So what do you do when you find yourself suddenly responsible for an IT budget and IT spending? If you’re lucky there are people around you who can take on some of the responsibility and orient you. But there might not be. Sometimes it’s up to you to figure out how to keep the bills paid and technology running without much guidance. This is what I’ve learned over the years from being in this position. Note: not all of this will apply to every organization. My experience is in a public institution with a roughly fixed budget each year (and doesn’t utilize something like zero-based budgeting).

First Steps

Look for Documentation

Did your predecessor leave you with any spreadsheets or lists of purchases from the last couple years? If you’re lucky, there may even be a document that anticipates future expenses. If you have anything like this, then that is your starting point. If you didn’t inherit this kind of documentation, then start learning the purchasing system quickly. Figuring out where your budget went last year and assume (until you have evidence otherwise) that this will be a reasonable baseline for this year.

Figure out What’s Normal

During your first year, you’re largely just going to want to keep track of expenses coming in and make sure you’re able to pay for them. You’ll want to use this data to forecast what kinds of expenses you’re going to see in the upcoming years. I think of expenses as falling into three categories.

  1. One time These are items that you pay for upfront and that’s it. A typical example in IT would be a laptop. You pay the full price for the laptop and then you own it and can use for as long as you like, however you like. One-time expenses almost always have associated costs that are not one time. For example, your laptop generates recurring costs for electricity, it requires employee labor costs to maintain it, or you may pay an annual fee for the vendor or a third party to take care of any required repairs on maintenance. In addition, when the item reaches end of life there will likely be a need and a cost to replace it. Physical equipment is probably the most common one-time cost, though it can also be leased. Software is less and less frequently available through a one-time purchase, though examples still exist. For example, Apple’s Final Cut Pro is still licensed as a one-time purchase.
  2. Subscription This category, for better or worse, makes up an increasing percentage of IT expenses. These are costs that recur on a fixed interval and may be subject to periodic increases. For example, you might have a five year contract for licensing and support on an enterprise software, for which you pay $200,000 in the first year with a 4% cost increase each of the remaining four years. Or maybe you’ve negotiated a contract that is $200,000 a year for five year. Anything that you have to keep paying to use and has a known cost is a subscription. Much software is now licensed this way and most support agreements for software or hardware function this way.
  3. Usage Finally, the most recent category of IT spend comes from usage-based fees. This is the primary billing model of cloud providers like Microsoft Azure and Amazon Web Services. Your usage may be billed in terms of gigabytes of storages, hours of running a VM, SMS messages sent, or many other metrics. Although there are many tools for estimating your monthly or yearly costs, your actual costs are never determined until you’ve used the service.

From the standpoint of a new IT budget manager, anything that is billed in terms of usage is the most dangerous. We’ve all heard stories of developers accidentally accruing $20k+ a day in AWS expenses. You will want to make sure that anything that is billed by usage has a roughly consist cost and there isn’t a trend of escalating costs or unpredictable spikes. Predictability is critical to budgeting. Subscription costs are the most predictable, because you usually know exactly how much you’ll be paying and exactly what you’ll be getting. Any one-time or usage-based expenses require more careful planning.

Plan for the Next Year

Once you’re confident that you’ll survive the current fiscal year, start planning for the next one. Many software subscriptions have yearly escalation costs that are 7% or higher. Is the cost of the yearly escalations going to quickly eat through any surplus you have? Has there been any equipment purchased that includes maintenance or a subscription for a certain number of years? Do you have funds available to continue that maintenance/subscription? Do you have expensive equipment that needs to be replaced soon? These are just a few of the scenarios that you should look out for.

Also look beyond your own department. Are other departments purchasing software or hardware that your team is involved with? If so, you want to at least be aware of all of these expenses and know how much they are, so you can guide future technology planning in those areas. Don’t immediately try to discontinue any software or services in another department or you own. Take some time to assess and figure out why the technology came about in the first place. Then you can start proposing future dates for discontinuing anything that is poorly utilized. Once you’ve accounted for all subscriptions and estimated usage costs in the upcoming year, look for room for one-time purchases and for smaller subscription or usage-based products.

Plan Further Ahead

Once you’re in good shape for the current year and next year, take a look at your contracts and start projecting expenses for the upcoming years. How many years do you need to project out? To answer that question, figure out the durations of your contracts. If you have contracts that extend out five years, then develop budget projections for the next five years. When creating these projections, make a note of which costs are estimates and which ones are fixed or known costs. In general, it will make your life easier if you establish multi-year agreements for things you know you’ll need, which will result in a known budget and hopefully reduce cost escalations. Finally, as you’re looking into the future, see if you have room in your budget to take on new projects or alternatively whether you’ll be in a position where you either need to make cuts or request a budget augmentation from your organization.

That’s it. There aren’t any big secrets here. If you’re thorough, organized, and start planning you’ll be in a good position to effectively manage your IT budget.