Establishing an IT Budget for a Small Business?

tirthas asks: "I am the Information Manager of a small (20 person) architecture firm and have recently been asked by my employer to prepare a technology spending budget. While I have a good handle on what I would like to spend vs. what I must spend, I am having some difficulty establishing a justifiable budgeting method. I have seen examples of 'per employee' methods and 'percentage of revenue' methods, but the dollars and percentages vary widely. What methods do you use to establish your departmental/company-wide budgets, what are your monetary amounts or percentages, and what successes or failures did you have in establishing your budgets?"

Comments

Keep it real

[winkydink]

Might I suggest a method called Figuring Out What You Need and How Much It Will Cost and When You Will Need It? Especially for so small a firm. There is no magic formula that can be applied as many things will be specific to your company and the level of maturity in your IT infrastructure.

Per employee and percentage of revenue are great metrics to meausre your technology spending against other companies, but I wouldn't use either of them as a budgeting tool.

As for getting a budget approved, may I recommend presenting things in a menu-like manner along with an explanation of the benefits of making the investment and thre risks of not making the investment. ~

Re:Keep it real

[a803redman]

Don't forget the "Oh God, that damn thing just died." section.

Re:Keep it real

[Nintendork]

I'm in a small business that has gone from 40 full time employees to about 150 in the last two years. My boss, the Director of IT started just a few months before me. Prior to him, there was no centralized IT dept. What the parent poster said is 100% true, but I'd like to add some equally important advice.

You need to itemize your budget into categories such as "Software purchases and maintenance", "Hardware", "Supplies", "Communications", "Training", and so on. Your first time making the budget, this will be an extremely tough process. Rely on reviewing the past years' spending and think of those purchases have not been made that should have (Think backup power, corporate antivirus solution, license audit, backup solution, workstation and server refreshes). This list can be quite long, depending on the company. Make sure you get buy off on this list by talking to all those involved and getting their approval in writing. As an example, make sure everyone is agreeing on the same software products so you don't get blindsided half way into the year by some $10,000 package that you weren't expecting another manager would require. You'll be held accountable for your department's spending compared to what was budgeted, so you absolutely MUST aim high on the estimated cost of everything, even more so on items that are tough to pinpoint the cost on. If there's something that has a fluctuating cost, look at a several year history to recognize growth and aim for the highest cost month at the current growth rate.

Make your proposal as simplified and easy to understand as possible. Leave out the techie stuff and tell him what he is going to get out of each item. For items that you know will be a tough sell, bring statistics and case studies of other, big name companies that use said item. When your boss sits down with you to review your proposal, you're going to have to fight for your budget. If he/she wants a more granular view into the proposal, give it to him. If he comments that certain items seem a little high, tell him that you put it a little high to give cushion and provide breathing room for unseen costs. During this process, fight for the things that are most important and give him victories on the smaller things. This way, you get the money for the things that matter most and if the boss comes to you later asking for something not so important, you can refer to the budget and ask what he wants bumped. If he backs out and drops his ad-hoc request, save that as ammo for the next budget review in case you need it. If your boss wants to give you an unreasonably low amount, you must set expectations and clarify the items that will have to be bumped from the review. If he's trying to give you your own budget, remind him that you're the one responsible for the budget and that responsibility cannot be given without also giving authority. Most people understand this line of reasoning and those that don't shouldn't be running a business and you're better off finding an employer that you can grow under. There are plenty of companies out there that would hire an experienced individual that puts a real effort into their job and stands behind what they bring to the company.

When the dust settles, there may be important items that got bumped due to the high costs in catching up to where your department should be at. Do NOT try and squeeze money out of other items to make room for those items that are being bumped early in the year. If crap hits the fan due to that item not being approved in the budget, it's not your fault and your boss made the decision on his own knowing the possible consequences as you explained them. On the other hand, if you get to Q3 and have a little extra money, you'll be in a much better position to purchase that item as a bonus and sleep comfortably knowing that you'll still make budget. Keep in mind though that you'll rarely find yourself getting more breathing room on your budget as the year progresses, so don't count on this happening.

This process may at

Re:Keep it real

[Glonoinha]

If your company were to shorten your life-cycle on your hardware to exactly two years, then donate the hardware to schools, you get to write off the entire purchase price of the hardware as a tax deduction even if you have already written it off (in full, or only partially) once.

Read about it here.

If your company is profitable and paying ~25% taxes (number pulled out of my butt, I have no idea what the top tax rates are for corporations) you get to deduct the full purchase price the first year (for 25%) up to like a $100k cap, and again the next year when you donate it (for another 25% savings in taxes.)

Re:Keep it real

[nolife]

Big picture though. Paying an extra $100 each for a warranty on 20 PC's is $2000. You could buy 3 spare PC's for that amount. In reality, most business PC warranties start at about $200 per pc for 3 years. Considering you can get a bare bones desktop system for about $500-600, you could buy 6 spare PC's for the 20 you need as hot spares and forget the extended warrenty and have less downtime with a broken PC waiting for repair. Even better would be to buy 2 spares and budget the rest of the money for anything that may break.
  The base 1 year warranty would still apply. Of course a lot of small businesses only have a secretary/PC person/materials person so it really depends on the ability of that person. If that person sucks at computers, you could cheat the system and buy 5 extended warranties and use those serial numbers when any of them break ;)

Seek assistance

[XorNand]

Wow... this is a whole can of worms. You're not going to get an appropriate answer on semi-anonymous web forum. I operate my own technology consulting firm who specializes (coincidently enough) in professional service firms such as yours. I earn my living, in part, by answering these types of questions.

I'll need to know the current technological state of your company. How close to capacity is your IT dept running, both in manpower and equipment/services? What are your company's growth expecations over the next two years? 5-10 years? In what role does your company see the IT department, cost center or profit center? In the case of the former, how might we turn that around? How does your utilization of technology come to others in your industry? Etc, etc...

Take the sound bites that you're going to get here with a grain of salt. You're going to need answers that are specific to your business itself. I know it's probably not what you want to hear, but you really should call in some outside help so you can learn how to do it right. Patching together piecemeal advice might cost you your job in the end.

Chicken Blood budget

[bobcat7677]

Whatever you do, don't forget to budget for ample supplies of chicken blood and other black magic staples. You know you will need it when the boss asks for those apps and hardware that magically do things that aren't possible in the natural realm.

Budget? What Budget?

[Wandering Wombat]

At my company (14 employees-ish) the budgest for IT is just "Find out what we need, buy it, and give us the reciepts". Seriously. Our IT guy just does what he has to, and justifies it when asked about it. If he can't justify it, he either gets limits on what he can spend next month, or it gets returned for something cheaper. With small companies with extremely variable budgets (months our company actually get PAID result in much higher IT purchases), it's best to take it one month at a time, and document reasons for EVERYTHING!

I'm in the same type of position and industry...

[Camarones]

I hate to say it, but a lot of your spending will depend on your clients. If your clients run Autodesk CAD software, then so should you, and that will make a huge dent in your bottom line. Our clients stagnated on AutoCAD 2000 for years, then just this month decided (and these are fortune-500 retailers, mind you) "oh, lets upgrade to AutoCAD 2006, so should YOU"...

I'm the sole IT person in a 50-person architecture/construction management firm. Our spending varies year-to-year but there are a certain amount of annual expenditures. Things like antivirus software (both at the server and desktop level, CAD upgrades (we stagger our and are getting onto Autodesk subscription... it hurts in the beginning but pays off after a couple of years).

I do my best to save on the software side and apply the savings to better hardware. By this I don't mean go out and pirate what you can't afford, I mean look for OSS alternatives to things you may think are a must-buy. I run sendmail with Mailscanner/spamassassin on FreeBSD and linux, instead of Exchange. I run supplemental Samba servers on quality HP servers. I do run a windows domain, because its just easier for me to manage than a Samba-based domain. Believe or not, MS stuff just works in my organization. Our industry-specific accounting software is windows-only also, so we're kind of stuck there.

Like someone before said, you need to take into account your corporate growth goals and decide if you want to invest in a lot of good hardware that should last a long time, or buy cheap initially and replace things when needed.

Business Strategy

[dlefavor]

What's the business strategy of the firm and how can technology best support it?

Don't stop with PC's and applications. Include phones, Internet access, printers, faxes, document repositories, paper, toner, CD's, you name it. If the business strategy is best supported by quill pens and parchment paper, though, don't be afraid to go low-tech.

The partners probably have an idea of how much they want to spend on you, your team, and what you and your team do. Find out.

Do not trifle with that step. If they think they can afford $30,000 a year on technology and you present a $300,000 budget, the next sound you hear will be the axe falling.

Never forget that your firm is in the business of architecting things. Having cool computers with the latest applications that do not contribute directly and measurably to the architecting of things is deadly.

Best method

[Todd Knarr]

First, ignore all the per-capita methods. They won't work.

Now, take your lists of what you need to spend and what you want to spend. Lay out the items, give each one a priority ranging from "must have" to "would be nice". Provide a justification for each one and for the priority you gave it. Give all justifications, not just the best one, with examples from reality (eg. the justification for the anti-virus software might make reference to actual virus infestations in the company in the previous year and how much they cost in money, time and resources). Be sure to account for recurring costs in future years (eg. the service contracts on equipment, anti-virus update services, etc.).

Once you've got your list, sit down with the Finance guys and figure out how far down the list the business can afford to go.

Realistic budgets aren't based on per-capita expenditures or percentages of revenues or profits, they're based on what the business actually needs to spend to stay in business.

Instant Strategy

[Clansman]

Here's a 9 point, back of an envelope plan which sums up what the big consulting firms will tell you (in less words).

1. Review the Business Plan. What does it tell you? You expanding? You going all e-business? What? Wishes as well as reality.

2. What about trends in the architecture world? Trends in technology? Cheap storage, cheap bandwidth etc?

--> Try to work out what capabilities are suggested by all of this. eg - if your firm says they want to go e-billing then, hey, thats a capability. Show these to your firm and get them to rank them, score them whatever.

3. You haven't just started up, I suppose, so how does your current IT match up? Do a big list of capabilities you have identified and assess each one against your current apps/functionality.

4. What would a future IT system look like if it were to deliver all these capabilities? How could you leverage some of the technology trends you identified in to creating growth or profit? (invoices by pdf = save on printing and mailing etc. Recruit new staff just via the web = savings etc )

5. Can you decribe an optimal IT applications and technology architecture yet? Would that be an open accessable database feeding billing, web portal, collaboration, etc? Web based? Accesible in the move, laptops etc?

6. Now do a gap analysis of what you have versus what you want. Describe how you could move between those two states. Ie projects, dependencies etc - migrate this database, use a temporary TS server, then move to app x etc etc. remember culture (saving local vs contributing centrally - loss of power for the individual) - have a plan for selling culture changes too.

7. How could you pay for this - what levels of investment would it take? How will the changes be paced - what happens this year and what next. Will there be an investment phase of a few years then a leveling out. Talk business cases here - ROI.

8. Map the risks and critical success factors. Map your communications plan for the changes.

9. Present. You now know exactly what you want, why you want it and in terms that the rest of your staff team will understand - they nedd the capabilities not the software itself. Easy sell really.

We go though this every few years and it is an effective enough methodology.

Re:Find the right balance

[hypnagogue]

giving everyone flat-panel monitors will probably cost you more in hardware than you will gain in productivity.

But you'll save more in power consumption. Comparing two typical 17" inch monitors, flat panel vs. CRT, shows that the CRT burns 3 times as much power. That extra 50 watts over the course of a year adds up to $33 -- which is already more than the difference in price. Figure in HVAC capacity to cool the extra 50 watts of heat output, and the savings is about $100/year. A switch to flat panels will pay for itself in just 2 years based on power consumption alone.

There is a point to this (honest): IT often has to play in cost-benefit analysis against other corporate budgets, including facilities.

Seriously?

[BlightThePower]

Your firm must be big enough to have an accountant, if so, time table a long meeting with him/her/it and thrash it out with them. You might as well, it'll only end up on their desk again anyway. Come up with a range of options that meet the requirements and the account will help you put figures on things, including your assessment of the liabilities in el cheapo solutions. Personally, I've had a good success level and good experiences with turning the "gatekeepers" into collaborators that way.

Keep It Real... Simple

[The-Bus]

I think the main idea here is to get an idea of what the goal is of the employer. Is it to try and predict profitability? Are they selling or divesting the company in any way? Do they need to allocate some bonus funds they just found? Is it for tax reasons?

I imagine if you're in charge of administering most of the daily tasks (backup, network maintenance, upgrades), there is no labor cost. This makes it very easy for you.

I would put something together where you talk about the existing infrastructure, and maybe some proposed changes. Rank these changes in priority from "Low" (we can live without them but they MIGHT provide efficiencies) to "Medium" (realistically these will be needed, provide a good benefit for the investment) to "Musts" (these have to be done in the next 12 months otherwise the business will not function as it does today).

For example, "Low" might be buying larger, better displays for the office and a plasma TV for the client presentation room. "Medium" might be to buy larger, better displays for some of the drafting people, if the current ones are already a bit old or unreliable. "Musts" might be the monthly costs of internet/voice service (make sure they're not double- or triple-counting anything) or replacing a monitor that you KNOW will be gone within three months.

Also, make an approximate tally of the current value of items in the office, as far as IT is concerned. What if a file server went down? How much is the replacement? How much would a new bells-and-whistles replacement be?

I would probably draft up a "recommended" budget:


Recommended Budget: Medium

1. Replace six machines in back office. Cost $9000.
   
2. Upgrade network to gigabit ethernet + wireless. Cost $1500.
   
3. Acquire new scanner and printer for front office. Cost $500
   

Then, above and beyond that, ESTIMATE the "Oh, crap" budget, for example:

Assuming 6-8% of all current equipment will be destroyed/lost/not working, this will cost $6,000 - 8,000.

Clearly spell out that the first part is "in your control" and the other part is BEYOND your control. You may find that the "in control" budget is $11,000, while the "beyond control" budget is $25,000. Or the "in control" budget is $35,000 and the "beyond control" budget is only $7,000. Approach each of these scenarios differently.

Once this is all done, write a half-page summary on the front page. One paragraph explaining the "in control" budget and a realistic range, plus the benefits. Then a second paragraph with the "Oh, crap" stuff.

I'm making the assumption that your employer wants to know the following:

• What do I need to spend to keep this company running?
  
• What do I need to spend to make us more competitive?
  
• If I upped my IT investment by $20,000, what could I get? (all the "Low Priority" stuff)
  
• Do I need this guy on my staff?
  

Succesfully and accurately answering the first three questions will make the fourth one easy.

Here's what I do

[jtosburn]

Hi-

I'm the sysadmin at a ~25 person architecture firm, and an architect, too.

What I do for budgetting is to start with an inventory of every piece of equipment we own. Then I assign an approximate lifespan to each thing, based on experience. Couple that with when each item was purchased, and replacement times and potential budgetting scenarios start to emerge. There are a couple of policies I try to wedge in there to steer purchases, such as I like to put the new machines in front of the heaviest, most demanding users, which for us is the more billable staff. I'm forunate in that I have management's backing, so that there's never any whining from project managers when an intern gets a kick ass machine, and the PM gets the hand-me-down. By keeping the machines coming in, I can keep everyone pretty happy. In addition, whenever possible, I try to upgrade our software versions either every two or three years, on everything except the Microsoft hegemony, which I only upgrade through churn of new workstations.

Around the fairly regular annual purchases, I then stategize the big ticket items: new plotter, Autocad updates, expanding licenses of Photoshop/InDesign, implementation of a new accoutning system, or what-have-you. This helps even out the costs from year to year. None of it's rocket science; you just have to put your head into it and figure out what it would cost to maintain your company's current level of technical prowess (x machines per year, etc), and that what it would cost to further develop the skillsets (by getting new software, and doing more training).

FWIW, we spend ~$45k per year, which works out to be ~2.5 - 3.5 % of revenue. My bosses have never gone for a straight percentage method, but it's my preference, since it automatically adjusts itself for good times and bad. Instead, I develop a budget, they either say yes to the whole thing, or specifically exclude one or more items. Then I establish the priorities and give them an idea of at what points in the year I'd like to spend money. They coordinate that with the company's cash flow, and if the year turns sour, I just get reigned in on my spending.

Sorry if I'm rambling too much. OTOH, if you want more, post a response, and I'll give you my email address.

Joel

Other gains of LCD screens

[PCM2]

About a year ago, my company's IT department rolled out LCD screens to every employee and I was ecstatic. Not so much because I had been clamoring for a new screen (I hadn't even thought about it), but because it was an upgrade that actually made some kind of logical sense.

Think about it. What I do all day is mostly send e-mails and work in Microsoft Office. A traditional 'upgrade' would be to drop a new, faster computer with a big hard drive on my desk. But not only does that take a lot of work on behalf of IT, not only is it incredibly disruptive to my workday, but it doesn't really benefit me at all. I can probably store my entire work folder and all its accumulated contents since I began working here on a single USB keychain drive. My CPU needs were met and exceeded some generations of hardware ago.

On the other hand, a new LCD screen that's crisp, clear, and easy to read -- as opposed to some legacy, piece of junk CRT that's been getting blurrier and dimmer for years -- is something tangible that I look at and notice day in and day out. You might think it doesn't result in an increase in productivity, but I disagree completely. In fact, if someone had given me the choice between the monitor and a new CPU, I would have taken the monitor in a second.