IT Services Budgeting: How-To & What to Include

Any business that relies on technology systems — regardless of its size or industry — should have a well-crafted IT services budget. Not only has technology spending evolved into a significant portion of most companies’ overall financial outlays, it’s also become integral to their ability to operate and compete. Indeed, worldwide IT spending is projected to reach a whopping $5 trillion in 2024, according to Gartner.

The IT budgeting process is essential to effectively managing an organisation’s IT expenses, as well as to making sure investments are aligned with business goals. It can also introduce more transparency into IT spending, ensuring that everyone in the organisation who relies on — or must account for — technology investments is on the same page. This alignment plays a key role in maximising the value of IT expenditures and supports the organisation’s overarching strategic objectives.

What Is IT Budgeting?

IT budgeting is the process of articulating the total funding allocated to an organisation’s technology needs over a specified period, typically a year. The process involves distributing planned investments across various departments and categories to cover a comprehensive range of expected IT expenditures. These include both one-time expenses, such as new software implementations, and recurring costs, like maintenance and personnel salaries.

Committing to a yearly IT budget creates a more strategic approach to balancing technology resources than managing one-off responses to individual tech requests from different departments or business units. Moreover, canny IT budgets take their cues from the overall business strategy. This enables the organisation to prioritise companywide IT service demands and optimise investments accordingly. It also integrates the IT budget within the overall company budget(opens in a new tab) for better financial planning and control.

Key Takeaways

• An IT budget allocates the funds an organisation plans to devote to IT systems and services in a given period, usually a year, across various spending categories.
• IT budgeting makes sure the IT department is equipped to manage day-to-day operations while supporting future business strategy and growth.
• While IT spending will vary according to business needs, there are common steps and best practices companies can use to successfully create and manage their IT budget.
• Tools, such as enterprise planning and budgeting solutions, can provide opportunities for greater IT budgeting transparency, collaboration and flexibility.

IT Budgeting Explained

At a high level, IT budgeting is really no different from any other type of business budgeting process. The goal is to evaluate the organisation’s IT requirements for the period ahead, prioritise those requirements based on business strategy and available resources, calculate the costs associated with those priorities, and obtain approval for the spending plan. That budget is then integrated into the business’s overall financial plan.

But because technology is essential for both the effective day-to-day operations of a company and its ability to innovate and grow, IT budgeting becomes more than a tactical exercise — it’s a strategic necessity. The pervasive role of IT in guiding operational efficiency, driving customer engagement, facilitating data-driven decision-making and spearheading innovation means that the allocation of IT resources directly influences a company’s competitive edge and market position. With 55% of companies planning to increase IT spending, according to Computer Economics’ “IT Spending and Staffing Benchmarks” study for 2023/2024, the quality of a company’s IT budgeting process can have very real impacts on its top and bottom lines.

Many companies broadly assign their IT spending into three categories:

• Capital expenses (CapEx): Any spending related to acquiring or upgrading fixed IT assets, such as hardware, infrastructure and software licenses. CapEx items typically involve a large up-front investment and offer little flexibility for scaling expenses to accommodate changing needs.
• Operating expenses (OpEx): Ongoing or recurring expenses, such as cloud subscriptions, maintenance services and compensation for IT staff. Unlike CapEx, OpEx items are spread out over time, offering opportunities to adjust spending to meet current needs.
• Project expenses: One-time expenses associated with specific, finite IT-related activities, such as cloud migrations or disaster recovery initiatives.

Companies often determine optimal overall IT spending levels as a percentage of their overall revenue, but that percentage can vary widely by company size, industry, geography or stage of IT maturity. Although midsize companies spend an average of 4.9% of their revenue on IT, according to a 2023 Gartner report, midsize banking and financial services firms spend an average of 8.6% of revenue on IT, while midsize industrial manufacturers and retailers spend 2.3% and 2.2%, respectively. Another 2023 study of IT spending across companies of all sizes finds that organisations, as a whole, budget an average of 12% of revenue for IT, with some industries spending much more (e.g., software companies at 19%) and some much less (e.g., consumer products and services at 5%).

Given the many stakeholders and types of tech involved, the process of IT budgeting can seem arduous — especially when it comes to finding consensus among those with competing technology needs and points of view. It may be tempting to expedite the process by marginally adjusting last year’s IT budget, imposing arbitrary spending cuts or even making IT spending decisions on the fly. But investing the time and resources required to bring key stakeholders together to prioritise and contribute to the company’s IT spending plan can stave off potentially painful and costly issues down the line, such as misaligned technology investments, resource shortages or overspending on low-impact technologies.

Ultimately, IT budgeting is as much an alignment and communications tool as it is a financial planning practice. The more work a company does to define a transparent, realistic technology strategy, the easier it will be to lay out the plans for leadership and get commitment to an IT budget.

Why Is Budgeting for IT Services Important?

The IT budgeting process brings the company’s IT and business strategies to life, in terms of dollars and cents. It also creates a framework for managing and optimising IT costs, preventing those costs from spiraling out of control in an era of rapidly evolving technology options.

The goal is to arrive at a “Goldilocks” level of IT spending for the period ahead — just the right amount for the company to have all the systems, services and people needed to achieve intended goals. Insufficient IT investment can compromise productivity, customer satisfaction, employee experience(opens in a new tab) and growth opportunities, while excessive spending can tie up critical cash that could be more effectively utilised elsewhere. Achieving this balance not only prevents financial wastage but also positions the organisation to seize new opportunities, drive innovation and maintain a competitive edge.

Here are a few more specific ways in which effective IT budgeting can propel improved business performance and outcomes:

• Better IT cost management: A comprehensive IT budget becomes the spending plan for the year. This plan ensures that the business keeps costs in line with agreed-upon allocations. Companies can also use the budgeting process to identify and reallocate nonessential expenses to higher priority investments.
• Better business cost management: Making smart investments in IT systems, people and processes is one of the primary avenues for increasing business efficiency(opens in a new tab). For example, the decision to invest in automating manual processes can significantly reduce operational costs.
• More informed decision-making: Through detailed cost analysis, IT budgeting equips decision-makers with the insights needed to make appropriate technology choices for the business. Budgets can also help IT departments ensure that they have the right resources in place to maintain continuous IT service delivery.
• Better resource allocation: With a collaborative IT budgeting approach that involves key stakeholders, IT resources will stay tightly focused on achieving business priorities. This not only supports better alignment with overarching business strategies but can also enhance overall satisfaction with the IT services provided. For example, by prioritising budgetary funds for a customer relationship management system upgrade, a business can directly improve sales team efficiency, as well as customer satisfaction.
• Increased transparency: A robust IT budget illuminates the IT priorities and spending for the whole organisation so that everyone understands where resources are being allocated and why. A well-crafted budget also highlights how much is being spent on IT in relation to overall business performance.
• Support for key projects: Proactive budgeting can secure funding for important IT investments, such as technology upgrades, cloud migrations(opens in a new tab) and cybersecurity investments. This helps guarantee that funding and resources will be available to complete critical initiatives, even when management attention is diverted to other emerging issues.
• Greater ability to manage IT performance: An IT budget provides a benchmark for evaluating the IT department’s financial performance by creating a way to compare actual expenses against budgeted amounts. It also presents numerous benchmarking opportunities: Companies can compare internal IT spending across departments, for instance, or compare their expenditures to the IT spending of others in their industry.

How to Create an IT Budget

Different companies will take different approaches to IT budgeting, in terms of time frame, how decisions are made, which key stakeholders are involved, how collaborative the process is and what the spending parameters and goals are. However, there are also some critical steps to creating an effective, realistic and strategically aligned budget that will be applicable for nearly every organisation.

Importantly, those involved in budgeting for IT services should not wait until just before the IT budget is due to start down this path. To promote a thorough and thoughtful budgeting process, the effort should begin several months before the established submission deadline, which is typically set by the organisation’s finance department or executive leadership. This kind of proactive approach allows ample time for collaboration, review and final approval.

Review Current IT Expenditures

The first step in creating an IT budget is to take a look at current IT spending. Those involved in the IT budgeting process should review the previous year’s budget to assess what’s working well and what isn’t. Keep an eye out for spending areas that may need to be reduced, reallocated or increased. Questions to consider include: Where is the organisation spending more than anticipated? Where might it be spending too little? And, importantly, why?

Avoid cutting and pasting last year’s numbers into this year’s budget (even if you only nominally increase spending across categories), as business needs are likely to have changed. Nonetheless, the insights gained from reviewing last year’s budget offer a useful baseline for the first draft of next year’s budget. If your organisation has never produced an annual IT budget before, analysing actual spending over previous fiscal years can furnish a solid starting point.

Identify IT Requirements

In order to budget appropriately for IT, it’s essential to understand the business’s technology needs. At this stage, it’s important for all key stakeholders in business and functional leadership roles to come together to determine their technology requirements for the coming year and how IT systems and services might support those. As companies move to incorporate more remote and hybrid work strategies, for example, they’ll likely need to prioritise investments in digital collaboration tools.

Forecast Future IT Needs

The IT budget should incorporate current IT requirements as well as future technology needs. In the best case scenario, the IT organisation will have developed its own forward-looking IT strategy that aligns with the longer-term business strategy. This will provide critical information for what additional IT projects, products and services might be incorporated into the IT budget for the coming year. A business with a plan to expand internationally will want to begin building a technology foundation capable of supporting a global workforce, for instance.

Prepare a Detailed Cost Analysis

Having identified the various IT needs for the year ahead, it’s time to dig into the financial details of these potential investments. This will involve calculating the costs associated with each IT project or requirement. Start by researching market prices, obtaining vendor quotes, analysing previous IT spending patterns and reviewing past IT service invoices to develop an accurate cost estimate.

At this stage, companies should make sure they calculate the total cost of ownership (TCO)(opens in a new tab) of an IT product or project. TCO incorporates not only initial costs but also future expenses likely to be incurred over time, such as user training, technical support and ongoing maintenance. This is also a good time to analyse the organisation’s mix of fixed costs (which stay the same regardless of requirements, such as employee salaries and maintaining a data centre) and variable costs (which go up or down in step with demand, such as cloud infrastructure).

Prioritise IT Projects and Expenses.

A workable budget should reflect the department’s goals and the overall IT strategy, while attempting to fulfil the most business-critical IT needs within a reasonable level of funding. A good approach is to first identify any must-have requirements for day-to-day operations, as well as any new priorities for the coming year. This will help determine where to focus major spending. From there, the company can target more strategic projects, evaluating their total costs, alignment with business strategy and likely return on investment. Then, leaders can prioritise projects with the biggest impact in the areas that matter most to the company (e.g., business growth, innovation or increased efficiency).

Allocate Funds for Each Category

With prioritised investments and detailed cost analyses in hand, it’s time to allocate funding for each category of expense. There are a number of ways to slice and dice the IT budget. Typically, companies will break their IT budget up by descriptive categories of expenses, including hardware, software and services, staffing, outsourcing and consulting, maintenance and IT projects. This categorisation can help manage and track expenses more easily.

In addition, some companies will opt to analyse their budget in other ways, looking at the percentage or total amount to be spent on OpEx(opens in a new tab), CapEx and project expenses, for example, or how much they plan to devote to running, growing and transforming the business. This extended analysis can support more strategic financial planning and help balance day-to-day costs with long-term investments. For instance, understanding the proportion of the budget devoted to OpEx and CapEx can provide insights into whether the company is focusing on maintaining current operations, investing in new capabilities or a mix of both.

Plan for Flexibility

When it comes to the ever-evolving IT space, it’s important to prepare for the unexpected. It’s essential to future-proof the budget by anticipating that new needs are likely to emerge over the course of the fiscal year. When possible, allocate a portion of the budget to unforeseen IT requirements or opportunities that are likely to emerge during the budgeted period. It’s equally possible that prices in certain categories could increase, so try to build in the ability to absorb a certain amount of additional expense. In addition, it’s a good practice to revisit the budget at regular intervals, such as quarterly, to give teams an opportunity to confirm the budget’s continued alignment with business priorities and make adjustments as necessary.

Get Stakeholder Approval

Because technology is so integral to business performance, there is a wide range of leaders who have a vested interest in IT spending priorities, from the CEO, CFO and board members to other functional business leaders. These parties also play a key role in the successful adoption and implementation of technology. So, with a complete and categorised IT budget in hand, it’s critical to get input from these stakeholders and secure their buy-in. This step will help confirm the budget’s accuracy, feasibility and alignment with business goals. If necessary, make adjustments and then get final approval as required by the organisation’s standard budgeting process.

9 IT-Specific Costs to Include in a Budget

A company’s IT budget can generally be divided into various categories of spending. Though the categories might differ due to the complexity or maturity of the IT function or its structure, some common types of IT spending to include in a budget are:

1. Hardware: This category includes expenditures on physical assets, such as computing devices (e.g., laptops, tablets, cellphones), storage devices, networking equipment and peripherals. Hardware also includes the cost associated with hosting, maintaining and updating these assets.
2. Software: Software expenses include software licenses, subscriptions (such as cloud subscriptions, software-as-a-service (SaaS) solutions and managed service providers) and support contracts. This IT expense category may include a mix of fixed and variable costs.
3. Infrastructure: The costs of managing and improving IT infrastructure, such as data centers, server rooms, cloud services, network and voice servers and associated power and cooling systems, would typically fall into this category. IT service continuity and disaster recovery solutions are also critical, infrastructure-related components to consider.
4. Information security: Any information security and cyber resilience investments, such as firewalls, intrusion detection and prevention systems, antivirus software, security gateways, encryption tools, software patching, security audits, employee cybersecurity training, and incident response planning will be included here.
5. Personnel/staffing: This category covers the costs related to IT talent acquisition, IT employee salaries and other benefits and nonemployee compensation for independent IT contractors and freelancers.
6. Outsourcing and consulting services: Expenditures for third-party service, such as IT consultancies, advisory firms, IT service providers and legal counsel, typically fall into their own IT budget category.
7. Maintenance and support: This covers business-as-usual support contracts, maintenance fees and warranties for hardware and software systems, as well as expenses related to troubleshooting, repairs, patches, upgrades and technical support.
8. Training and education: This area of spending covers costs associated with training programs, certifications, workshops, conferences and other professional development investments for the IT team. Expenses related to broader employee training on IT systems — essential for maximising the value of IT investments — may also be included here.
9. IT projects: Discrete IT projects may get their own expense category to encourage understanding of the total cost of the project (and, thus, its return on investment). Specific expenses that may be allocated to a project may include hardware, software, consulting costs, administrative costs, change management costs and training.

15 IT Budgeting Tips and Best Practices

The steps involved and the expenses included in an IT budget cover the “how” of the process. Best practices, derived from industrywide observations and insights, illuminate the path to doing it well. Here’s some strategic guidance for developing an IT budget that not only gains approval but also serves the business’s best interests.

1. Align the IT budget with business goals: A realistic and effective IT budget requires an understanding of what the business is seeking to achieve with its IT investment. At the very least, the team involved in creating the IT budget should interview all relevant stakeholders to find out what their plans are for the coming year. This will determine the implication for IT spending. Being up front about this alignment can also save time during the review and approval process by eliminating surprises and ensuring that all parties have a clear grasp of priorities and expectations.
2. Emphasise cost transparency: Given its impact on an organisation’s capital and operating expenditures, as well as the fact that it will be incorporated into the company’s overall financial plan, it’s crucial to demystify the IT budget for the wider organisation. Using a standardised reporting format that itemises IT costs — and demonstrates their alignment with the organisation’s financial key performance indicators, cash flow and financial statements — can provide that transparency. This approach helps provide clarity into estimated costs for the year ahead and aids strategic planning, builds stakeholder trust and garners support for IT initiatives.
3. Prioritise investments: With IT demands at an all-time high, it’s vital to distinguish which IT expenses and initiatives are most important to the business. Identifying critical IT services, as well as company pain points that technology can address, can help IT teams and business decision-makers home in on what should make the cut for a given budget period. Technology audits, for instance, can be used to assess what needs to be budgeted for upgrades, updates and replacements, while close collaboration with key business stakeholders can help focus investments concerning top needs and plans. For example, a company that identifies unreliable networks, collaboration challenges or cybersecurity gaps as primary goals will want to include investments in those areas, as they directly affect operations and security.
4. Plan for scalability and flexibility: The budget should focus on identifiable technology needs or deficiencies, but unexpected challenges or opportunities are likely to emerge during the course of the budgeting period. The COVID-19 pandemic, for example, necessitated unforeseen investments in remote-work tools. A business might also experience unexpected growth or contraction that would demand a budget scalable and flexible enough to respond to changing needs.
5. Include a contingency fund: One way to prepare for unplanned technology needs is to set aside funds to deal with emergencies, such as data breaches or IT service disruptions. By setting up a contingency fund within the budget, the organisation can avoid the scenario of having to redirect money intended for other planned IT projects in order to address the crisis.
6. Leverage cloud services: Cloud services can offer greater IT cost flexibility because they provide the ability to scale IT services up or down, based on business needs. In addition, cloud services offer the opportunity to transform large CapEx investments (such as building and equipping a data centre or purchasing software) into smaller, predictable operating expenses in the form of payments to a cloud infrastructure provider or an SaaS subscription. But cloud services may not make sense for every business or IT need; an organisation might need or benefit from on-premises systems for financial, regulatory or other reasons, for instance. So, it’s important to explore the business case before making the decision to migrate to cloud services.
7. Focus on total cost of ownership (TCO): Total cost of ownership of an IT product includes not only its purchase or subscription cost but also the expenses it will incur over its life span. “Hidden” costs, such as the time it takes to implement the solution(opens in a new tab), ongoing maintenance, necessary upgrades, end-user training and technical support, can be significant and, therefore, must be accounted for.
8. Invest in preventative maintenance: Maintenance is high on the list of IT ownership costs. One way to corral this burden is to proactively invest in regular maintenance. Allocating funding that can be used to regularly assess IT assets can head off service disruptions and costly repairs, and it might even maximise the asset’s life span and operational efficiency — saving the company time and money in the long run.
9. Educate and train staff: Enterprise technology is always evolving and advancing. Keeping both the IT function and the larger user population up to date on the skills necessary to effectively use and implement technology systems is essential. Without appropriate funding for education and training, an organisation risks not realising the full business value of its investments in technology.
10. Outsource wisely: Taking advantage of third-party IT service providers with specialised tech skills, such as managed service providers and cybersecurity firms, can offer benefits from lower costs to greater efficiency. Outsourcing can also be useful when individual employees with these skills are hard to source or if companies don’t need to employ a full-time specialised team. But, like any other category of IT expense, outsourcing demands financial scrutiny. It’s important to fully assess the business case for outsourcing to determine whether it makes sense for an organisation. Again, it’s key to match the IT budget with business needs and goals, prioritising accordingly.
11. Seek input from IT teams: The expertise of in-house IT teams, as well as that of core technology partners and consultants, is invaluable when developing an IT budget. Their on-the-ground knowledge can pinpoint areas of unnecessary costs or underfunding, helping companies develop a more realistic IT budget.
12. Benchmark against industry standards: Regularly benchmarking IT spending can uncover opportunities for cost-cutting, as well as areas of underinvestment that may expose the business to increased risk. By comparing IT spending to that of industry competitors of similar size, for instance, a company may find that it’s spending far more on data centers than its competitors. This could reveal a more cost-effective opportunity to migrate an on-premises system to the cloud. Or a business may realise that it has been underspending on systems maintenance and modernisation and, as a result, is accumulating technical debt that it needs to address to remain agile and competitive.
13. Balance short-term and long-term needs: Though most IT budgets plan for the next year, it’s also important to consider any long-term business strategies that will require IT investments in the years beyond that. Balancing short-term and long-term budget needs addresses both day-to-day operational transactions and opportunities and threats on the horison. An organisation with a long-term plan for international expansion, for instance, should make sure to invest steadily in systems it will need to support a global organisation in the future — without ignoring the IT funding required to run day-to-day operations.
14. Monitor and report regularly: Once the IT budget is finalised and approved, it’s time to institute processes for monitoring and managing actual IT spending and costs throughout the budget period. Organisations that excel at IT budgeting tend to approach this process as an ongoing practice, rather than as a once-a-year exercise. Part of this process includes providing key stakeholders — such as executive teams, boards of directors and business unit leaders — with regular reports on IT budget performance.
15. Make adjustments as necessary: In order to continually improve IT budgeting, the business should treat the IT budget as a living document. While every effort is made to ensure that an IT budget for a given period aligns with and supports the overall business strategy, that strategy may shift during the budget period. Therefore, it’s important for the IT budget to accommodate those changing business needs. For example, waiting until the next budget period to address a surge in technology costs or a new technology-enabled business opportunity can inflict a significant curb on business performance. Instead, develop a practice of frequent IT budget reviews — quarterly, say. This enables the business to quickly identify emerging issues (e.g., project overruns or unexpected expenses) or lucrative opportunities, ensuring that there will be sufficient funding to respond.

Budget for IT Easily With NetSuite

Budgeting for IT services can be one of the more complex financial tasks in an organisation, particularly in today’s dynamic, technology-fueled business environment. One of the best ways to manage this complexity and implement the best practices articulated above is to invest in an enterprise planning and budgeting system that supports the IT budgeting process.

NetSuite Planning and Budgeting can automate many of the most labour-intensive IT planning and budgeting processes, from data analysis, what-if scenario modeling and generation of regular IT spending reports to integration of the IT budget into overarching organisational plans. This empowers decision-makers to develop technology budgets and forecasts that reflect genuine business needs. What’s more, NetSuite’s capabilities exist within a single, scalable solution — one that facilitates much-needed budget transparency, as well as the ability to collaborate across business functions. In turn, businesses are able to create IT budgets that support overall business goals and strategies, even when plans change.

Technology investments have never been more important to day-to-day business operations and long-term business performance. Effective budgeting for IT is essential if the business is not only to provide appropriate funding for IT systems, processes and people but also to manage those costs within the yearly plan. Adopting IT budgeting best practices and taking advantage of a modern enterprise planning and budgeting solution can support a more collaborative and transparent process that is more likely to keep tech needs aligned with business goals and strategies.

IT Budgeting FAQs

How do you create a budget for an IT department?

While every organisation may approach IT budgeting a little differently, the goal is the same: to invest in technology that supports both current business operations and future goals, while controlling costs. There are some common steps any organisation can take to create an IT budget:

1. Review current IT expenses.
2. Identify additional IT requirements for the year ahead.
3. Forecast future IT needs.
4. Prepare a detailed cost analysis.
5. Prioritise IT investments.
6. Allocate funds by IT spending category.
7. Integrate flexibility and funding for unforeseen technology needs that will emerge.
8. Get stakeholder approval.

What is the IT budgeting process?

The IT budgeting process involves evaluating the organisation’s IT requirements for the year ahead, prioritising those needs based on business strategy and available resources, calculating the costs associated with those priorities, obtaining approval for the spending plan, then integrating that final budget into the overall financial plan for the business. Businesses also find it valuable to regularly report on IT budget performance, review whether the budget is still in alignment with the business’s needs and make adjustments as necessary.

What should my IT budget be?

How much an organisation spends on IT will vary based on a number of factors, including its size, industry, growth stage and technological maturity. Oftentimes, businesses will look at their IT spending as a percentage of their overall revenue, in order to benchmark their spending against similar companies to ensure that they aren’t overspending or underspending on IT.

How do you do budgeting for an IT project?

Developing an effective and realistic budget for an IT project is important as it ensures that the project team not only has the resources required to deliver the project but also has a realistic spending plan to guide project delivery. An IT project budget will lay out how much the organisation plans to spend on the project and when it will incur those costs. Steps for developing an IT project budget include articulating the objectives of the project, defining its scope, outlining key deliverables, indicating the resources required (including personnel, technology, tools, travel and training), estimating the cost of those resources, planning a contingency fund, creating the budget document and getting approval for the budget.