Budgeting is an extensive part of an organizations planning. Budgets help organizations to determine where they must invest money to help them grow and where they can scale back to save on costs and expenses.

Budgeting is a long and time intense process. The budgeting process in some corporations tends to be not very well thought out process resulting in the budget not being effective or efficient, expensive and sometimes does align with the business objectives (McKeen and Smith).

The current practice of budgeting in organizations is based on a performance and is followed to point where there is no flexibility, which creates issues for IT departments that are exploring ways to be innovative.  The fiscal budget, which is determined by the CFO, has two categories, Capital Expenditure and Operating Expenditure (McKeen and Smith).  There seems to be no real standard when it comes to the capital expenditure for IT as some organizations tend include a variety of items to capitalize (e.g. project development, consulting fees) while others only capitalize purchases that are directly related to technology.

Functional IT budgets, which are used by the IT managers, have a different set of categories.

 Operating Costs are cost associated with keeping the IT department operational from maintenance to the support required to run the technology.  

Strategic Investment is comprised of spending on new innovative technology that will help business objectives and strategies.

The allocation of cost for IT budget either can be a corporate expense or a business unit expense. Most organizations tend to go with the latter. Going with latter creates a environment of competiveness and unsupportiveness within the organization resulting in no corporate projects. This leads to IT departments having to maintain and support several applications that do the same type of function (Mckeen and Smith).

Creating a effective IT budget is important for tracking IT expenditures and as IT spending has been increasing it can help CIO’s determine where they can scale back and save on costs. Budgets also help organizational IT strategies and goals and provide a time frame achieving them.

The process for IT budgeting is based on three activities (Mckeen and Smith).

1. Corporate Fiscal Policy is something most IT mangers are not aware of and are established without having considered IT spending but it seems that more corporations are aligning their corporate fiscal policy with the return on IT spending and how it is helping the organization.
2. Strategic Goals are usually done between business units and IT as the budgeting costs are allocated to the business units. This leaves little room for enterprise level projects that would be better overall for the organization as this would cut costs and make maintenance of applications easier and provide more money for innovative spending.
3. IT Spending Levels are determined by internal and external factors. The spending by organizations on IT is mostly influenced by external factors. Organizations look at competitors and place benchmark on what they are spending. Internal factors consist of what was spent on IT in previous years, where is the organization is terms of growth.

Budgeting for IT is not a perfect process but IT departments and their organizations seem to be examining new ways to make budgeting more effective and efficient (McKeen and Smith).

The readings from (McKeen and Smith) provide five practices that have become useful in helping with IT budgets.

1. IT finance specialist
2. Budgeting tools and Methodologies
3. Separate Operations from Innovation
4. Enterprise funding models
5. Rolling budget cycles

If organizations start adopting these five practices I believe that budgeting for IT is headed in direction that will be more efficient and effective. I would place more emphasis on Enterprise funding models, as this would eliminate costs of purchasing redundant applications for each business unit. Practicing this type of model will give an overview of what the organization needs and will better align the organizations strategies with IT. Having a finance specialist will help with budgets as most IT mangers are not accounting savvy and providing tools that can help create better budgeting processes are both good practices to follow.

Budgeting for IT is more important now than ever as more organizations are increasing their IT spending. It is important to have good processes and procedures in place to assure that spending that IT performs is benefiting the strategies of the organizations and is providing a positive return on investment. Budgeting for IT will never be perfect but as more attention is given to budgeting for IT the more easier it will be for IT managers justify their spending.