Extracted from The Executive’s Guide to Information Technology, 2
John Baschab & Jon Piot,
John Wiley & Sons, 2007, DePaul 24x7 books for instruction use
Chapter 15: IT Budgeting and Cost Management
This chapter presents a practical overview of IT budgeting and cost containment practices for the CIO. In
creating the department budget, the CIO must analyze a large number of variables and balance multiple
competing priorities, while devising the most cost-effective approach for delivering mission critical services.
Because of the impact the budget has on the IT manager's ability to run an effective department, budget
creation is one of the most important jobs an IT manager has.
The chapter is organized in four key sections:
Key components of the IT budget and the typical ratios of
spending in each component.
Two processes for completing the annual budgets.
IT cost drivers:
An overview of key cost drivers in the budget and strategies for
Additional IT budget considerations:
Managing capital expenditures, cost audit
practices, contingencies planning, managing the budget, chargeback mechanisms,
lease/buy decisions, and handling out-of- budget business unit requests.
The first section describes key components of the IT budget, such as software, hardware, labor, and what
ratios between the components the CIO should expect to see. The process section presents two methods for
creating the budget and compares their merits. The cost drivers section covers key items that drive IT costs
that affect the year-to-year change in the operating and capital budgets. Next, the chapter presents a
number of strategies for minimizing IT costs, especially infrastructure and capital expenditures. Finally, the
chapter presents a number of key management considerations for the IT manager to contemplate, such as
lease versus buy decisions, audits, chargeback mechanisms, and so on.
Why This Topic Is Important
At a basic level, the CIO is judged on the department's output versus operating and capital input required.
The lower the capital input required for the same high output, the better the ratio, and the actual
effectiveness of the IT manager is judged to have increased. Effective management of capital is of prime
concern to both senior executives and the IT manager; thus, it is a topic of high importance.
Successful management of the IT department depends on the CIO's ability to operate a fiscally sound unit. It
also entails the CIO making good decisions about spending priorities and ensuring that these spending
priorities are aligned with the direction of the business. A good CIO also ensures that the bulk of
discretionary spending is focused on fulfilling the demands of business units and in support of projects and
initiatives focused on revenue- generating activities.
CIOs may not have formal training or education in the business and budget management processes, and