Your Budget: Two Ways to Start

All business activities begin with a budget, outlining what you plan to spend and how you plan to spend it. There are lots of ways to build a budget. To get into budget think, consider these two contrasting methods for allocating resources: zero-based budgeting and portfolio management.

Ursula Conway, CIO of Las Vegas-based Ameristar Casinos, begins each budget cycle at zero and builds from there. In this way, she says she justifies every dollar her IT group spends. "It's not, oh, last year I had $2 million so I need a 4 percent increase," says Conway, who's also a CPA.

For example, if inflation (the annualized rate at which average prices rise) is 3 percent, and Conway simply and automatically adds 3 percent to her software and hardware budget, she believes that might discourage her from examining contracts that could possibly be combined or renegotiated, terminated or expanded. "We think it's better business to start from scratch to evaluate all the cost components," she says. "It forces you to know your budget."

Boyle of Meta Group says that a CIO needs to go through a zero-based budgeting regimen at least once to derive this deep understanding of the budget. After that, he says, "you don't need to keep redoing it".

Portfolio management, on the other hand, takes a more holistic view, treating IT projects as a group and calling for the CIO to budget each project according to the business need it addresses. This demands that CIOs create a single, integrated view of all IT investments so that they can see how spending on one project affects another, and how the projects' risk-reward profiles do or don't balance (see "How to Do Portfolio Management Right", CIO June 2003). With this approach, a company can make value judgments about the relative importance of each project.

American Airlines lives by portfolio management, says Janette Zabransky. Zabransky is American's IT finance and vendor management director who serves as CFO of the IT department under CIO Monte Ford.

When, for example, the airline's mechanics recently asked for customized laptops (made to be especially rugged to survive the hangar environment) to replace their desktops, Zabransky figured out what the business unit would save in hours of productivity by giving the mechanics laptops near their workstations, instead of forcing them to trek to a computer room to look up work orders. Those savings alone justified the project idea to her, but Zabransky went a step further: She made the project contingent upon the maintenance and business engineering units committing to the savings she projected for them in their own budgets.

In effect, Zabransky used the other business units' budgets to get approval for the project in her budget, asserting to the executive committee that the savings and increased productivity would pay for the notebooks and have a positive impact on the airline's P&L.

The project got funded; the notebooks were purchased.

The Language of Money

Often, when CIOs talk about IT and money, they're thinking about what IT can do to improve their enterprises' performance. That's certainly not a bad thing, but when CFOs and CEOs talk about IT and money, frequently they're thinking about what IT can do for the company in the eyes of investors.

To link IT spending to what's good for investors and the bottom line, companies often come up with their own formulas. Stephen David, CIO and business-to-business officer at Procter & Gamble, says the company applies a metric called total shareholder return (TSR). TSR looks at sales, cost structure changes and asset usage, among other things, to calculate whether Procter & Gamble is meeting its goals. David works with a chief finance person in IT, and also gets other IT managers looking at TSR.

"Using our finance person [in IT], getting people training, we can translate TSR for IT - What are the drivers? And what can they do? - so IT people, in conjunction with finance people, can work toward TSR goals," he says. He reviews the IT group's portfolio against those measures. They analyze results. Make decisions. The business moves forward.

In other words, the terms David uses to talk about his company's performance come from accounting and finance, the language of money. It takes training to become fluent in that language.

Time to get started.

Accounting: The Basis for Business Decisions by Robert F Meigs and Walter B Meigs was used as a reference for this article