IT Forecasts, Budgets and Post Audits

By Marcia Gulesian

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Senior executives are caught in a double bind: ever greater commitments to IT investment are being driven by competitive necessity and discouraged by escalating costs and uncertain benefits.

It is thus useful to understand the origin of these costs and identify IT projects where benefits cannot be measured and those where benefits can (the latter being the minority).

This discussion will be limited to an examination of management and budgets in software development, the main discretionary expenditure in IT planning and also the key element in using IT for business innovation.

This focus is admittedly narrow but, nonetheless, relevant because software development is extremely expensive, when measured in terms of full lifecycle costs. Inasmuch as operations and maintenance costs can amount to one to three times development cost, today’s development budget sets a considerable portion of the IT budget for the next several years.


Many managers regard budgets negatively. The word budget is about as popular as, say, strike or layoff.

Yet top managers must convince their subordinates that the budget is a positive device designed to help managers choose and reach goals. Note that budgets are not cure-alls. They are not remedies for weak management talent, faulty organization, or a poor accounting system.

At the same time, these subordinates must be able to justify, in simple terms, their numbers. When they can, not only is a more collegial relationship likely to take hold, but the proposed budget is more likely to be funded.


It is easy for managers to demand that IT costs be brought under control, but it is reasonable for them to do so only if they acquaint themselves with the origins of those costs. Thus, management must recognize all development costs, many of which are hidden.

Furthermore, management must understand that its current investment in development creates future operations and maintenance costs. And, management frequently overlooks the ensuing organizational, support, and infrastructure costs, which can be obscured by an accounting system that expenses IT as overhead.

Tradition has led senior business managers and many IT executives to view IT as an annual expenditure. In good times, the IT manager makes the case for an increase of "X" percent or adds up all the approved new software development requests from the business units and factors in aggregate operations costs.

In bad times, senior management demands either a decrease in the rate of growth or even an absolute cut in the budget. But both approaches ignore the cost dynamic of software development, where costs are usually compounded. Assume that software development is 25% of the total IT budget in the first of five years and that every dollar of development generates 20 cents of operations and 40 cents of maintenance costs. Then, consider the following three scenarios:

  • You maintain a level IT budget—At the end of the fifth year, the additional operations and maintenance costs generated by each year’s new software development will have cut development by 93% even though the overall budget remains the same.
  • You keep software development level—Over the course of the five years, the additional operations and maintenance costs generated by each year’s new software development will have raised the IT budget by 15% a year. Development will have dropped from 25% of the total budget to 18%.
  • You grow software development by a fixed percent—The IT budget will grow at 18% a year for a 10% growth in development per year. At the end of the fifth year, development will have dropped to 20% of the total budget, down from the initial 25%.
  • So much for costs. What about the benefits of software development?

    Post Audits

    Post audits identify problems that need fixing, check the accuracy of forecasts, and suggest questions that should have been asked before the project was undertaken. Post audits pay off mainly by helping managers to do a better job when it comes to the next round of investments.

    Most firms keep a check on the progress of large projects by conducting post audits after the projects have begun to operate.

    Post audits may not be able to measure all cash flows generated (or expenses saved) by a project. It may be impossible to split the project away from the rest of the business.

    Suppose your firm has just taken over a trucking company that operates a merchandise delivery service for local stores. You decide to revitalize the business by cutting costs and improving service. This requires three investments: buying five new diesel trucks; constructing a dispatching center; and developing a new software application to keep track of packages and schedule trucks.

    A year later you conduct a post audit of the application. You verify that it is working properly and check actual costs of development, deployment, and training against projections. But how do you identify the incremental cash inflows generated by the new application?

    No one has kept records of the extra diesel fuel that would have been used or the extra shipments that would have been lost had the new application not been installed.

    You may be able to verify that service is better, but how much of the improvement comes from the new trucks, how much comes from the dispatching center, and how much comes from the new application? It is impossible to say. The only way to judge the success or failure of your revitalization program is to examine the delivery business as a whole.

    In contrast, developing an ad-hoc application using commercial-off-the-shelf tools may sometimes produce clear-cut benefits that are attributable to the new application alone and result in virtually no down-stream costs once the application is turned over to the end user.

    For example, a new optimization tool could

  • Minimize the costs of shipping goods from production plants to stores near metropolitan demand centers, while not exceeding the supply available from each plant and meeting the demand from each metropolitan area.
  • Find the best way to visit 20 cities with the least amount of traveling.
  • The bottom line is, in order to stay competitive, senior management needs to fund IT budgets with a degree of expertise heretofore usually seen only in their funding of core-business budgets.

    Marcia Gulesian has served as software developer, project manager, CTO, and CIO over an eighteen-year career. She is author of well more than 100 feature articles on IT, its economics, and its management.