As a managed IT provider, Leapfrog Services is often heavily involved in our clients’ IT budgeting processes. Ideally, we conduct an IT business Strategic Alignment Session before the budget is complete to discuss how IT can help meet planned goals and help determine the costs involved.
In this final post of our series on IT budgeting for 2020, we look at the five most common mistakes we see and how you can avoid the same problems.
#1: Failing to verify pre-planned IT spending
Many of our customers (and businesses in general) are in the habit of taking what they spent this year on IT and rolling it forward to what they’ll spend next year— a pro forma approach. This is probably the most common budgeting mistake we see and it occurs across all industries and sectors.
For most companies, not every year is the same when it comes to IT spending. There are typically investment years and depreciation years. An investment year involves heavy CapEx spending on hardware and software while a depreciation year does not. The typical cycle is one investment year followed by a couple of depreciation years. Even companies that use cloud computing or are currently migrating to the cloud still need to make periodic investments in IT infrastructure (networking, computers, etc.). You don’t want to run out of capacity or have to deal with operating systems that have reached the end of support.
Not only can an investment year catch you by surprise if you’re not aware it’s coming, most companies need to set aside funds during depreciation years to prepare for investment years.
The best way to avoid these kinds of rude awakenings is to check your strategic IT roadmap. Then talk to your IT department and service providers about next year’s expected expenses before submitting the budget.
#2: Not investigating the hidden costs of IT solutions
A lot of our customers want to move aggressively to the cloud — it makes sense for them to move away from owning assets and toward a predictable OpEx model. But not everything can or should be moved to the cloud and cloud migration is more complicated than it sounds.
Information about hidden and ongoing management costs or the resources needed to integrate new cloud services with your existing network and workflow is not available online.
One of our clients in the media industry, for example, spent a lot of time researching and preparing what it believed would be the cost to subscribe to Office 365 company-wide and move its file system to Amazon Web Services (AWS) cloud storage. The company had a massive amount of data, including video, and their calculations severely underestimated what it would take to store the data in the cloud and access it for editing and other purposes.
In reality, our client would have needed 100 times its existing internet capacity to make cloud storage function for their needs. Without the added capacity, they wouldn’t get nearly the same functionality they were getting from their on-premises solution, which would slow down production and hurt employee morale.
While their intention was good — save money by not investing capital — the actual cost of cloud storage plus the additional internet capacity was greater than the cost of updating the infrastructure, not less. To budget correctly, it’s critical to know actual costs.
Our solution honored their strategy by moving some of their operations to the cloud, including email and backups, while reinvesting in local storage and some additional internet connectivity to maintain the high performance they needed. This hybrid approach met their needs, although they did need to face the discomfort of re-submitting the budget.
#3: Disregarding the tech-talent shortage
If you have great people on your IT staff, other companies will pay to get them. Expect your top talent to be headhunted.
The tech talent shortage is real and will only increase as more companies use more technology. Even if you’re paying premium salaries, competitors may pay more because they see investing in expert IT services as contributing to profitability.
One of our clients in the manufacturing sector, for example, had a solid internal IT team of four. When one of the four was lured away, it left our client shorthanded and the team was unable to complete projects that were already backlogged. What’s more, after adding up productivity loss, recruiting, training, and a higher salary for the new hire, the turnover event ended up costing the company 50% of the headhunted employee’s salary. Compared to national data that loss was actually on the low end — turnover can equal up to 250% of each job role’s salary.
When trying to avoid IT staff turnover, Leapfrog recommends adding performance-based bonuses to your 2020 budget to retain key employees.
A goals-based compensation plan inspires top IT talent to do their best work and gives them a strong reason to stay. If an IT staff member does jump ship, it probably won’t be one of your top performers.
#4 Postponing investments in DR, backups, and DR testing
It’s true that backups and disaster recovery are among the least compelling areas of IT and tend to get overlooked. People don’t like to think about disasters, IT teams don’t typically enjoy the work, and leadership tends to be overly optimistic unless the company has already experienced a major IT disaster. Upgrading disaster recovery (DR) plans and testing them each year can seem like unnecessary expenses. We’ve seen all too often that this isn’t the case. DR that functions properly is critical to business continuity.
For example, a communications company client had a booming business that required them to add 35% more capacity to its business units so they could work on projects and customer initiatives. However, the company didn’t simultaneously invest in additional backup and DR capacity. Within a month of adding the new business unit capacity, it started to have back-up failures. The solution was to quickly migrate from its dedicated on-premises DR solution to Disaster Recovery as a Service (DRaaS), which can be easily scaled as needed.
The fast-tracked migration process cost more than if it had been planned and budgeted for in advance, and funds from a different part of the budget had to be allocated for the IT work.
Another common mistake is not budgeting for a DR test. A human resource management company with a sophisticated IT infrastructure that included high availability for 24/7/365 customer access decided not to budget for a DR test one year. When there was a disaster, it discovered a DR glitch the hard way. Following the failure, 95% of the company’s DR solutions worked as planned but one solution did not. That one failure caused major problems.
Even sophisticated, well-managed IT environments need to be verified through annual DR testing. An actual disaster is not the time to find out your plan needs adjusting.
Your backups and DR solutions need to grow with your business and be verified regularly. Don’t overlook these critical line items in your 2020 IT budget.
#5 Not factoring in the cost of technical debt
We’ve all been there — you’re in the middle of an important project and hit a roadblock. You can either manage the roadblock correctly or use a workaround and fix the problem later.
In the IT world, the additional cost your organization incurs to undo workarounds later is called technical debt.
Technical debt accumulates with each workaround. Organizations that accumulate technical debt tend to be those that rely on legacy systems, face time to market pressure, or have inexperienced or undisciplined IT staff. Eventually, the technical debt will need to be paid if the company wants to move the business forward.
It’s a common mistake to overlook the need to budget for technical debt, especially when planning upgrades.
For example, a client in the financial services industry had been using a legacy system. Rather than investing in new technology, it continued to find workarounds for the old system. When the firm was finally ready to update, they hadn’t budgeted for the work required to untangle all of the workarounds first — they hadn’t budgeted for their technical debt.
Leapfrog was able to resolve the situation by recommending they budget for the initial leg work (the technical debt) in the upcoming year and for updating the system the following year. This way, they avoided absorbing the entire investment in a single year. The firm was fortunate that postponing the upgrade didn’t mean taking a major hit in the marketplace — it doesn’t always work out that way.
When all the upgrade work was complete, the firm had invested more resources in creating the workarounds, undoing the workarounds, and upgrading to the new system than they would have if they’d upgraded to the new system to begin with. Timing matters, of course, but organizations need to be aware that technical debt can be expensive.
If your organization uses IT workarounds, make sure to log each one so you can include a line item for technical debt in your budget. If you don’t spend the funds that year, they’ll be available when you need them.
Good IT budgeting requires good planning
Budgeting accurately for IT can be challenging. There are a lot of details to consider — many of them are not obvious. You can learn from our clients’ well-intentioned but common mistakes. Remember to:
- Consult your IT roadmap before you plan
- Discuss hidden costs with your IT team
- Compensate your IT talent for a job well done
- Upgrade DR as you grow and test every year
- Include technical debt as a line item