IT budget

What is an IT budget?

IT budget is the amount of money spent on an organization's information technology systems and services. It includes compensation for IT professionals and expenses related to the construction and maintenance of enterprise-wide systems and services.

The IT budget is typically overseen by the chief information officer (CIO), the IT organization's top executive. However, as IT has become central to business results, the scope and allocation of the IT budget have become more complex because not all IT spending falls within the IT department.

Since IT affects every corner of an organization, budget development is a complex task. It starts with gathering input from department leaders on what IT investments they think are needed. From there, IT management must make estimates of what those technology requests will cost. It can take weeks or even months to compile an enterprise's budget. If senior management rejects the budget plan, the process might have to restart.

Why is an IT budget important?

IT organizations procure and use many products and hire a significant number of staff to deploy and run systems and data centers. An IT budget identifies cost-related items in the IT department and becomes a blueprint for IT operations and IT initiatives that can be submitted to the chief financial officer for funding.

The principal reason for budgeting is to have a financial plan or framework to manage IT costs within specific guidelines and limitations. A budget provides a strategic plan that reduces the likelihood of reckless spending on nonessential technology and IT services.

Situations that occur outside normal budgeting, such as procurement of a new system or specialized software, might be treated as a capital expenditure with the necessary approvals from senior management.

How much do companies spend on IT?

IT budgets reflect the size of the organization and its dependency on technology and IT resources. Based on estimates from various consultants and research firms, including Deloitte, small and medium-sized businesses devote a relatively larger percentage of revenue -- 6% to 8% -- to IT expenditures compared with enterprise-sized companies that spend 2% to 4% of revenue on IT.

By contrast, organizations with large IT requirements, such as cloud service providers and managed service providers, can spend 15% to 20% of revenue on IT. The major CSPs -- AWS, Google and Microsoft -- collectively have hundreds of data centers located around the world.

IT budget components

IT budgets include a variety of components. The major ones include the following:

• Compensation. This is a major part of the IT budget; these costs include employees and external consultants that the IT department uses.
• Office and data center space. This includes any costs associated with obtaining and maintaining the physical space, as well as furnishing it.
• Hardware and software. These budget items include procuring and maintaining hardware and software applications for data centers and for employee use. Applications such as enterprise resource planning, accounting, finance and human resource applications would all fall into this category.
• Utilities. Power, heating and cooling systems and services are included in these budget items. Cloud computing services also might be part of this category.
• Operations. This covers expenses related to maintaining systems and keeping them running. Research and development as well as design and engineering expenses might fall into this category.
• Data storage. This covers on-site and cloud storage expenses.
• Networking. This includes costs associated with various types of networking services and networking equipment, including wireless infrastructure and local area networks (LANs).
• Security. Expenses related to security of data as well as physical security of buildings and equipment fall here.
• Other expenses. Various other cost areas could include planning and development, emergency response, auditing and compliance, training, and records management.

An important part of the budget process is to look ahead and examine what upgrades are needed and what trends could affect the organization's use of IT. A key example is the growing use of artificial intelligence, which is already reshaping how IT supports business operations.

IT-related items that tend to fall outside the IT budget include applications deployed for and used by specific business units. Marketing applications, such as those that enable social media campaigns and content management systems, usually fall under the marketing spend rather than the IT budget.

IT budget example

IT budget preparation is complex, and budgets must be carefully developed. The following table presents a sample IT budget. The number of items will vary depending on the size of the department and its scope of activities. Each of the items listed could have multiple sublevels depending on the components making up a specific activity.

IT budget approval process

CIOs are responsible for the IT budget, but they aren't the only ones responsible for approving the budget. Indeed, even with centralized IT budgets where most of an organization's technology spend falls with the IT department, the CIO often devises and manages that budget in conjunction with an executive IT steering committee, other executives and directors, and other information C-level executives, including the chief digital officer, chief data officer and chief information security officer.

While the IT budget rarely includes all of an organization's technology spending, it does establish a framework for viewing technology costs regardless of where they reside. This enables IT leaders and other C-suite executives to eliminate redundancies among various budgets and keep overall IT spending in check. The IT budget should map closely to the organization's business strategy, taking into account business objectives and serving as an important decision-making tool.

As part of the budgeting process, CIOs must evaluate management goals to support long-term strategy. Learn how to make a business case to justify tech spending.