The Role of Capital Budgeting in Technology Decision-Making

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As technology continues to transform professional environments and modern workflows, the need for information technology budgeting grows increasingly important. Cutting-edge hardware and software tools often come with a hefty price tag, and a single hasty decision can cost an organization thousands without adding any value to its daily operations. This accounts for why some business leaders take a slow-roll approach to upgrading their core applications and system infrastructures, despite the productivity gains they may achieve.

IT budget documents and binder

Investing in the right technologies at the right time involves a lot of internal planning and strategic analysis. Waiting too long can lead to missed opportunities and detrimental inefficiencies. So how do IT managers and executives balance the benefits of tech-based innovation with high acquisition and implementation costs?

The importance of capital budgeting in IT management

Capital budgeting is an essential decision-making process that helps companies evaluate the short- and long-term value of capital-intensive projects, from opening new facilities to replacing outdated computers. Before an organization invests in new technologies, it must first assess whether the project is likely to be profitable, especially if it involves a lot of upfront expenditures. For example, upgrading networking equipment can help companies improve their in-office connectivity and the performance of their web-based applications, but it’s not always clear how these changes translate to a positive return on investment. Some of the financial benchmarks organizations consider include:

  • Budgetary constraints
  • Cash inflows and outflows
  • Internal rate of return
  • Net present value
  • Payback period

Reviewing these metrics allows organizations to make smarter tech investments and avoid unnecessary spending, as lower-priced alternatives to an industry-leading solution may offer comparable results at a fraction of the cost. Strong financial planning helps IT directors weigh available options, incorporate saving strategies, and ensure their expenses align with their companies’ operational and commercial goals. According to a 2019 study from Spiceworks, around 89% of surveyed companies expect their IT budgets to stay the same or grow over the next 12 months, suggesting that many high-level decision makers recognize the value of tech-oriented innovation.

While the specific factors driving this budgetary expansion vary between organizations, more than 60% of respondents reported that upgrading outdated IT infrastructure was a key concern. Other notable influences include the increased priority of IT projects (56%), elevated security concerns (56%), employee growth (43%), and changes to existing regulations (37%). Information technology budgeting empowers IT executives to identify which initiatives will support their organization’s broad strategic objectives without negatively impacting its bottom line. But how do companies determine whether their IT projects will be financially successful?

Breaking down the information technology budgeting process

Although many organizations view their IT budgets as a single pool of available capital, the surest way to supercharge decision-making and maximize ROI is to sort relevant expenses into distinct categories. This can help CIOs and other C-suite executives develop precise operating models that demonstrate how each tech investment will improve their operational and financial outcomes. To streamline this process, the global research firm Gartner developed the “run-grow-transform (RGT) method,” which considers the upfront costs of IT investments along with the resources needed to effectively implement, manage and support the proposed improvements. Gartner’s RGT model contains three distinct components, including:

1. Run: Operate and maintain

This portion of the model assesses the IT resources that businesses use to facilitate everyday operations, including employee workstations, network and system infrastructure, cyber-security tools, and other ancillary applications. While these expenses do not directly contribute to a company’s revenue goals or business-focused initiatives, they are essential for maintaining consistent performance and predictable functionality. Some examples include:

  • Application management
  • Software compliance
  • Hardware re-imaging
  • IT financial management

2. Grow: Enhance and expand

This component of the RGT model evaluates the IT resources that enable companies to develop and improve their internal systems in support of organic growth and business process refinement. The goal of this type of IT asset is to bolster existing capabilities and increase productivity, allowing businesses to remain competitive in the long term. For example, discretionary spending used to upgrade customer-facing applications can provide new opportunities for generating sales leads and increasing revenue. Some essential growth functions include:

  • IT sourcing and procurement
  • Network architecture revamps
  • Software and application upgrades
  • Performance analysis

3. Transform: Innovate and drive

Gartner’s model puts a lot of emphasis on this segment of IT investment, as it helps companies adapt to shifting market demands through the implementation of enhanced systems and tech-enabled workflows. Considered a high-risk, high-reward category, transformative technologies provide business leaders with a range of opportunities to enter new markets, attract unfamiliar customers, and establish compelling value propositions. These goals are often difficult to achieve when decision makers exclusively focus on operational and growth capabilities, which is why many CIOs prefer a high-level view of their IT budgets. Some important transformative investments include:

  • Research and development
  • IT solution pilots
  • Workflow digitization
  • Data collection and analysis

What an online MS in MIS can teach you about information technology budgeting

As MIS professionals advance to manager, director, and executive roles, they will likely become more involved in IT planning and budgeting processes. Overseeing new deployments and coordinating upgrades to existing infrastructure requires both technical insight and business acumen, which is where a graduate degree can help. The online Master of Science in Management Information Systems from the University of Alabama at Birmingham offers a range of unique learning experiences that can help students master the IT administration concepts they need to excel in their careers. If you’re interested in information technology budgeting, the IT Management concentration can provide you with hands-on experience in technology planning, systems analysis, and business strategy.

Learn more about how a master’s degree in management information systems, offered through the Collat School of Business, can enhance your existing career. Reach out to an enrollment advisor today.

Recommended Readings:

Learn more about a career as a database administrator

Understanding disaster recovery and business continuity

Benefits of earning an MS MIS online

Sources:

The 2019 State of IT Report by Spiceworks

Align IT Functions With Business Strategy Using the Run-Grow-Transform Model by Gartner

What is Capital Budgeting? by Corporate Finance Institute

A strategic approach to IT budgeting by Journal of Accountancy