A Strategic Approach to IT Budgeting

A Strategic Approach to IT Budgeting November 4, 2013 Maryland Association of CPAs Technology Conference Donny C. Shimamoto, CPA.CITP, CGMA v1.2-cpa Speaker Biography Donny C. Shimamoto, CPA/CITP, CGMA Donny Shimamoto, CPA.CITP, CGMA, is the founder and managing director of IntrapriseTechKnowlogies LLC, a CPA consultancy focused on organizational development and advisory services for the middle market and nonprofits. Donny is a recognized national expert in IT management and international author/speaker on business intelligence initiatives. Donny helps many nonprofits by bridging accounting and IT to strengthen organizational governance and risk management, improve business processes through technology, and increase the effectiveness of decision through business intelligence and evidence-based management. Donny was a member of the AICPA Governing Council and is the chairman of its Information Management & Technology Assurance Executive Committee. Donny was recognized as one of 2013 s Top 100 Most Influential People in Accounting by Accounting Today, Top Thought Leaders in Public Accounting by CPA Practice Advisor in 2012 and 2013, received the 2009-2010 President s Award from the Hawaii Society of CPAs, was named to CPA Technology Advisor s 40 Under 40 list in 2007 & 2009, and was also a Hawaii Top High Tech Leader in 2004. 1

Audience Polls Demographics Organization Type/Size Small Organization Medium Organization Large Organization Government CPA Firm Role in Organization Lead Executive Executive Leadership Dept Director/Manager Dept Staff Auditor or Consultant Part of Organization Accounting/Finance Information Technology Line of Business, Programs/Departments Consultant or Auditor Choose one from each set of options that best matches how you view your organization and your role at work. A Systematic Approach to IT Budgeting Anatomy of an IT Budget Types of Expenditures Categories of Expenditures Classes of Expenditures IT Asset Lifecycle Planning Tying IT Risk to Hardware Refresh Cycles Software Licensing Explained Understanding Managed Service Providers Adding some Cloud into the Budget Comparing Cloud vs. On-Premise Solutions via the Budget Summary 2

A Systematic Approach to IT Budgeting Challenges with IT Budgeting Personnel knowledge challenges Accounting doesn t understand IT IT doesn t understand Accounting Many IT decisions have multi-year impacts, but many IT budgets focus on only one year at a time IT costs incurred at varying times and recur in multi-year patterns; single year focus can result higher long term cost Not just standard personnel and non-personnel costs May not be the same from year to year Unable to distinguish mandatory and discretionary IT costs Often all intermingled and inseparable Apples-to-apples comparison often difficult due to lack of consistency in vendor quoting and technical nuances Let s deconstruct the anatomy of an IT Budget to see how we can address the above challenges Anatomy of an IT Budget Types of Exp Types of Expenditures Personnel Salaries & Benefits employees and associated costs Non-Personnel Hardware equipment and other fixed assets, installation costs, maintenance contracts, warranties Software licenses and support contracts Subscriptions could be associated with hardware, software, training, cloud computing and managed service providers Services advisors, consultants, service providers, auditors, legal counsel Once you identify the Type of Expenditure then you ask the right questions to better understand the cost 3

Anatomy of an IT Budget Personnel Personnel Budget Questions Are there any anticipated changes to salaries? Are there any anticipated change to benefits/benefits eligibility? Are there any licenses/certifications to add/maintain/end? Do any of those have training associated with them? Do any of them have exam or license renewals? Are there any terminations / layoffs planned? Which positions and when? Are there any new hires anticipated? Is this a full-time or part-time position? What benefits would the person be eligible for? Is there any training that needs to be budgeted for? Competitive Analysis Question: How does our compensation package compare to market? Anatomy of an IT Budget Hardware Hardware Budget Questions What hardware is at end-of-life? How long will new hardware last? Are there any maintenance or support contracts needed? Are there any subscriptions associated with the hardware? Which costs have to be capitalized? Additional Hardware Questions Do we have enough computers for planned new hires? Are there any other dept plans that will require hardware? Are there any projects that may impact current hardware? Competitive Analysis Question: What is our competition doing what HW are they using? Have we considered virtualization or cloud-based alternatives to hardware/infrastructure? 4

Anatomy of an IT Budget Software Software Budget Questions Are there any software licenses that need to be renewed? What period is the software license valid for? Are there any subscriptions associated with the software? Are there any installation costs? Which costs have to be capitalized? Additional Software Questions Do we have enough software licenses for new hires? Are there any other dept plans that will require software? Are there any projects that may impact current software? Competitive Analysis Question: What is our competition doing what SW are they using? Have we considered cloud-based alternatives to software? Anatomy of an IT Budget Services Services Budget Questions Is the service level adequate for our coming needs? Are the services provided still needed? Are there additional services needed? Has our volume of services changed? Impact to price? Does the service have a required period associated with it? Additional Services Questions Are there any other dept plans that will require services? Are there any IT projects that may impact current services? Have services associated with projects been isolated from operational costs? Competitive Analysis Question: Have we considered outsourcing non-core IT functions? Have we considered managed service providers? 5

Anatomy of an IT Budget Subscriptions Subscriptions Budget Questions What is the level of usage of the subscription? Should we renew at a different subscription level? Does the subscription have a period required by contract? Are there any installation costs? Which costs have to be capitalized? Additional Subscriptions Questions Do we have enough subscriptions for planned new hires? Should we convert any software to subscriptions? Have all subscriptions associated with hardware and software been included in the budget? Competitive Analysis Question: Have we looked a new subscription offerings/pricing models to validate that we are optimizing our software and subscriptions cost? Anatomy of an IT Budget Types of Exp Types of Expenditures Personnel Salaries & Benefits employees and associated costs Non-Personnel Hardware equipment and other fixed assets, installation costs, maintenance contracts, warranties Software licenses and support contracts Subscriptions could be associated with hardware, software, training, cloud computing and managed service providers Services advisors, consultants, service providers, auditors, legal counsel Remember to focus on the coming year and also on future periods that may impact purchase decisions 6

Anatomy of an IT Budget Categories Categories of Expenditures Defined Capital expenditures that will need to be considered as part of the capital budget (usually needs to be capitalized) Hardware and large software license purchases usually here Significant repairs, parts replacements, upgrades Operating expenditures that are related to operations Subscriptions, maintenance, support for HW/SW usually here Project expenditures that are tied to a discreet effort May or may not need to be capitalized May be required or discretionary expenditures Consider allocating personnel costs among these categories to better understand how IT personnel resources are being deployed Anatomy of an IT Budget Categories Categories of Expenditures Considerations Capital expenditures that will need to be considered as part of the capital budget (usually needs to be capitalized) Has a greater cash flow impact, but may also be eligible for financing from vendors or banks Consider impact to the financial statements Operating expenditures that are related to operations Usually required expenditures related to day-to-day ops Usually somewhat of a fixed cost; focus usually to minimize Project expenditures that are tied to a discreet effort May have associated capital or operating expenditures Usually discretionary, but not executing may have impact too Timing may be adjusted for cash flow Proper categorization can help to analyze impact to cash flow and financial statements 7

Anatomy of an IT Budget Classes Classes of Expenditures (Adapted from Gartner) Run keep the organization running Most Operating expenditures fall here Project expenditures related to support and maintenance of the IT infrastructure also fall here Grow projects and initiatives that seek to improve organizational efficiencies and effectiveness Many Project expenditures fall here, particularly when they are related to business improvement activities Many Capital expenditures fall here Transform providing new capabilities, products, or services Also thought of as Research & Development Some Project and Capital expenditures fall here When trying to tweak the IT budget, Run usually should be kept, Grow and Transform should be prioritized Anatomy of an IT Budget Classes Classes of Expenditures Analyzing your budget IT Budget Entity C Entity B Entity A Your Org? Run 80% 60% 50%?? Grow 20% 30% 30%?? Transform 0% 10% 20%?? None of these spending patterns are wrong. They just represent different types of IT roles/investment. 8

Audience Poll Which entity are you most similar to? a) Entity A (Run = 50; Grow=30; Transform=20) b) Entity B (Run = 60; Grow=30; Transform=10) c) Entity C (Run=80; Grow=20; Transform=0) d) Other e) Not sure Remember None of these spending patterns are wrong. They just represent different types of IT roles/investment. IT Asset Lifecycle Planning What is an IT Asset Lifecycle? IT Assets follow a general life pattern From Acquisition ( birth ) To Disposal/Discontinuance ( death ) IT Assets have different timelines for their life cycles Hardware 3-5 years Software depends on license agreement Subscriptions usually monthly to annually, depends on agreement Services depends on contract Understanding the IT Asset Lifecycle helps to Identify the total cost of an IT Asset over its life Identify points in time with option to change cost structure Identify future impact of current decisions Ensure the IT decisions balance short & long term value 9

IT Asset Lifecycle Planning Hardware Acquisition costs usually capitalized Costs in other phases usually expensed Option to Repurpose usually forgotten/skipped Acquire Maintain Replace Dispose Repurpose Tying IT Risk to Hardware Refresh Cycles How often an organizations refreshes its hardware depends on its level of risk tolerance Different IT Assets have varying risk of failure as they age Consider the criticality of the IT Asset to operations Consider the ease of replacement in the event of failure Risk of Failure Laptop Desktop Virtual Terminal Servers Firewall Low <2 yrs <3 yrs <6 yrs <3 yrs <4 yrs Moderate 2-3 yrs 3-5 yrs 6-8 yrs 3-4 yrs 4-6 yrs High 4+ yrs 5+ yrs 8+ yrs 4+ yrs 6+ yrs Ease of Replacement Moderate Moderate Easy Hard Moderate 10

Tying IT Risk to Hardware Refresh Cycles Consider repurposing servers and workstations into a lower risk role (e.g. login/dns/file/print server, etc.) when they reach a Moderate risk of failure Acquire Maintain Replace Dispose Repurpose IT Asset Lifecycle Planning Software Acquire/Replace costs may be capitalized Maintain/Renew/Dispose costs usually expensed Upgrade costs might be capitalized Replace/Renew/Upgrade is a key decision point usually tied to the software license agreement Acquire Maintain Replace / Renew / Upgrade Dispose 11

Software Licensing Explained Types of License Programs Outright Purchase retail software license one time cost Defined Period One time cost; Only valid for a defined period Defined Period + Subscription Usually large one time cost, plus subscription annually usually 15-20% or original purchase price Only valid for a defined period, subscription = renewal Subscription May have one-time activation cost Usually has regularly recurring payments (annually/monthly) Usually has a defined period with renewal option Upgrades usually included / available Software Licensing Explained Types of License Programs Impact to Budget Outright Purchase One time expenditure in year of acquisition Defined Period One time expenditure in year of acquisition Potential renewal cost at end of period Defined Period + Subscription One time expenditure in year of acquisition Recurring subscription cost in subsequent years Subscription May have one-time expenditure in year of acquisition Recurring subscription cost in subsequent years When analyzing a purchase decision be sure to look at the costs in out years / total cost 12

Software Licensing Explained Microsoft License Programs OEM = provided with purchased equipment Only valid for that equipment (can t be moved/transferred) Can t transfer to virtualized environment No previous version rights Retail = purchased from a store Can be moved/transferred between equipment Can transfer into virtualized environment No previous version rights Open License = purchased from a retailer Can be moved/transferred between equipment Can transfer into virtualized environment Rights to use previous versions with Software Assurance Has a license period, may be treated like a subscription Software Licensing Explained Microsoft Open License Open Business Two-year periods, pay upfront Software Assurance optional Open Value / Open Value Subscription Three-year periods (one-year allowed for subscription) Pay upfront or pay annually (subscription) Must include Software Assurance Can purchase Online Subscriptions, but must pay annually Microsoft Online Subscriptions Priced monthly, pay monthly Different plan levels with different costs Annual contracts, increases allowed at any time, decreases only at annual renewal point 13

IT Asset Lifecycle Planning Subscriptions All costs usually expensed Replace/Renew/Upgrade is a key decision point usually tied to the subscription agreement Increases usually allowed at any time Decreases usually only at Renew point Acquire Maintain Replace / Renew / Upgrade Discontinue IT Asset Lifecycle Planning Services Capitalize/expense depending on type of work Lifecycle depends on contract with service provider Managed Service Provider contracts often behave like Subscriptions; and may have software associated with it Acquire Maintain Replace / Renew Discontinue 14

Understanding Managed Service Providers Managed Services is the practice of transferring day-to-day related management responsibility as a strategic method for improved effective and efficient operations inclusive of Production Support & lifecycle build/maintenance activities. Source: Wikipedia, http://en.wikipedia.org/wiki/managed_services A Managed Services Provider (MSP), is typically an IT services provider, who manages and assumes responsibility for providing a defined set of services to their clients either proactively or as they (not the client) determine that the services are needed. Most MSPs bill an upfront setup or transition and an ongoing flat or near-fixed monthly fee, which benefits clients by providing them with predictable IT support costs Source: Wikipedia, http://en.wikipedia.org/wiki/managed_services Could bookkeeping be considered a managed service? Understanding Managed Service Providers Benefits of a Managed Service Provider (MSP) MSP usually specializes in the services provided MSP usually incorporates best practices into their service model Services automatically provided as needed within scope E.g., when there is a problem applying a system patch, MSP will automatically go in and fix it; without additional cost Considerations when using an MSP Usually requires that you conform to their model / software suite Works well for standardized environments When IT staff are employed by organization Usually shifts non-value-added tasks to MSP May not decrease staffing cost, but allows staff to focus on more value-added activities 15

Understanding Managed Service Providers Impact of an MSP to the IT Budget Usually increases predictability in service costs Usually setup cost, then recurring monthly payments Cost driven by number of supported devices May have software licenses included in cost May offer reduced cost of hourly services w/ higher level plan Higher level plans normally include more managed services Usually higher recurring cost But total cost can be less depending on level of incidences Total cost may be higher if there is variability in the environment Review the MSP contract to determine How much flexibility you have for increases/decreases Renewal points and plan levels (options/service levels) MSPs aren t right for everyone, requires a leap of faith Adding Some Cloud to the Budget Cloud Computing / Software-as-a-Service (SaaS) Reduces the need for equipment purchases Vendor is responsible for server equipment / infrastructure However, may require bandwidth/network equip upgrade Reduces up-front implementation costs Don t need to pay for setup/config of hardware Don t need to incur full platform install/setup Sometimes user setup is included with subscription fee Reduces on-going support & maintenance costs Vendor is usually responsible for system operations, patches, backups, business continuity, software upgrades Don t need to worry about hardware lifecycle risks Reduces cost of Replacement phase Don t need to incur costs of server upgrade/replacement Don t need to incur costs of software upgrade/install 16

Adding Some Cloud to the Budget Impacts of Cloud / SaaS to the Budget / Cash Flow Usually reduces overall cost of acquisition Implementation costs usually expensed Usually follows subscription lifecycle model Many vendors allow monthly payments Many vendors offer discount for annual payment up-front Budget / Cash Flow Considerations No asset created, so usually not eligible for financing What is the impact to funding eligibility if cost is spread over time instead of up-front? What is the impact to the financial statements (and related performance incentives) if expensed? Does a conversion to a cloud/saas solution reduce costs in other areas? IT Asset Lifecycle Planning Understanding the IT Asset Lifecycle helps to Identify the total cost of an IT Asset over its life Identify points in time with option to change cost structure Identify future impact of current decisions Ensure the IT budget decisions balance short and long term value Create a multi-year IT Budget to analyze total cost Note replacement / renewal points and costs Remember to include any associated services with changes Remember to determine if there are disposal costs Balance risk and cost over time Consider the use of an MSP for cost management and better IT staff utilization Consider the impact of Cloud Computing to funding, cash flow, and financial statements 17

Now you have your IT budget created After completing the entire budget, go back and look at the big picture that it shows Use multiple versions of the IT budget to do what if scenarios Compare costs of physical vs. virtual servers Compare costs of on-premise vs. cloud solutions Creating the budget the first time can be a big endeavor Maintaining it usually required less effort Call to Action IT Budgeting CEOs/MPs, CFOs/Controllers, and LoB/Dept Managers should work with their IT Manager or Service Provider to develop an IT Budget that Ensures alignment of IT with business strategy & mission Balances both short-term and long-term IT costs Balances IT-related risks, costs, and value Helps with organizational planning for cash flow, funding sources, and financial statements Separates discretionary from non-discretionary IT costs Enables informed decision-making for IT projects A good IT budget is both a planning and decision-making tool that can help to maximize the benefits of your IT investments and enable your organization to better achieve its mission 18

Thank you for your attention and participation! Any Questions? Donny C. Shimamoto, CPA/CITP, CGMA IntrapriseTechKnowlogies LLC email: donny808@cpa.com voice: (808) 735-8324 twitter: @donnyitk See also March 2012 Journal of Accountancy article: A Strategic Approach to IT Budgeting @ http://www.journalofaccountancy.com/issues/2012/mar/20114439.htm 19