See also: Is the CFO the new CIO?
CIOs are pretty good at budget management as it plays to their strong suit of logic and analysis.
However, every organisation has its own quirks when it comes to accounting and you need to familiarise yourself thoroughly with their practices to avoid nasty surprises.
“I’ve seen the situation where someone has had to hold onto the coat tails of the FD and the CIO,” says Campbell McLundie of accountants Scott-Moncrieff.
The reason was an IT project that was delivered within budget but ahead of schedule, so cash wasn’t allocated to it.
Instead of plaudits, the CIO got a thorough dressing down from the FD.
To avoid similar budgeting gaffes, check these 10 tips from the CIO panel of experts: Ibukun Adebayo, CIO of Turning Point; Campbell McLundie, consulting partner at Scott-Moncrieff; and Sheila Bryant, CFO and company secretary Leading Resolutions:
1. Make wise purchases
Sound budget management is not unlike good housekeeping.
You need to review your purchases and assets regularly to see that you get value for money and do not duplicate and waste money.
Spotting what will be important for the business and prioritising these purchases is important.
If consumers or clients are buying your wares over the internet, for example, equipping staff with mobile technology may be imperative in order to cope with this new business model.
2. Watch the salary budget
Salary is typically the biggest item on a CIO’s budget, accounting for 50 to 60 per cent of the total pot.
Canny recruitment can yield huge cost savings.
Three years ago, the social care charity Turning Point decided to grow its own staff in house, rather than recruiting experienced staff when the need arose.
Today two of the original crop have remained and have been promoted, and this highly motivated talent has been acquired much more cheaply than going to market.
3. Measure ROI
Nothing’s cheap if it doesn’t offer the business long-term benefit, but measuring return on investment is something most businesses are bad at.
Making a clear case for all investments, rather than spending your pot as you see fit, clearly builds a confident and transparent relationship with the board.
Introducing videoconferencing based on the premise that by the end of 2013 you could cut travel costs by 30 per cent, for instance, offers clear, measured value.
4. Who holds the budget?
Some unexpected costs can come at you out of left field because IT is so often rolled out on a per-project basis and the costs allocated on a piecemeal fashion.
You may come in for a nasty surprise and find costs have been lumped onto your bill simply because a project has a strong IT component.
The sort of thing that may get palmed off on IT, for instance, is a training bill when a new system is installed.
The risk is greatest when the project’s label includes the word ‘change’: even though a project benefits the whole organisation, IT often finds itself picking up the tab.
5. Manage stakeholders
This way you can not only circumvent nasty surprises, but also check on how the business is planning to deliver the benefits.
Decent ROI on IT — that’s one that at least matches the business plan — is essential in order to secure budget in the future.
But it’s a tough one because ROI lies outside the direct control of the CIO, and stories abound of divisions failing to use new IT systems efficiently because of fears it could diminish a fiefdom or cut headcount.
Make sure you invite the owner of the business to project meetings, agree objectives on ROI that are accountable and known at the board, and always follow up.
6. Try central charging models
The old-fashioned way of budgeting is for the IT department to be a centralised cost base and to pick up all IT-related charges.
It’s not a particularly efficient approach because there’s no incentive for the business to use IT in a smart way, but at least costs are transparent.
A step forward is to divvy up the IT costs between the number of user units — a bit like splitting the bill at a meal.
Of course this leads to instances of unfairness, such as when one person eats chateaubriand and her neighbour makes do with bread and soup. But it does at least introduce the notion of chargeback and seeing other teams as internal customers.
7. Consider the ABC method
Forward-thinking organisations lean towards a more precise way of allocating charges to internal customers called activity-based costing — ABC.
This entails a lot of legwork to examine the outcomes of the business and the IT activities involved in creating them. It’s incumbent upon the CIO to really understand the drivers of the IT costs and to measure and log these activities.
This has the advantage of pushing ownership out to the business, but the downside is that if costs are difficult to understand or seem unfair on any department, users will not buy in and will start to shop for their IT elsewhere.
8. Know Capex from Opex
Capital expenditure – as opposed to operating expenditure — can be a source of consternation to the CIO, particularly if he is a newcomer.
It is standard accounting practice to spread purchase costs over the useful economic life of an asset. So instead of taking the £10m hit for a new SAP system immediately, it may be charged at £2m a year over a five-year period.
The problem with Capex is that half of the CIO’s budget may already be accounted for by his predecessor’s spending.
Operating expenditure accounts for the money as it is spent.
Effectively it gives the CIO a clean sheet each year but it also makes expenditure and ROI much more transparent.
9. Avoid Capex anguish
CIOs should familiarise themselves with the company’s Capex policy straight way to avoid blushes in the boardroom.
You may agree to a 20 per cent cut in your IT budget, for example, only to discover that you have no cash left because the remainder of your budget has already been spent writing off earlier IT investments.
Have a chat with the FD to find out what your spending money for the year is.
If you find yourself with a heavy Capex burden left by your predecessor, it might be worth holding amnesty talks with the CEO and FD, especially if the money is writing off systems that have already been replaced.
10. Undersell and over-resource
A common mistake is to underestimate the costs and oversell the benefit when making a business case for IT.
If you do the former, then you risk blowing the budget.
A smart way to do this is to built in plenty of contingency on the resource side and be cautious when estimating the benefits.
Make sure they are significant but be conservative.
This way, when you over-deliver consistently the board will be delighted.
Crucially, it makes getting funds for the next project easier.