Given the murky economic outlook, budgetary efficiency is an increasingly important part of every IT leader's job. In fact, according to "The State of Enterprise IT Budgets: 2008," a March report from Gartner Inc., 75% of enterprises say improving the efficiency of IT is a critical or high priority.
Think you have the budget covered? So did many others, who nonetheless found themselves explaining missteps that cost hundreds of thousands -- even millions -- of dollars.
Here are some of the things they learned not to do:
1. Always say yes. Acceding to constant demands can send the budget spiraling out of control, says Mike Gorsage, a partner and regional technology practice leader at Tatum LLC, an Atlanta-based executive services and consulting firm.
Gorsage cites the case of a hospital where the CIO worked under a directive to fulfill all requests. "The senior executives told IT if someone needs something, just get it done," he says.
As a result, planned projects accounted for about 10% of the $100 million budget, while unplanned work sucked down a staggering 30%. And just over 60% went to maintenance. Best-practices models indicate that 70% should be spent on maintenance, 25% on planned projects and only 5% on unanticipated demands, Gorsage says.
The tipping point came when IT suffered a costly failure on a big project -- a failure that stemmed from all those helter-skelter projects, Gorsage says.
"Finally, the CIO and senior management figured they had to put in strong governance, but it took six or seven months of pain to get that done," Gorsage says. The new rigorous approval and planning process brought the hospital's IT spending closer to that 75/25/5 split.
2. Plan to stop spending once projects go live. Underestimating the work needed after a project goes live is the No. 1 problem with IT budgets, says Ken Gabriel, a partner and global lead for the ERP advisory unit at KPMG International, a global network of professional services firms.
It can leave companies with budget overruns of up to 20%, he says -- hardly pocket change when projects cost millions of dollars.
Gabriel worked with one utility company that realized just two weeks before the completion of its new $200 million SAP implementation that it hadn't budgeted for postdelivery needs such as working out bugs and training staffers.
"They had planned to get rid of consultants that day [when it went live], and they realized that it wasn't going to be possible," Gabriel says.
IT leaders had to ask the board for $2 million to bring back about 15 consultants and cover the costs of the 20 internal IT folks needed for that postproject work.
3. Plan and spend locally. Local control guarantees that local needs are met, but it adds significant costs to the bottom line. Just ask Randy Headrick, director of communications and information and CIO for the Air National Guard (ANG) at Andrews Air Force Base in Maryland.
Headrick says the ANG didn't have a central budget or procurement process for its IT network, so buying decisions were left up to individuals at each of its 88 bases and 250 smaller units.
"We were heading toward a network that wasn't congruent," Headrick says.
It was also becoming increasingly costly.
Since he centralized budgeting and procurement in 2007, Headrick has been getting better volume prices He also has a more secure infrastructure that's easier and cheaper to maintain because components are standardized. The ANG is spending about 30% less for the same capacity than it did under the distributed process.
"We have a stronger, more secure, more robust, more current network, and it's not costing us as much money," Headrick says.
4. Don't plan for business intelligence or reporting. "People underbudget BI and reporting needs. They focus on the processes, and they think they can get back to the reporting," says John Larkin, a former CIO who's now a partner at TPP Global Services LLC, a consultancy in Westwood, Mass.
He once worked with a company undergoing a $3 million ERP implementation that also called for operational control-type reporting and dashboards for operational monitoring.
Project leaders assumed that the bulk of that work could be done by internal resources, but they failed to consider that they were tied up on implementing the new system. As a result, the company had to spend $600,000 on consultants to handle the BI and reporting requirements, Larkin says.
"It's hard to get a major project like ERP justified, so there's a bias toward assuming that the internal resources can do more than they can," he warns.
5. Bank on big savings from overseas outsourcing. Many in IT have yet to learn that there's a limit to the savings offshore outsourcing can really deliver, so they set unrealistic expectations, relying on inflated figures or best-case scenarios that are too good to be true.
Larkin says he worked with one midsize company that had based its IT budget on expectations of a whopping 60% savings from sending application and maintenance work to India.
When the actual savings turned out to be 20% to 30%, the IT execs were left scrambling to squeeze money from other places to cover budget overruns.
"Clearly, getting an experienced adviser, getting benchmarks and talking to others could help get more accurate numbers," Larkin says.
6. Don't consult; assume. Even if your budget smarts are top-notch, other company leaders can cause you trouble.
When a handful of executives devised a plan to expand Denver-based Frontier Airlines Inc. by adding a new regional airline, the group decided to keep its plans quiet, says Bob Rapp, who was the company's vice president and CIO in 2006.
So the group didn't consult with Rapp, who reported to the chief financial officer, until after the board had approved the project and its financing. That's when Rapp saw that the technology assumptions were way off.
The plan didn't include an industry-specific system operations control center, a Federal Aviation Administration requirement for the new division. The cost: About $1 million to build the facility and then another $1 million per year to operate it, according to Rapp.
Thereafter, he began reporting directly to the CEO to help prevent similar oversights.
This story, "A Fool and His Money: Six Stupid Budget Tricks" was originally published by Computerworld.