The 5-Step IT Budgeting Process

Developing an IT budget that hits the mark paves the way for a year of strategic wins. But how can your IT budget-planning process set you up for success?

Most companies start annual IT budgeting by looking at last year’s budget and working from there. Although common, we’ve seen that’s not the best approach when our clients want to focus on their business goals. And it will be even less effective for 2023 planning, because the last few years have been anomalies. 

In 2020, budgets were thrown off by the pandemic, of course. And in 2021 and 2022, companies focused on shoring up digital transformations that had been implemented on the fly, returning to the office, and catching up with back-burner items, including paying off technical debt — all while continuing to invest in growth and initiatives to stay competitive. 

In 2023, it’s become clear that in a post-COVID-19 world, we need a new normal for IT budgeting, too. This is the perfect year to take a fresh look at your IT budgeting process, which starts sooner, requires a different mindset, and needs to be more flexible.

What’s different about IT budgeting for 2023?

There are enough differences that we wrote a guide about them, Making Sense of What’s Different for IT Budgeting in 2023. The top factors to consider include:

  • Cloud migration and the shift from CAPEX to OPEX
  • Inflation, supply chain volatility, and continuing adjustments due to the pandemic 
  • Massive cyber risk that needs to be mitigated
  • Infrastructure that needs to be modernized to leverage digital transformation 
  • IT staff shortages and higher wages 

Why does the 5-step process that we recommend work? 

For 24 years, Leapfrog has been helping clients develop successful IT budgets. We’ve built budgets during booms and recessions, periods of massive technological transformation, COVID-19 — every year for more than two decades. Our clients differ in size, industry, and growth objectives. Yet, after having participated in hundreds of IT budgeting processes and seeing how those budgets play out, there are clear best practices any organization can follow, yours included. 

Here’s the high-level framework that can help you hit the mark each year, regardless of current circumstances:

  1. Schedule and invite
  2. Prepare reports
  3. Deliberate collaboratively
  4. Price accurately
  5. Present to leadership

This process gives everyone enough time and enables your team to work together to focus on your business goals (instead of last year’s spending). It also enables your IT department or partner to weigh in early so they can provide input and ultimately design the most affordable solutions to integrate with your existing technology. 

Here’s a breakdown of what happens during each step:

Step 1: Schedule and invite

Let people know what’s expected and when. 

Start now if you haven’t already. 

Typically, we have recommended starting six months before the budget is due — but 2023 is not typical. Given inflation, supply chain challenges, and the other differences noted above, 1Q2022 would have been a good time to start your IT budgeting process. But right now is second best.

Include each person with budget authority.

IT budgeting is a team sport. In Leapfrog’s experience, the process works best when all department leads are included in planning and are able to advocate for what their teams need to meet the company’s strategic goals. Each department lead will want to schedule one or more IT budgeting sessions with their team to discuss everyone’s ideas and focus on goals.

Include your risk assessment steering committee.

Cybersecurity and other security management activities require funding — possibly more than you expect. Your risk assessment findings and proposed solutions are critical pieces of your IT budget.

Include your IT department.

Each person with budget authority and expects new technology needs should loop in IT as early as possible. Your IT team needs to be able to make time available for individual meetings.

Schedule your hands-on strategic alignment session.

Confirm the date. Everyone with budgeting authority needs to prepare a report even if they’re not attending the session. Invite your budget-planning team, a risk-assessment steering committee representative, key department heads, a c-level executive, and your CIO or MSP to attend.

Step 2: Prepare reports

Help your team do its best work.

People with budget authority review your current IT roadmap.

Everyone who needs IT dollars should be familiar with the current state of your company’s IT environment and your strategic-level IT planning for the next few years. Your IT roadmap drives effective IT budget planning.

Determine technology needs for 2023 — and think about 2024.

Assess whether existing IT tools and resources will meet your needs over the next 12-24 should be a dash, not a hyphen months. Since it can now take a year to get new hardware, people with budget authority should be aware that some 2023 projects and initiatives may not start until 2024.

Consult with IT on potential new technology needs.

Before preparing their final reports, participants should schedule times to talk with IT about their potential needs. The IT team may have insights, recommendations, caveats, and alternatives to suggest in advance.

Finalize reports for budget deliberation.

Each person with budget authority needs to clearly define all proposed projects, initiatives, and security solutions in their reports, including the start and end dates.

Step 3: Deliberate collaboratively

Work together to understand technical requirements and set priorities.

Hold your hands-on strategic alignment session.

Roll up your sleeves to review, discuss, and prune the wish list to the priorities that are in line with business goals and possible given resource and time realities. Sometimes these sessions are short, but usually not.

Plan your strategy by creating separate Run, Grow, and Transform budgets.

Divide your overall IT budget into three areas — each requires a separate annual budget. Your “Run” budget covers what it costs to operate IT, your “Grow” budget covers what it costs to scale, and your “Transform” budget covers innovation costs. The technology strategies behind each need to be judged and funded on their own merit.

Get your IT department’s insight into each report.

During the session, get IT’s take on translating the various technology needs in each report into specific technical requirements with ballpark pricing insights. This will give you an idea of what will be required for the final budget. 

Look at everything through the lens of your business goals.

Tie your IT spending to your business strategy rather than norms from surveys — survey respondents’ answers are interesting but their goals aren’t your goals. Balance your overall budget enough to meet your productivity, security, and business standards needs, but don’t overspend in any particular area.

Step 4: Price accurately

Be thorough, realistic, and flexible. 

Cost out the approved items from the strategy session.

Task IT with getting accurate pricing for the items approved during the strategic alignment session, including the time it will take to implement changes to your environment.

Allow enough time to gather pricing.

Accurate pricing is rarely available online, and salespeople may not prioritize your information requests unless you’re actively buying. Supply chain issues are exacerbating the process so IT will likely need to develop alternatives for some items. This requires time to research on top of the time it takes to compile the cost of each line item.

Be flexible, with an eye toward security.

Be open to ideas from IT about how to work around supply chain issues, keeping in mind that sacrificing security to grow or transform faster is what got a lot of companies in trouble at the beginning of the pandemic.

Consider hiring an experienced consultant.

A third-party technology consultant can speed up the pricing research if your team lacks bandwidth. Look for someone who focuses on your industry and has experience with companies like yours.

Step 5: Present to leadership

IT leadership prepares the budget presentation for leadership.

Use a proposal format that includes:

  1. A summary of the overall budget strategy
  2. Summaries of the Run, Grow, and Transform budget strategies
  3. Detailed descriptions of each project and initiative within each budget that includes the cost, required resources, associated risk, and level of difficulty 

Note which recommendations are critical or discretionary. 

Use a chart to visualize where dollars will be spent to help decision makers see the big picture, what’s most important, and that their priorities are covered.

Be prepared to make changes to the first draft.

In Leapfrog’s experience, about 50% of budgets are sent back for adjustments. Decision makers may want additional meetings or to find ways to make initiatives more affordable.

Be prepared to adjust course during the year.

While line item prices may have been accurate during the budgeting process, we’ve recently seen that prices and delivery dates can change significantly during the year, in addition to changes in other variables that are typical in business (resources, M&A, cyber events, etc.). If you’ve built in options, you’ll be able to do best with the budget you have left given the changing circumstances.

Streamline for next year.

If you’re not already, track all IT costs and activities (sorted by department), including unplanned expenses, unexpected price changes, contract dates, vendor lead times, and new hire IT-related expenses. While each year is different, especially lately, this data can help you avoid surprises next year. 

A budget that’s aligned with your IT roadmap and focuses on your priorities

Technology is core to how we run, grow, and transform our businesses. It enables us to operate effectively while preparing for a future that will move even faster. A methodical, holistic IT budgeting process sets you up for success year after year.

To recap, be sure to complete these key activities: 

  • Start with the right participants at the right time 
  • Consult your IT roadmap
  • Have ample communication between participants and IT before preparing initial reports
  • Have a robust strategic alignment session with business and IT at the table
  • Develop separate Run, Grow, and Transform budgets within your overall IT budget 
  • Allow ample time for IT to collect accurate, complete pricing 
  • Present a budget that explains IT strategies and how they’re linked to business priorities

A final note about 2023: At the start of the pandemic, companies understandably prioritized staying in business — they used technology to make it happen. However, if you haven’t already, Leapfrog strongly recommends that you prioritize closing any security vulnerabilities and paying off any technical debt you may have incurred during the rush to transform digitally. Both of these issues, which became more common in 2019-2022, can undercut the success of your new projects and initiatives. 

Successful IT budgeting is successful business planning. Leapfrog’s goal is for you to have a prosperous 2023!

Download this post as a PDF with charts to help guide your process.