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IT Budgeting for Not-for-Profits

The document provides background information on Donny Shimamoto and discusses his experience in IT budgeting for not-for-profit organizations. It covers the anatomy of an IT budget including types, categories, and classes of expenditures. It also discusses IT asset lifecycles and how to tie IT risks to hardware refresh cycles. The document explains software licensing models and the benefits of managed service providers.

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INTRAPRISETECHKNOWLOGIES LLC IT Budgeting for Not-for-Profit Organizations PACER Center Webinar June 9, 2011 Presented by Donny C. Shimamoto, CPA.CITP
Donny C. Shimamoto, CPA.CITP Background & Experience Alumni of PricewaterhouseCoopers LLP – Strategic Technology Group – Financial Audit and IT Audit – Washington Consulting Practice Founder of IntrapriseTechKnowlogies LLC – Organizational Development advisor with a focus on Business Intelligence and Performance Management – Business Process Improvement with emphasis on internal controls and technology risk management – IT Outsourcing for small and middle market organizations Notable Not-for-profit Clients – Hawaii Community Foundation, Catholic Charities Hawaii, Moiliili Community Center, American Institute of CPAs
Donny C. Shimamoto, CPA.CITP Involvement, Awards, and Recognition American Institute of Certified Public Accountants – Governing Council (2010+) – Assurance Services Executive Committee (2009+) – Co-Chair, Business Intelligence Workgroup (2009+) – IT Executive Committee (2006-2009, 2011+) Association of IT Professionals – Honolulu: Board (2008), Treasurer (2009, 2011), President (2010) – National: Chair – Governance Task Force (2009), Member - Strategic Planning Committee (2009), Facilitator – AITP Professionalism Advisory Council (2010) Awards & Recognition – Presidents Award 2010, Hawaii Society of Certified Public Accountants – Top “40 Under 40” Accounting Professionals in the US 2007 & 2009, CPA Technology Advisor Magazine – Top High Tech Leaders in Hawaii 3 2004, Pacific Technology Foundation & Technology News Network
Audience Polls – Demographics Organization Role in Organization Type/Size – Lead Executive – CPA Firm Managing Partner – Small Business CEO/President/Owner – Middle Market – CFO/Controller – Large Corporations – CIO / IT Director – Government – Auditor or Consultant Choose one from each set of Part of Organization options that best matches – Accounting/Finance how you view your – Information Technology organization and your role at – Audit or Consulting work.
IT Budgeting for Not-for-Profit Organizations Anatomy of an IT Budget – Types, Categories, and Classes of Expenditures IT Asset Lifecycle Planning – Tying IT Risk to Hardware Refresh Cycles – Software Licensing Explained – Understanding Managed Service Providers – Adding some Cloud into the Budget Different takes on the IT Budget – Using the “reserve method” of IT Budgeting – Tying the IT Budget to Business Strategy – Competitive Analysis Questions
IT Budgeting for Not-for-Profit Organizations Challenges with IT Budgeting – Personnel knowledge challenges Accounting doesn’t understand IT; IT doesn’t understand Accounting – IT costs incurred at varying times and recur in multi-year patterns Not just personnel and non-personnel costs May not be the same from year to year – Unable to distinguish mandatory and discretionary IT costs Often all intermingled and inseparable – Single year focus can result in higher long term cost Many IT decisions have multi-year impacts, but many IT budgets focus on only one year at a time Let’s deconstruct the anatomy of an IT Budget to see how we can address the above issues
Anatomy of an IT Budget – Types of Exp Types of Expenditures – Personnel Salaries & Benefits – employees and associated costs – Non-Personnel Hardware – equipment and other fixed assets, installation costs, maintenance contracts, warranties Software – licenses and support contracts Subscriptions – could be associated with hardware, software, training, cloud computing and managed service providers Services – advisors, consultants, service providers, auditors, legal counsel Once you identify the Type of Expenditure then ask the right questions to better understand the cost
Anatomy of an IT Budget – Personnel Personnel Budget Questions – Are there any anticipated changes to salaries? – Are there any anticipated change to benefits/benefits eligibility? – Are there any licenses/certifications to add/maintain/end? Do any of those have training associated with them? Do any of them have exam or license renewals? – Are there any terminations / layoffs planned? Which positions and when? – Are there any new hires anticipated? Is this a full-time or part-time position? What benefits would the person be eligible for? Is there any training that needs to be budgeted for?
Anatomy of an IT Budget – Hardware Hardware Budget Questions – What hardware is at end-of-life? – How long will new hardware last? – Are there any maintenance or support contracts needed? – Are there any subscriptions associated with the hardware? – Which costs have to be capitalized? Additional Hardware Questions – Do we have enough computers for planned new hires? – Are there any other departmental plans that will require hardware? – Are there any IT projects that may impact current hardware?
Anatomy of an IT Budget – Software Software Budget Questions – Are there any software licenses that need to be renewed? – What period is the software license valid for? – Are there any subscriptions associated with the software? – Are there any installation costs? – Which costs have to be capitalized? Additional Software Questions – Do we have enough software licenses for planned new hires? – Are there any other departmental plans that will require software? – Are there any IT projects that may impact current software?
Anatomy of an IT Budget – Services Services Budget Questions – Is the service level adequate for our coming needs? – Are the services provided still needed? – Are there additional services needed? – Has our volume of services changed? Impact to price? – Does the service have a required period associated with it? Additional Services Questions – Are there any other departmental plans that will require services? – Are there any IT projects that may impact current services? – Have services associated with projects been isolated from operational costs?
Anatomy of an IT Budget – Subscriptions Subscriptions Budget Questions – What is the level of usage of the subscription? – Should we renew at a different subscription level? – Does the subscription have a required period associated with it? – Are there any installation costs? – Which costs have to be capitalized? Additional Subscriptions Questions – Do we have enough subscriptions for planned new hires? – Should we consider converting any software to subscriptions? – Have all subscriptions associated with hardware and software been included in the budget?
Anatomy of an IT Budget – Types of Exp Types of Expenditures – Personnel Salaries & Benefits – employees and associated costs – Non-Personnel Hardware – equipment and other fixed assets, installation costs, maintenance contracts, warranties Software – licenses and support contracts Subscriptions – could be associated with hardware, software, training, cloud computing and managed service providers Services – advisors, consultants, service providers, auditors, legal counsel Remember to focus on the coming year and also on future periods that may impact purchase decisions
Anatomy of an IT Budget – Categories Categories of Expenditures – Defined – Capital – expenditures that will need to be considered as part of the capital budget (usually needs to be capitalized) Hardware and large software license purchases usually here Significant repairs, parts replacements, upgrades – Operating – expenditures that are related to operations Subscriptions, maintenance, support for HW/SW usually here – Project – expenditures that are tied to a discreet effort May or may not need to be capitalized May be required or discretionary expenditures Organizations should consider allocating personnel costs among these categories to better understand how IT personnel resources are being deployed
Anatomy of an IT Budget – Categories Categories of Expenditures – Considerations – Capital – expenditures that will need to be considered as part of the capital budget (usually needs to be capitalized) Has a greater cash flow impact, but may also be eligible for financing from vendors or banks Consider impact to the financial statements – Operating – expenditures that are related to operations Usually “required” expenditures related to day-to-day ops Usually somewhat of a fixed cost; focus usually to minimize – Project – expenditures that are tied to a discreet effort May have associated capital or operating expenditures Usually discretionary, but not executing may have impacts Timing may be adjusted for cash flow Proper categorization can help to analyze impact to cash flow and financial statements
Anatomy of an IT Budget – Classes Classes of Expenditures (Adapted from Gartner) – Run – keep the organization running Most Operating expenditures fall here Project expenditures related to support and maintenance of the IT infrastructure also fall here – Grow – projects and initiatives that seek to improve organizational efficiencies and effectiveness Many Project expenditures fall here, particularly when they are related to business improvement activities Many Capital expenditures fall here – Transform – providing new capabilities/products/services Also thought of as ‘Research & Development” Some Project and Capital expenditures fall here When trying to “tweak” the IT budget, Run usually should be kept, Grow and Transform should be prioritized
Anatomy of an IT Budget – Classes Classes of Expenditures – Analyzing your budget Your IT Budget Entity A Entity B Entity C Org? Run 80% 60% 50% ?? Grow 20% 30% 30% ?? Transform 0% 10% 20% ?? None of these spending patterns are “wrong”. They just represent different types of IT roles/investment.
IT Asset Lifecycle Planning What is an “IT Asset Lifecycle”? – IT Assets follow a general “life” pattern From Acquisition (“birth”) to Disposal/Discontinuance(“death”) – IT Assets have different timelines for their life cycles Hardware – 3-5 years Software – depends on license agreement Subscriptions – monthly to annually, depends on agreement Services – depends on contract Understanding the IT Asset Lifecycle helps to – Identify the total cost of an IT Asset over its life – Identify points in time with option to change cost structure – Identify future impact of current decisions – Ensure the IT budget decisions balance short term and long term value
IT Asset Lifecycle Planning – Hardware Acquire Maintain Replace Dispose Repurpose Acquisition costs usually capitalized Costs in other phases usually expensed Option to Repurpose usually forgotten/skipped
Tying IT Risk to Hardware Refresh Cycles How often an organizations refreshes its hardware depends on its level of risk tolerance – Different IT Assets have varying risk of failure as they age – Consider the criticality of the IT Asset to operations – Consider the ease of replacement in the event of failure Risk of Virtual Laptop Desktop Servers Firewall Failure Terminal Low <2 yrs <3 yrs <6 yrs <3 yrs <4 yrs Moderate 2-3 yrs 3-5 yrs 6-8 yrs 3-4 yrs 4-6 yrs High 4+ yrs 5+ yrs 8+ yrs 4+ yrs 6+ yrs Ease of Moderate Moderate Easy Hard Moderate Replacement
Tying IT Risk to Hardware Refresh Cycles Acquire Maintain Replace Dispose Repurpose Consider repurposing servers and workstations into a lower risk role (e.g. login/DNS/file/print server, etc.) when they reach a Moderate risk of failure
IT Asset Lifecycle Planning – Software Acquire Maintain Replace / Renew Dispose / Upgrade Acquire/Replace costs may be capitalized Maintain/Renew/Dispose costs usually expensed Upgrade costs might be capitalized Replace/Renew/Upgrade is a key decision point usually tied to the software license agreement
Software Licensing Explained Types of License Programs – Outright Purchase “retail” software license – one time cost – Defined Period One time cost; Only valid for a defined period – Defined Period + Subscription Usually large one time cost, plus subscription – annually usually 15-20% or original purchase price Only valid for a defined period, subscription = renewal – Subscription May have one-time activation cost Usually has regularly recurring payments (annually/monthly) Usually has a defined period with renewal option Upgrades usually included / available
Software Licensing Explained Types of License Programs – Impact to Budget – Outright Purchase One time expenditure in year of acquisition – Defined Period One time expenditure in year of acquisition Potential renewal cost at end of period – Defined Period + Subscription One time expenditure in year of acquisition Recurring subscription cost in subsequent years – Subscription May have one-time expenditure in year of acquisition Recurring subscription cost in subsequent years When analyzing a purchase decision be sure to look at the costs in out years / total cost
Software Licensing Explained Microsoft License Programs – OEM = provided with purchased equipment Only valid for that equipment (can’t be moved/transferred) Can’t transfer to virtualized environment No previous version rights – Retail = purchased from a “store” Can be moved/transferred between equipment Can transfer into virtualized environment No previous version rights – Open License = purchased from a “retailer” Can be moved/transferred between equipment Can transfer into virtualized environment Rights to use previous versions with Software Assurance Has a license period, may be treated like a subscription
Software Licensing Explained Microsoft Open License – Open Business Two-year periods, pay upfront Software Assurance optional – Open Value / Open Value Subscription Three-year periods (one-year allowed for subscription) Pay upfront or pay annually (subscription) Must include Software Assurance Can purchase Online Subscriptions, but must pay annually Microsoft Online Subscriptions – Priced monthly, pay monthly – Different plan levels with different costs – Annual contracts, increases allowed each month, decreases only at annual renewal point
IT Asset Lifecycle Planning – Subscriptions Acquire Maintain Replace / Renew Discontinue / Upgrade All costs usually expensed Replace/Renew/Upgrade is a key decision point usually tied to the subscription agreement Increases in subscriptions usually allowed at any time Decreases in subscription usually only at Renew point
IT Asset Lifecycle Planning – Services Acquire Maintain Replace / Discontinue Renew Capitalized/expensed depending on type of work done Lifecycle depends on contract (or lack thereof) with service provider Managed Service Provider contracts often behave like Subscriptions; may have software associated with it
Understanding Managed Service Providers Managed Services is the practice of transferring day-to-day related management responsibility as a strategic method for improved effective and efficient operations inclusive of Production Support and lifecycle build / maintenance activities. A Managed Services Provider (MSP), is typically an IT services provider, who manages and assumes responsibility for providing a defined set of services to their clients either proactively or as they (not the client) determine that the services are needed. – Most MSPs bill an upfront setup or Transition and an ongoing flat or near-fixed monthly fee, which benefits their clients by providing them with predictable IT support costs. Source: Wikipedia, http://en.wikipedia.org/wiki/Managed_services
Understanding Managed Service Providers Benefits of a Managed Service Provider (MSP) – MSP specialize in the services provided – MSP incorporate best practices into their service model – Services automatically provided as needed within scope E.g., when there is a problem applying a system patch, MSP will automatically go in and fix it; without additional cost Considerations when using an MSP – Usually requires that you conform to their model/software Works well for standardized environments – When IT staff are employed by organization Usually shifts non-value-added tasks to MSP May not decrease staffing cost, but allows staff to focus on more value-added activities
Understanding Managed Service Providers Impact of an MSP to the IT Budget – Usually employed to have increased predictability in service costs – Usually one-time setup cost and then recurring monthly payments Cost driven by number of supported devices May have software licenses included in cost May offer reduced cost of hourly services with higher cost plans Higher cost plans normally include more managed services – Usually higher recurring cost But total cost can be less depending on level of incidences Total cost may be higher if there is variability in the environment
Understanding Managed Service Providers Impact of an MSP to the IT Budget – Review the MSP contract to determine How much flexibility you have for increases/decreases Renewal points and option points MSPs aren’t right for everyone – Must do good cost analysis to validate savings – They sometimes require a leap of faith
Adding Some Cloud to the Budget Cloud Computing / Software-as-a-Service (SaaS) – Reduces the need for equipment purchases Vendor is responsible for equipment / infrastructure – Reduces up-front implementation costs Don’t need to include setup/config of hardware Don’t need to incur full platform install/setup Sometimes client setup is included with subscription fee – Reduces on-going support & maintenance costs Vendor is usually responsible for system operations, patches, backups, business continuity, software upgrades – Reduces cost of Replacement phase Don’t need to worry about hardware lifecycle risks Don’t need to incur costs of upgrade/replacement
Adding Some Cloud to the Budget Impacts of Cloud / SaaS to the Budget / Cash Flow – Usually reduces overall cost of acquisition Implementation costs usually expensed – Usually follows subscription lifecycle model Many vendors allow monthly payments Many vendors offer discount for annual payment up-front Budget / Cash Flow Considerations – No “asset” created, so usually not eligible for financing – What is the impact to funding if cost is spread over time instead of up-front? – What is the impact to the financial statements if expensed? – Does a conversion to a cloud/SaaS solution reduce costs in other areas?
IT Asset Lifecycle Planning Understanding the IT Asset Lifecycle helps – Identify the total cost of an IT Asset over its life – Identify points in time with option to change cost structure – Identify future impact of current decisions – Ensure the IT budget decisions balance short and long term value
IT Asset Lifecycle Planning Create a multi-year IT Budget to analyze total cost – Note replacement / renewal points and costs Remember to include any associated services with changes – Remember to determine if there are disposal costs (particularly with equipment) – Balance risk and cost over time – Consider the use of an MSP for cost management and better IT staff utilization – Consider the impact of Cloud Computing to funding, cash flow, and financial statements
Different Takes on the IT Budget Now you have your IT budget created… what next? – After completing the entire budget, go back and look at the big picture that it shows – Use multiple versions of the IT budget to do “what if” scenarios Compare costs of physical vs. virtual servers Compare costs of on-premise vs. cloud solutions – Creating the budget the first time can be a big endeavor Maintaining it usually requires less effort
Different Takes on the IT Budget Let’s look at some ways to look at the budget from different perspectives – Asking Competitive Analysis Questions – Using the “reserve” method of IT Budgeting – Tying the IT Budget to Business Strategy
Different Takes on the IT Budget Asking Competitive Analysis Questions – Personnel Budget How does our personnel compensation compare to market? – Hardware Budget What is our competition doing—what hardware are they using? Have we considered virtualization or cloud-based alternatives to hardware? – Software Budget What is our competition doing—what software are they using? Have we considered cloud-based alternatives to software? – Services Budget Have we considered managed service providers? Have we considered outsourcing non-core IT functions? – Subscriptions Budget Have we looked a new subscription offerings/pricing models to validate that we are optimizing our subscriptions?
Different Takes on the IT Budget Using the “reserve method” of IT Budgeting – Two Primary Objectives: Reduce presence of peaks that may greatly impact cash flow Smooth out IT costs for easier planning / cost allocation – Take an IT Budget and reallocate the costs over a period of time Usually a 3-5 year rolling period Depends on the pattern of purchases – Similar to the “reserves” kept by a condo association Helps to ensure there is enough funding for required capital projects, with the option to defer Consider using the same principles as condo assn to determine if the “reserve” has a high enough balance Only useful for budget approvals, does not impact actual expenditures or financial statements
Different Takes on the IT Budget Tying the IT Budget to Business Strategy – What role does IT play in the organization’s mission? – Is that role reflected in the final Run-Grow-Transform analysis? – What changes may be necessary to better align with the business strategy and overall mission of the organization? Your IT Budget Entity A Entity B Entity C Org? Run 80% 60% 50% ?? Grow 20% 30% 30% ?? Transform 0% 10% 20% ??
Call to Action – IT Budgeting Executive Directors & Program Managers should work with their IT Manager or Service Provider to develop an IT Budget that – Ensures alignment of IT with business strategy – Balances both short-term and long-term IT costs – Balances IT-related risks and costs – Helps with business planning for cash flow and financial statements Separates discretionary from non-discretionary IT costs – Enables informed decision-making for IT projects A good IT budget is both a planning and decision-making tool that can help to maximize the benefits of your IT investments and enable your organization to better achieve its mission
Thank you for your attention and participation! Any Questions? Donny C. Shimamoto, CPA.CITP donny@intraprisetechknowlogies.com (808) 735-8324 voice IntrapriseTechKnowlogies LLC Technologies and knowledge for synergizing your intraprise www.intraprisetechknowlogies.com | Hawaii | California

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IT Budgeting for Not-for-Profits

  • 1.
    INTRAPRISETECHKNOWLOGIES LLC IT Budgeting for Not-for-Profit Organizations PACER Center Webinar June 9, 2011 Presented by Donny C. Shimamoto, CPA.CITP
  • 2.
    Donny C. Shimamoto,CPA.CITP Background & Experience Alumni of PricewaterhouseCoopers LLP – Strategic Technology Group – Financial Audit and IT Audit – Washington Consulting Practice Founder of IntrapriseTechKnowlogies LLC – Organizational Development advisor with a focus on Business Intelligence and Performance Management – Business Process Improvement with emphasis on internal controls and technology risk management – IT Outsourcing for small and middle market organizations Notable Not-for-profit Clients – Hawaii Community Foundation, Catholic Charities Hawaii, Moiliili Community Center, American Institute of CPAs
  • 3.
    Donny C. Shimamoto,CPA.CITP Involvement, Awards, and Recognition American Institute of Certified Public Accountants – Governing Council (2010+) – Assurance Services Executive Committee (2009+) – Co-Chair, Business Intelligence Workgroup (2009+) – IT Executive Committee (2006-2009, 2011+) Association of IT Professionals – Honolulu: Board (2008), Treasurer (2009, 2011), President (2010) – National: Chair – Governance Task Force (2009), Member - Strategic Planning Committee (2009), Facilitator – AITP Professionalism Advisory Council (2010) Awards & Recognition – Presidents Award 2010, Hawaii Society of Certified Public Accountants – Top “40 Under 40” Accounting Professionals in the US 2007 & 2009, CPA Technology Advisor Magazine – Top High Tech Leaders in Hawaii 3 2004, Pacific Technology Foundation & Technology News Network
  • 4.
    Audience Polls –Demographics Organization Role in Organization Type/Size – Lead Executive – CPA Firm Managing Partner – Small Business CEO/President/Owner – Middle Market – CFO/Controller – Large Corporations – CIO / IT Director – Government – Auditor or Consultant Choose one from each set of Part of Organization options that best matches – Accounting/Finance how you view your – Information Technology organization and your role at – Audit or Consulting work.
  • 5.
    IT Budgeting forNot-for-Profit Organizations Anatomy of an IT Budget – Types, Categories, and Classes of Expenditures IT Asset Lifecycle Planning – Tying IT Risk to Hardware Refresh Cycles – Software Licensing Explained – Understanding Managed Service Providers – Adding some Cloud into the Budget Different takes on the IT Budget – Using the “reserve method” of IT Budgeting – Tying the IT Budget to Business Strategy – Competitive Analysis Questions
  • 6.
    IT Budgeting forNot-for-Profit Organizations Challenges with IT Budgeting – Personnel knowledge challenges Accounting doesn’t understand IT; IT doesn’t understand Accounting – IT costs incurred at varying times and recur in multi-year patterns Not just personnel and non-personnel costs May not be the same from year to year – Unable to distinguish mandatory and discretionary IT costs Often all intermingled and inseparable – Single year focus can result in higher long term cost Many IT decisions have multi-year impacts, but many IT budgets focus on only one year at a time Let’s deconstruct the anatomy of an IT Budget to see how we can address the above issues
  • 7.
    Anatomy of anIT Budget – Types of Exp Types of Expenditures – Personnel Salaries & Benefits – employees and associated costs – Non-Personnel Hardware – equipment and other fixed assets, installation costs, maintenance contracts, warranties Software – licenses and support contracts Subscriptions – could be associated with hardware, software, training, cloud computing and managed service providers Services – advisors, consultants, service providers, auditors, legal counsel Once you identify the Type of Expenditure then ask the right questions to better understand the cost
  • 8.
    Anatomy of anIT Budget – Personnel Personnel Budget Questions – Are there any anticipated changes to salaries? – Are there any anticipated change to benefits/benefits eligibility? – Are there any licenses/certifications to add/maintain/end? Do any of those have training associated with them? Do any of them have exam or license renewals? – Are there any terminations / layoffs planned? Which positions and when? – Are there any new hires anticipated? Is this a full-time or part-time position? What benefits would the person be eligible for? Is there any training that needs to be budgeted for?
  • 9.
    Anatomy of anIT Budget – Hardware Hardware Budget Questions – What hardware is at end-of-life? – How long will new hardware last? – Are there any maintenance or support contracts needed? – Are there any subscriptions associated with the hardware? – Which costs have to be capitalized? Additional Hardware Questions – Do we have enough computers for planned new hires? – Are there any other departmental plans that will require hardware? – Are there any IT projects that may impact current hardware?
  • 10.
    Anatomy of anIT Budget – Software Software Budget Questions – Are there any software licenses that need to be renewed? – What period is the software license valid for? – Are there any subscriptions associated with the software? – Are there any installation costs? – Which costs have to be capitalized? Additional Software Questions – Do we have enough software licenses for planned new hires? – Are there any other departmental plans that will require software? – Are there any IT projects that may impact current software?
  • 11.
    Anatomy of anIT Budget – Services Services Budget Questions – Is the service level adequate for our coming needs? – Are the services provided still needed? – Are there additional services needed? – Has our volume of services changed? Impact to price? – Does the service have a required period associated with it? Additional Services Questions – Are there any other departmental plans that will require services? – Are there any IT projects that may impact current services? – Have services associated with projects been isolated from operational costs?
  • 12.
    Anatomy of anIT Budget – Subscriptions Subscriptions Budget Questions – What is the level of usage of the subscription? – Should we renew at a different subscription level? – Does the subscription have a required period associated with it? – Are there any installation costs? – Which costs have to be capitalized? Additional Subscriptions Questions – Do we have enough subscriptions for planned new hires? – Should we consider converting any software to subscriptions? – Have all subscriptions associated with hardware and software been included in the budget?
  • 13.
    Anatomy of anIT Budget – Types of Exp Types of Expenditures – Personnel Salaries & Benefits – employees and associated costs – Non-Personnel Hardware – equipment and other fixed assets, installation costs, maintenance contracts, warranties Software – licenses and support contracts Subscriptions – could be associated with hardware, software, training, cloud computing and managed service providers Services – advisors, consultants, service providers, auditors, legal counsel Remember to focus on the coming year and also on future periods that may impact purchase decisions
  • 14.
    Anatomy of anIT Budget – Categories Categories of Expenditures – Defined – Capital – expenditures that will need to be considered as part of the capital budget (usually needs to be capitalized) Hardware and large software license purchases usually here Significant repairs, parts replacements, upgrades – Operating – expenditures that are related to operations Subscriptions, maintenance, support for HW/SW usually here – Project – expenditures that are tied to a discreet effort May or may not need to be capitalized May be required or discretionary expenditures Organizations should consider allocating personnel costs among these categories to better understand how IT personnel resources are being deployed
  • 15.
    Anatomy of anIT Budget – Categories Categories of Expenditures – Considerations – Capital – expenditures that will need to be considered as part of the capital budget (usually needs to be capitalized) Has a greater cash flow impact, but may also be eligible for financing from vendors or banks Consider impact to the financial statements – Operating – expenditures that are related to operations Usually “required” expenditures related to day-to-day ops Usually somewhat of a fixed cost; focus usually to minimize – Project – expenditures that are tied to a discreet effort May have associated capital or operating expenditures Usually discretionary, but not executing may have impacts Timing may be adjusted for cash flow Proper categorization can help to analyze impact to cash flow and financial statements
  • 16.
    Anatomy of anIT Budget – Classes Classes of Expenditures (Adapted from Gartner) – Run – keep the organization running Most Operating expenditures fall here Project expenditures related to support and maintenance of the IT infrastructure also fall here – Grow – projects and initiatives that seek to improve organizational efficiencies and effectiveness Many Project expenditures fall here, particularly when they are related to business improvement activities Many Capital expenditures fall here – Transform – providing new capabilities/products/services Also thought of as ‘Research & Development” Some Project and Capital expenditures fall here When trying to “tweak” the IT budget, Run usually should be kept, Grow and Transform should be prioritized
  • 17.
    Anatomy of anIT Budget – Classes Classes of Expenditures – Analyzing your budget Your IT Budget Entity A Entity B Entity C Org? Run 80% 60% 50% ?? Grow 20% 30% 30% ?? Transform 0% 10% 20% ?? None of these spending patterns are “wrong”. They just represent different types of IT roles/investment.
  • 18.
    IT Asset LifecyclePlanning What is an “IT Asset Lifecycle”? – IT Assets follow a general “life” pattern From Acquisition (“birth”) to Disposal/Discontinuance(“death”) – IT Assets have different timelines for their life cycles Hardware – 3-5 years Software – depends on license agreement Subscriptions – monthly to annually, depends on agreement Services – depends on contract Understanding the IT Asset Lifecycle helps to – Identify the total cost of an IT Asset over its life – Identify points in time with option to change cost structure – Identify future impact of current decisions – Ensure the IT budget decisions balance short term and long term value
  • 19.
    IT Asset LifecyclePlanning – Hardware Acquire Maintain Replace Dispose Repurpose Acquisition costs usually capitalized Costs in other phases usually expensed Option to Repurpose usually forgotten/skipped
  • 20.
    Tying IT Riskto Hardware Refresh Cycles How often an organizations refreshes its hardware depends on its level of risk tolerance – Different IT Assets have varying risk of failure as they age – Consider the criticality of the IT Asset to operations – Consider the ease of replacement in the event of failure Risk of Virtual Laptop Desktop Servers Firewall Failure Terminal Low <2 yrs <3 yrs <6 yrs <3 yrs <4 yrs Moderate 2-3 yrs 3-5 yrs 6-8 yrs 3-4 yrs 4-6 yrs High 4+ yrs 5+ yrs 8+ yrs 4+ yrs 6+ yrs Ease of Moderate Moderate Easy Hard Moderate Replacement
  • 21.
    Tying IT Riskto Hardware Refresh Cycles Acquire Maintain Replace Dispose Repurpose Consider repurposing servers and workstations into a lower risk role (e.g. login/DNS/file/print server, etc.) when they reach a Moderate risk of failure
  • 22.
    IT Asset LifecyclePlanning – Software Acquire Maintain Replace / Renew Dispose / Upgrade Acquire/Replace costs may be capitalized Maintain/Renew/Dispose costs usually expensed Upgrade costs might be capitalized Replace/Renew/Upgrade is a key decision point usually tied to the software license agreement
  • 23.
    Software Licensing Explained Types of License Programs – Outright Purchase “retail” software license – one time cost – Defined Period One time cost; Only valid for a defined period – Defined Period + Subscription Usually large one time cost, plus subscription – annually usually 15-20% or original purchase price Only valid for a defined period, subscription = renewal – Subscription May have one-time activation cost Usually has regularly recurring payments (annually/monthly) Usually has a defined period with renewal option Upgrades usually included / available
  • 24.
    Software Licensing Explained Types of License Programs – Impact to Budget – Outright Purchase One time expenditure in year of acquisition – Defined Period One time expenditure in year of acquisition Potential renewal cost at end of period – Defined Period + Subscription One time expenditure in year of acquisition Recurring subscription cost in subsequent years – Subscription May have one-time expenditure in year of acquisition Recurring subscription cost in subsequent years When analyzing a purchase decision be sure to look at the costs in out years / total cost
  • 25.
    Software Licensing Explained Microsoft License Programs – OEM = provided with purchased equipment Only valid for that equipment (can’t be moved/transferred) Can’t transfer to virtualized environment No previous version rights – Retail = purchased from a “store” Can be moved/transferred between equipment Can transfer into virtualized environment No previous version rights – Open License = purchased from a “retailer” Can be moved/transferred between equipment Can transfer into virtualized environment Rights to use previous versions with Software Assurance Has a license period, may be treated like a subscription
  • 26.
    Software Licensing Explained Microsoft Open License – Open Business Two-year periods, pay upfront Software Assurance optional – Open Value / Open Value Subscription Three-year periods (one-year allowed for subscription) Pay upfront or pay annually (subscription) Must include Software Assurance Can purchase Online Subscriptions, but must pay annually Microsoft Online Subscriptions – Priced monthly, pay monthly – Different plan levels with different costs – Annual contracts, increases allowed each month, decreases only at annual renewal point
  • 27.
    IT Asset LifecyclePlanning – Subscriptions Acquire Maintain Replace / Renew Discontinue / Upgrade All costs usually expensed Replace/Renew/Upgrade is a key decision point usually tied to the subscription agreement Increases in subscriptions usually allowed at any time Decreases in subscription usually only at Renew point
  • 28.
    IT Asset LifecyclePlanning – Services Acquire Maintain Replace / Discontinue Renew Capitalized/expensed depending on type of work done Lifecycle depends on contract (or lack thereof) with service provider Managed Service Provider contracts often behave like Subscriptions; may have software associated with it
  • 29.
    Understanding Managed ServiceProviders Managed Services is the practice of transferring day-to-day related management responsibility as a strategic method for improved effective and efficient operations inclusive of Production Support and lifecycle build / maintenance activities. A Managed Services Provider (MSP), is typically an IT services provider, who manages and assumes responsibility for providing a defined set of services to their clients either proactively or as they (not the client) determine that the services are needed. – Most MSPs bill an upfront setup or Transition and an ongoing flat or near-fixed monthly fee, which benefits their clients by providing them with predictable IT support costs. Source: Wikipedia, http://en.wikipedia.org/wiki/Managed_services
  • 30.
    Understanding Managed ServiceProviders Benefits of a Managed Service Provider (MSP) – MSP specialize in the services provided – MSP incorporate best practices into their service model – Services automatically provided as needed within scope E.g., when there is a problem applying a system patch, MSP will automatically go in and fix it; without additional cost Considerations when using an MSP – Usually requires that you conform to their model/software Works well for standardized environments – When IT staff are employed by organization Usually shifts non-value-added tasks to MSP May not decrease staffing cost, but allows staff to focus on more value-added activities
  • 31.
    Understanding Managed ServiceProviders Impact of an MSP to the IT Budget – Usually employed to have increased predictability in service costs – Usually one-time setup cost and then recurring monthly payments Cost driven by number of supported devices May have software licenses included in cost May offer reduced cost of hourly services with higher cost plans Higher cost plans normally include more managed services – Usually higher recurring cost But total cost can be less depending on level of incidences Total cost may be higher if there is variability in the environment
  • 32.
    Understanding Managed ServiceProviders Impact of an MSP to the IT Budget – Review the MSP contract to determine How much flexibility you have for increases/decreases Renewal points and option points MSPs aren’t right for everyone – Must do good cost analysis to validate savings – They sometimes require a leap of faith
  • 33.
    Adding Some Cloudto the Budget Cloud Computing / Software-as-a-Service (SaaS) – Reduces the need for equipment purchases Vendor is responsible for equipment / infrastructure – Reduces up-front implementation costs Don’t need to include setup/config of hardware Don’t need to incur full platform install/setup Sometimes client setup is included with subscription fee – Reduces on-going support & maintenance costs Vendor is usually responsible for system operations, patches, backups, business continuity, software upgrades – Reduces cost of Replacement phase Don’t need to worry about hardware lifecycle risks Don’t need to incur costs of upgrade/replacement
  • 34.
    Adding Some Cloudto the Budget Impacts of Cloud / SaaS to the Budget / Cash Flow – Usually reduces overall cost of acquisition Implementation costs usually expensed – Usually follows subscription lifecycle model Many vendors allow monthly payments Many vendors offer discount for annual payment up-front Budget / Cash Flow Considerations – No “asset” created, so usually not eligible for financing – What is the impact to funding if cost is spread over time instead of up-front? – What is the impact to the financial statements if expensed? – Does a conversion to a cloud/SaaS solution reduce costs in other areas?
  • 35.
    IT Asset LifecyclePlanning Understanding the IT Asset Lifecycle helps – Identify the total cost of an IT Asset over its life – Identify points in time with option to change cost structure – Identify future impact of current decisions – Ensure the IT budget decisions balance short and long term value
  • 36.
    IT Asset LifecyclePlanning Create a multi-year IT Budget to analyze total cost – Note replacement / renewal points and costs Remember to include any associated services with changes – Remember to determine if there are disposal costs (particularly with equipment) – Balance risk and cost over time – Consider the use of an MSP for cost management and better IT staff utilization – Consider the impact of Cloud Computing to funding, cash flow, and financial statements
  • 37.
    Different Takes onthe IT Budget Now you have your IT budget created… what next? – After completing the entire budget, go back and look at the big picture that it shows – Use multiple versions of the IT budget to do “what if” scenarios Compare costs of physical vs. virtual servers Compare costs of on-premise vs. cloud solutions – Creating the budget the first time can be a big endeavor Maintaining it usually requires less effort
  • 38.
    Different Takes onthe IT Budget Let’s look at some ways to look at the budget from different perspectives – Asking Competitive Analysis Questions – Using the “reserve” method of IT Budgeting – Tying the IT Budget to Business Strategy
  • 39.
    Different Takes onthe IT Budget Asking Competitive Analysis Questions – Personnel Budget How does our personnel compensation compare to market? – Hardware Budget What is our competition doing—what hardware are they using? Have we considered virtualization or cloud-based alternatives to hardware? – Software Budget What is our competition doing—what software are they using? Have we considered cloud-based alternatives to software? – Services Budget Have we considered managed service providers? Have we considered outsourcing non-core IT functions? – Subscriptions Budget Have we looked a new subscription offerings/pricing models to validate that we are optimizing our subscriptions?
  • 40.
    Different Takes onthe IT Budget Using the “reserve method” of IT Budgeting – Two Primary Objectives: Reduce presence of peaks that may greatly impact cash flow Smooth out IT costs for easier planning / cost allocation – Take an IT Budget and reallocate the costs over a period of time Usually a 3-5 year rolling period Depends on the pattern of purchases – Similar to the “reserves” kept by a condo association Helps to ensure there is enough funding for required capital projects, with the option to defer Consider using the same principles as condo assn to determine if the “reserve” has a high enough balance Only useful for budget approvals, does not impact actual expenditures or financial statements
  • 41.
    Different Takes onthe IT Budget Tying the IT Budget to Business Strategy – What role does IT play in the organization’s mission? – Is that role reflected in the final Run-Grow-Transform analysis? – What changes may be necessary to better align with the business strategy and overall mission of the organization? Your IT Budget Entity A Entity B Entity C Org? Run 80% 60% 50% ?? Grow 20% 30% 30% ?? Transform 0% 10% 20% ??
  • 42.
    Call to Action– IT Budgeting Executive Directors & Program Managers should work with their IT Manager or Service Provider to develop an IT Budget that – Ensures alignment of IT with business strategy – Balances both short-term and long-term IT costs – Balances IT-related risks and costs – Helps with business planning for cash flow and financial statements Separates discretionary from non-discretionary IT costs – Enables informed decision-making for IT projects A good IT budget is both a planning and decision-making tool that can help to maximize the benefits of your IT investments and enable your organization to better achieve its mission
  • 43.
    Thank you foryour attention and participation! Any Questions? Donny C. Shimamoto, CPA.CITP donny@intraprisetechknowlogies.com (808) 735-8324 voice IntrapriseTechKnowlogies LLC Technologies and knowledge for synergizing your intraprise www.intraprisetechknowlogies.com | Hawaii | California