to each director. Let me start with ZBB.
Zero based budgeting must be done in the manager or team leader level and rolled up to director and CIO level. It requires the manager or team lead to understand the business and forecast the work required to keep the systems lights on, enhancements and G&A project.
The cost for lights on, enhancement and projects are will be incurred by employee, contractor, purchase servie, software cost & hardware cost. Each manager or team lead under each director will forcast for lights on, enhancement and project in terms of employee, contractor, purchase service, software cost and hardware cost.
The training required to perform the forecast will be the starting session of next part of this initial IT Financial Framework.