<p>IT leaders of SMEs must learn to manage the IT budget transparently in order to effectively support the growth of their business. Understanding who drives which IT costs within the enterprise helps manage the users' expectations. This cost transparency will also show that the business units actually drive and incur the costs rather than the IT department.</p>
<div><strong>Evolve the Organizational Transparency</strong></div>
<p>There are three IT maturity phases that all enterprises must go through. Progressing through these phases ensures that IT can produce optimal value for the rest of the enterprise:</p>
<p><strong>The hidden phase. </strong>This is where enterprises begin when the IT department is originally formed. All IT costs are hidden from the rest of the enterprise and there is no accountability to the business units. Each of the unit's requests is carried out without thought of the consequences because work needs to be done to get the enterprise off the ground. Even IT may not know what costs are incurred on behalf of which business unit. </p>
<p><strong>The near-transparent phase.</strong> Most enterprises fall into this phase. Overall, IT infrastructure and shared application costs are known but are not allocated to individual business units. However, there is a system to track the costs of each project that is carried out for a business unit. </p>
<p><strong>The value phase.</strong> Enterprises strive to be in this phase. All IT costs and the value IT provides are known to senior management – from the infrastructure to the strategic projects of each business unit. The business units understand that they, not IT, incur the costs of the projects.</p>
<p>Moving from stage one directly to three is not recommended as the enterprise's maturity must progress incrementally. The following recommendations will help an SME move forward through the different phases to improve its IT transparency.</p>
<div><strong>Recommendations</strong></div>
<p><strong>Segregate out the business unit costs from enterprise-wide spending.</strong> In moving to phase two, IT spending needs to be classified into two different components so that senior management clearly understands where funding must be spent, reallocated, or cut and who needs to drive the initiative. </p>
<p><strong>IT infrastructure and enterprise-wide spending.</strong> <br />
</p>
<p>This category is based on: </p>
<p>The hardware and software systems which lay the foundation to run the overall business. These systems include data warehousing, data networks, servers, routers, VoIP network, ERP framework, standard business productivity applications (e.g. email systems, office applications), and user operating systems. </p>
<p>The systems and people that IT uses to manage the overall enterprise. Systems include configuration management, performance monitoring, and security. Staff costs not only include wages and salaries but training and professional development. Investment in personnel will improve stability and ensure that the IT department will have the resources to develop and progress with the current rapid pace of technological change. </p>
<p>These components are best managed by IT so that IT can focus on standardization and consolidation in order to minimize its costs. As well, enterprise-wide spending needs to be promoted by corporate executives since it can only be supported by a clear sponsor within the organization – the senior management team. This spending should be established in the corporate budget or in a specific IT support budget.</p>
<p><strong>Business-unit software spending.</strong> The systems in these units usually lay on top of the enterprise-wide infrastructure and are developed for specific business purposes. They include business intelligence applications developed for reporting, sales or client management software, and financial accounting software. Because these applications are tailored to specific groups or departments, they are likely not useful to be deployed as enterprise-wide initiatives. As well, these initiatives need to be driven by the units themselves.</p>
<p><strong>Organize each business unit's spending.</strong>To prepare a move to phase three, once IT costs are conceptually separated, divide each business unit's budget into two separate components: </p>
<p><strong>Operational maintenance. </strong>This section of the budget needs to be separated out so that money can be committed to keeping the enterprise's IT up and running across all of the business units. Although this component mainly focuses on labor, it is a significant cost to the business unit and is rarely made apparent. </p>
<p>Upgrades to software systems are not considered here because the business can usually keep running if the improvements are not pursued. However, leased software components (which are operationally expensed) at the end of their lifecycle need to be refreshed and a business case will be needed to purchase new ones.</p>
<p><strong>Project Innovations.</strong> These are initiatives that are proposed to support the business strategy of the enterprise, and not considered part of the ongoing costs of running IT. These innovations are divided further into two types: </p>
<p><strong>Infrastructural improvements.</strong> These are improvements to the enterprise's overall IT infrastructure. These requests need to be solicited and funded by IT and the corporate executive rather than the different business units. Control and management of these initiatives can only be supported by a single voice, not through the competing business units. </p>
<p><strong>Business unit project initiatives.</strong> These are requests, of any size, made by the business units to help drive improvements within their section of the enterprise. Initiatives may include both infrastructural and information system improvements. This is where prioritization is the most politically challenging and requires an accurate measurement of return to the overall enterprise.</p>
<p>Breaking down the costs into these groups illustrates what can be cut or delayed in the budget (the innovations), and what is required to keep the enterprise running (the maintenance). Also, if the enterprise uses chargeback rates, it can differentiate the chargeback rates based on what users are purchasing. Specifically, IT would want to create a consistent enterprise infrastructural rate, whereas IT project development costs would be established based on the actual labor, software, and hardware costs associated with the project.</p>
<p><strong>Include maintenance costs in project development.</strong> Often, when a project is approved for funding the development costs are estimated and approved but maintenance is not considered. The expected lifecycle costs need to be identified and the impact on future IT budgets recognized. IT's incremental budget burden increases with every project implementation in the enterprise. IT leaders need to be aware of this when developing a budget and should ensure each project includes a long-term cost analysis. </p>
<p><strong>Present the budget to executives in an activity-based format.</strong> Once the budget is developed in a clear and organized fashion (in phase two), and the enterprise accepts the assignment of IT costs to business activities, the enterprise can move to phase three. The process of Activity-Based Costing (ABC) can be used to identify the costs for IT support of individual business or organizational units. </p>
<div><strong>Bottom Line</strong></div>
<p>Providing IT transparency within an enterprise will better enable project prioritization and investment. Having the business unit peers know where IT funds are allocated will also better manage their expectations.</p>
