As a technology manager in the IT department, a major part of your job will be researching, estimating, and justifying the purchase of technology for your organization. However, you’ll rarely be the one to approve the technology budget.
Often, someone from management or the C-Suite is going to come to you with an initiative for a new technology project. That’s how a project is going to get started.
The variables from there are plenty — they could just be asking for research, they could want you to get the ball moving, they could have a set budget already in place. However, for the most part, you won’t be the driving force behind a technology project.
That doesn’t need to be the case, though. When the IT department (or any tech manager) shows interest in the business side of the company, all parties benefit.
Even if it’s high-level strategy — if you can make a case for a new technology that will help your company then you not only have more control over the tech, but you’ve shown your superiors a willingness to take on more responsibility for the business. So don’t be afraid to do some research and make a pitch that makes sense.
We’ll discuss how to get buy-in from the C-Suite when discussing technology budget later in the article. First, let’s learn more about figuring out the budgetary needs.
Budget vs. Project Cost Estimate
The first obstacle to budgeting is understanding a key difference in how to estimate the cost of a project during the planning process.
People use technology budgeting and project cost estimating interchangeably all the time. However, the two are really each a different side of the same coin. They are very related, but there are subtle differences between a project budget and a project cost estimate.
Cost estimating is the process of quantifying every resource that is going to be required to complete a project. Resources means everything — labor, materials, land (in the case of construction), and everything else that needs to be paid for in terms of the project.
The cost estimate is a list and quantification of all of those with a dollar amount attached to it. At the end of the process you have a single dollar amount that represents the roll up of everything that you’ve qualified.
Budgeting relies on that estimate. You have to have an idea of what the cost will be before you set out to do your budgeting. Budgeting is the process of identifying not the amounts, but the sources of the funds to be used to cover the cost estimate.
Think of buying a car. The cost estimate is like the sticker price on the window of the car.
Budget is the exercise the buyer will go through to determine where the money will come from — who is pitching in, how much they’re pitching in, what accounts the money will come from, and so forth. Finally, how much they’re willing to pay.
It’s important to make sure that your budget and your estimate are in alignment.
It takes a lot of work to make sure that happens. You need to know you’ve identified the source of the funds that will cover the estimate, or (if there aren’t enough funds) figure out what you need to revise to bring the estimate underneath the budget.
In the best-case scenario, the estimate comes before the technology budget. The sequence would be:
– Scope is prepared
– Schedule is prepared
– Cost estimate built
– Budget determined
If you think about it, how could anyone complete an estimate if they didn’t know what they were trying to buy? If you don’t have a scope you can’t build an estimate. Everything is built on scope, and in an ideal world follows that logic.
The schedule will give you a time frame. If the stakeholder wants something done on an accelerated timeframe, that will have a huge impact on the estimate and therefore the technology budget.
You might have to pay extra for faster shipping, or pay overtime labor to get things done more quickly. On the flipside, if the client has a long timeframe — a year or more, or perhaps they don’t want the project started for another year or more — then that will affect the estimate as well.
Labor, materials, land, or anything else could cost different prices years down the road, and that means new variables in the cost estimate.
Unfortunately, it’s hardly ever a best-case scenario. There are occasions when an executive will come to you, give you an assignment, explain what the budget is, and you’ll need to work backwards to make it work.
There are many other variations as well — you might get a project that is partially budgeted, scoped, or scheduled and have to fill in the rest yourself.
Depending on what you’re given, you might choose a different technique to determine the cost estimate and, ultimately, the final technology budget.
Determining Cost Estimate
There are essentially three types of cost estimates. Each is unique and has its pros and cons. Each is also better geared for certain situations, and each is based on certain assumptions.
Analogous estimating is less time consuming than the other estimates. Here you’re relying on a project you’ve already done in the past.
You make the judgment call to say that the new project you’ve been assigned is just like one previously completed, so the cost should be the same. You use the cost from the previous project to estimate the cost of the new one.
There is inherent risk in doing so, however. If two projects are known to be alike in some respects, then they should be alike in other respects — that’s a significant assumption.
Nevertheless, analogous estimating is legitimate, valid, and done every day. If you were doing an AV project, and the last one you did was two months ago, then there shouldn’t be much variation in prices of equipment, labor, etc. You put a dollar figure on it and you’re done.
This is quite a bit different, but still not difficult to do. Parametric estimating is characterized by more than one past project. Ideally you have thirty past projects, though you can go as little as five and still end up alright.
You take the historic data from the projects you’ve completed in the past, use the data analysis tool in Excel, run regression on the data, and Excel will create a model/equation where all you need to do is plug in the same variables from your next project.
Based on the projects you’ve done in the past, it will calculate a single-point estimate for you.
The assumption here is that the factors and variables included in your past projects are present in your future project. You’re assuming they have the same relationship.
Detailed Engineering Estimate
This is just as the name implies — detailed, drilling down on every single cost item that you think will be used on the project. This method takes a lot of time to build — weeks, months, or even years depending on the size of the project.
It’s based on actual measurements from architectural drawings, take- offs, detailed scope information, design information, etc. They’re the most detailed and time-consuming cost estimates, but also the most accurate.
Deciding which estimate strategy to use depends on the information that you have and what the estimate will be used for. If the stakeholder is only exploring options and has very little information, you can do a quick analogous estimation.
These are ballpark, high-level estimates. On the other end, if the stakeholder is just about ready to enter into a formal contract arrangement, you will want to make sure you have the highest level of accuracy in your estimate and use a detailed engineering estimate.
Accounting for Unforeseen Events
Something seasoned project managers take into account is what they can’t account for. There are a few ways to do so.
When you create your cost estimate you’ll come up with a figure — let’s say $50,000.
There is a very low probability that the project will come out to be exactly $50,000 — it will be in a range where that amount falls somewhere in the middle. There is a weakness in having a single-point estimate like that.
Seasoned project managers will do a three-point estimate. A three-point estimate reflects the probabilistic measurements of the estimate.
Most projects go over bud- get, more often than going under budget. It’s like a bell curve that’s skewed to the right. The three-point estimate is a way of reflecting that probability.
Take the estimate you came up with — $50,000 in this case — and multiply it by four. Write that number down. Then think about the worst-case scenario and what it would cost.
Write that number down. Finally, think of the best-case scenario, an optimistic representation of what the cost will be if every- thing goes right.
Now you have three numbers. The best case, the worst case, and the initial estimate multiplied by four. Add those numbers up and divide by six.
That figure logically takes into consideration the chances of the estimate being too low or too high, and accounts for uncertainties and risk.
That can be done at different levels as well. You can do a three-point estimate on every single line item, or every component group of items. You could do a three-point estimate on concrete or wood, or you could do it on raw materials in general. Then you add all of the line items or groups up to get the overall number.
Another strategy is a contingency line item in your estimate. This is often expected in your estimate for the technology budget. You’ll want the contingency in there — not to cover changes in scope, but only to handle the uncertainties.
A quick way to identify that number is to take the difference between the worst-case scenario and the most likely estimate and use that as your contingency.
The last thing any project manager should do when finishing estimations is to create the basis of the estimate (BOE). The BOE is a narrative — it summarizes what the estimate is, where the information came from, any assumptions, any constraints, etc.
It’s especially important in analogous and parametric estimations because you’re making significant assumptions, and that should be documented. These assumptions and restraints are important because they fill in the lack of information that you have when creating the estimate.
How to Gain Approval for Technology Budgets
Oftentimes, finance, accounting, or sometimes HR sees an issue, a need, or an upgrade that needs to happen before the IT department does.
Maybe the sales team needs better forecasting tools. They’ll discuss their needs with finance, come up with what makes sense financially and practically for the business, then bring that information to the IT department for implementation.
The IT team is then involved in assessing and scoping the project, which, as we’ve learned, directly influences the budget.
When it comes time to present your findings, the best approach is a balanced approach. The stakeholder might believe they want a certain product, but your findings indicate that another is a better fit for your business.
You can’t just tell the stakeholder that’s the case — you need to convince them. Create a business case that shows the costs and benefits of each, and explain why cost or benefit is better or worse for one than the other.
That’s really where you always want to focus. On the whole, the stakeholder isn’t going to be concerned with the technology itself — they’ll be concerned with the business case for that technology. Cost and return.
What the impact will be on your resources, your workforce, and your bottom line. If you can paint a picture of added profit thanks to one technology over another, that’s better than advocating for the technological capabilities of the product.
This is where things get tricky. You could as easily deal with a stakeholder that wants the cheapest solution so the cost as low, as one that wants the most expensive just because they assume it’s best.
Your job is to get rid of those preconceived notions and explain why a solution in the middle might be the best choice for your business.
Ask yourself these questions to inform your pitch for a technology budget:
– Why do we want this technology?
– Where is the business trying to go?
– What will this technology do? What are the strengths and weaknesses?
– What is the cost of the technology? What is the ROI?
– How will this technology impact the work force?
Always get back to the business, strategy, and what the needs are. Wherever possible use dollars and cents to justify your case. Where that’s not possible, use business needs to justify your case.
You’re a technology manager and you’re interested in capabilities — the stakeholder likely isn’t, they’re interested in how it will impact the business. Always keep that in mind.
If you’ve properly estimated cost then getting budget approved will be that much easier.
However, the cost estimate alone won’t be enough to justify budget. You need to sell the stakeholders on your pitch, and you do that by illustrating what the technology will do for the company, its employees, and the bottom line.