Setting an IT Budget: What to Consider

In many associations, fall is budget season.  It’s that time when we review the ongoing expenses and plan for projects that may not even begin until next year. Technology is of course one of those expenses.  What should we be considering in an IT budget?

Technology Department Operating Budget

The operating budget includes planned expenditures for existing contracts and ongoing work.  Your best planning tool may be to review your current year’s expenses.  Consider all of your vendors and all of your existing contracts. 

These IT budget items may include:

• Internet connection for the association headquarters
• Data center or hosting contracts
• IT support and helpdesk agreements
• Software support agreements
• Enterprise software licenses
• Specialized software subscriptions

Indirect technology line items may include:

• Professional development training
• Travel, meals, etc.

Operating budgets are organized by department and then by natural groupings for the type of expense.  Sometimes they are also categorized by project code to review expenses by the program area such as “Spring Conference” and “Fall Conference.”  We have seen examples of IT department budgets with all expenses lumped together under a general heading such as “computer maintenance.”  The best practice is to separate expenses into natural groupings so you compare changes year over year; lumping all IT expenses in a single line item is an oversimplification.  A better practice is to maintain several line items for the major expenses as outlined above so that you may track them efficiently multi-year.

Capital Budget

Most associations prepare a special IT budget, commonly called a “capital budget,” to include items that where the cost may be depreciated over several years.  This IT budget is usually submitted to the finance committee and eventually to the board of directors alongside the annual operating budget.  It typically includes assets such as furniture and computer hardware.  In some cases, it may also include software license costs and project development costs.  In all cases, the expense must meet a minimum value which is typically outlined in the associations’ finance policy.

New Projects and Purchases

Things get tricky when planning for new software implementations.  If the system selected is a SAAS solution (Software as a Service), then the expense for the software must be accounted for in the operating IT budget.  However, upfront software license costs and development expenses may be capitalized.  Training and data conversion costs associated with a software implementation project cannot be capitalized. 

In my experience, the annual purchase of laptops are included in the capital IT budget and depreciated on a three year schedule.  Some organizations stretch the useful life of laptops 4 or 5 years.  Also included are any servers, firewalls, switches and other peripherals maintained in the association headquarters.  These are typically depreciated over a 5 year schedule. 

So, instead of accounting for these items in the operating budget, review them with your CFO or controller to decide where to account for them . Then your accountant will typically combine the first year of depreciation for the proposed projects, along with remaining expenses from previous year’s projects, to include in the operating budget as depreciation.  Some organizations account for all of the association’s depreciation in another department’s budget.

Centralized vs Decentralized Budgeting

Another variable to consider as you begin your annual planning is whether to centralize or decentralize all IT expenses or to allocate them to the departments.  There are pros and cons to consider.  Centralized expenses allow IT staff to better plan for replacement of equipment on a predictable schedule that aligns with staffing resources.  It allows for visibility into the software licenses and SaaS subscriptions to avoid duplication of systems.  Decentralized IT budgeting makes more sense in organizations with strong program-based budgeting so you can allocate the expense with the program.  It also promotes a sense of ownership for IT systems at a functional level.

At the end of the day, all IT expenses are the association’s expenses. A hybrid between centralized and decentralized is quite common.  Most often, we see hardware and enterprise software systems budgeted in the IT department operating budget and software that is used exclusively by a single department included in that department’s budget.  In this scenario, it is important that staff anticipate IT expenses for all and understand where they are included.  It is also important to clarify expectations for IT staff responsibility when your IT budget resources are not directly managed by IT staff.   

Putting the IT budget all together

At most associations, staff prepares the budget months ahead of time.  Sometimes staff go through several rounds of planning to prepare a draft budget that is then shared with a finance committee of volunteer leaders and eventually to the board of directors for approval.

Involve IT leadership in technology budget discussions, even if you have a decentralized budget. Their insight is invaluable.  The IT leadership should be prepared to explain the IT budget to a non-technical audience without the jargon.  Focus explanations on how the new software system was selected with input from stakeholders, how it will improve staff efficiency or how it will deliver the valued benefit to the membership.  These presentations are a time for IT leaders to demonstrate their business skills, not their technical ones. 

In these uncertain times, it is challenging to predict the future. However, if you think about it, that is the challenge during any IT budget-building cycle.  Understanding where your current technology dollars are going now and how they are being managed, tracked, and distributed helps alleviate some of the unpredictability and make the best use of your upcoming technology funds.