Briefly about the analysis of IT budget
Another week, another exciting step toward fully understanding how an IT organization operates. In this blog, we have previously reviewed the basics of IT operations assessment and discussed how this methodology can support the creation of a comprehensive IT strategy (LINK). These discussions were suitable for providing a high-level overview, but they did not offer much guidance for diving into the details. I aim to fill this gap over the next few minutes by giving a deeper insight into one of the specific areas of the assessmentPress enter or click to view image in full size
I will discuss the framework of IT cost analysis through the following questions:
- When and why is it worth analyzing IT costs?
- What grouping criteria can be considered, and what does each reveal?
- What conclusions can be drawn from the numbers?
When and why is it worth analyzing the IT budget?
Of the questions posed in the subtitle, it’s best to start with the simpler one: When is it worth analyzing the IT budget? The short answer: During every strategy development and IT assessment exercise. This topic is a confident fixture in the table of contents of any related deliverable — it is always worth dedicating time and resources to it.
Why is it worth embarking on this type of analysis?
IT costs, on their own, provide a concise snapshot of how the IT organization operates — including both the obvious insights and those we are less willing or able to talk about. Costs are imprints of the entire operation; they are just as suitable for uncovering major shortcomings as they are for identifying opportunities. Another major advantage is that numbers are objective and free from judgment — something I consider particularly important, as I have already emphasized in an earlier article about benchmarks (LINK).
Main categories for budget classification
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IT expenditures can be grouped in many different ways to support understanding or tracking. The most common classification methods are the following:
- By type of expenditure — a classification commonly used in financial and accounting planning, which helps distinguish between immediate expenses and those that are written off from corporate profits over the long term. In the breakdown I present, personnel costs are separated from operational costs — the purpose of this is generally to provide insight into the functioning of human resources as well. This is the classification that appears in every assessment.
Typical subcategories:
OPEX
— Licences
— Hardware
— Software
— Physical storage (operations, energy cost)
— Network
— Outsorced activities
CAPEX
— License procurement
— Hardware procurement
— Software procurement (On-Premise, SaaS)
— Physical storage (construction, procurement)
— Network
— Outsourcing
— Project cost — vendor
— Internal project cost
PEREX
— Base salary
— Performance bonus
— Other bonus - By frequency of expenditure — this classification helps determine whether a cost is a recurring expense necessary for daily operations or a one-time expenditure incurred within the framework of a project. It is typically important for planning, understanding strategic initiatives, and organizing work.
- By goal of expenditure — this classification shows how costs are allocated across different directions. From a strategic perspective, it generally indicates how committed an IT organization is to continuous development and transformation, versus focusing solely on maintaining current operations. In many cases, ensuring regulatory compliance represents a significant cost item, which is why it is often listed as a separate category.
Analysis aspects — What the numbers reveal?
As I mentioned earlier, the IT budget is a numerical snapshot of how the IT organization operates. Consequently, it is important during analysis to understand the organizational context and interpret IT costs within that context. However, since this article aims to discuss IT expenditures in general rather than within the specific context of a single IT organization, I have compiled a few questions that I personally go through at least once in every assessment.
- What are the largest costs? Are there any expenditures that stand out at first glance?
In an assessment, once the expenditure report is received, the first step worth taking is to sort the rows in descending order. Simple yet powerful — we usually have a sense of the largest costs even before delving into the details. If we encounter information that contradicts this expectation, we immediately have our first question to pose to the assessed party. - Which categories stand out the most, and where do I see deviations compared to industry benchmarks?
One of the most reliable practices for gaining a clearer understanding of the numbers is to compare them against industry averages — in this case, the main point of interest is where we observe deviations from the standards. - What trends can be observed in IT costs over the past three years?
A single number alone doesn’t tell the whole story — whether certain expenses are high or low in isolation provides little informational value. However, by examining deviations compared to previous years’ data, we can uncover patterns and trends that offer a more detailed picture of the IT organization’s directions. This approach is also useful if we want to estimate next year’s expenditures. - Do the expenditures align with other documentation and any information shared during stakeholder interviews?
This is an extremely important question. In any case, it can happen that the information provided by the professional team or even management is incomplete, or that the documentation provided is outdated. It is always worth comparing the numbers with the textual information — as with the other points mentioned, the most interesting insights often arise from discrepancies.
The devil is always in the details
At the beginning of this piece, I tempted the esteemed reader with the promise of offering a deeper insight into the art of IT budget analysis. I hope I have succeeded in doing so; however, it must be noted that this activity always requires a unique and meticulous level of attention. It is often the case that the true significance of a particular cost item becomes clear only after several iterations — and equally often, that an early, seemingly groundbreaking discovery turns out to have a simple, even trivial explanation.
Therefore, to anyone embarking on this fascinating task, I offer the following advice: question every line, every item — the numbers don’t lie!
Would you like to gain deeper insights into your IT expenditures and draw conclusions that can contribute to the growth of your organization? Our consulting team can support you in both assessment and strategy development tasks. Feel free to reach out with your questions to the author as well as other members of the GRBC team.
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