November 21, 2018
How to Create an IT Budget
As the end of the year approaches, budgeting is often on the minds of business people. Developing an effective IT budget isn’t easy considering how dynamic businesses must be. What if plans change mid-year? What if there’s an acquisition? How do you make your budget look good if you want to be acquired?
There are many issues to consider, and in the fast paced world of IT, making a year long plan takes careful consideration.
IT Expenditure Categories
Typically, IT spends can be broken into a few categories, each with their own impact to the bottom line.
Whether your business is entirely cloud based and most of your users have tablets and smartphones, or if you’re more conventional and have desktops and laptops, hardware ages. New software comes to market that requires faster processors and more RAM. New wireless standards seem to come out every few years, often requiring device upgrades to take advantage of. Of course, physical wear and tear happens as well, and who wants to go into a meeting with potential customers with old, tattered hardware?
So how often do you replace hardware? For desktops and laptops, we typically recommend a three to five-year replacement plans. Power users like engineers get replacements more often. Simple data entry computers on the shop floor, less often. (As an aside, we don’t recommend hand-me-downs for the shop floor. More on that later.)
Smart phones and tablets also have a useful life span. As vendors such as Microsoft, with Office 365, and Google, with G Suite, are ever improving their mobile apps, more and more work can be done on those devices. Thus, the available processing power and storage on those devices come into play. Also, unlike their desk-bound cousins, these devices often have to connect to mobile networks as well. Providers are always improving their networks, and new devices are often required to take advantage of those improvement. Sometimes this means that tablets and smartphones must be replaced more often, perhaps even yearly for power users.
Regardless of what tools your business uses, you must budget for replacement and disposal of hardware.
All that shiny hardware is useless without the appropriate software to run on it. Unless you’re a startup, you probably already have line of business (LoB) software implemented to run your operations. Of course, needs evolve, software is improved, and security holes are patched. So when do you upgrade, to what, and how much will it cost?
We always recommend that companies keep LoB software on a current support contract with the vendor. This will not only help smooth out the costs associated with upgrading, but will speed the resolution of technical issues. Of course, in addition to what you’re paying for the support contract, there is the hidden human cost of upgrades: if you change something, how much training will the users need to get up to speed?
Businesses must budget for adding new software as well. There are armies of programmers out there creating new tools for businesses daily. Some evolve into great ideas, others fade away, but when one is created that targets your industry, it is a huge opportunity to jump on. Sometimes it can be as simple as an Excel plug-in that targets calculations specific to your industry, which probably won’t cost a lot, but can be as complex as a new CAD solution that will help your engineers bring products to industry more quickly.
The right software tools can truly reduce overall costs, but budgeting for them can feel like a moving target.
Servers and Infrastructure
So, now we’ve got good hardware, and effective software to run on it. No user is an island, so how do those devices communicate and where is the data stored?
If you’re lucky enough to be a cloud-first business, much of this is already taken care of for you. Huge data centers filled with very expensive and well-designed systems protect your data. You still need to connect to it though. To some extent, very business needs servers and infrastructure. So, how do we budget for it?
This is pretty easy if there are no huge business changes on the horizon. Look at it like a road; if the same type and volume of vehicles are always driving on the same stretch of highway, it simply needs to be maintained, patched and only occasionally upgraded. In business though, it is naive to expect nothing to change.
Servers typically have a life of three to five years. We usually cap them at five years, even if they’re still useful, for a very simple reason: it is hard to find repair parts for old hardware. If a workstation dies, it is a simple matter to slap in a replacement. An emergency server replacement though is a Herculean task. Typically, Dell, our server vendor of choice, will warranty a server for five years. That means it is in their best interest to stock replacement parts for those machines. Outside of that warranty, it is really up to chance. The Worst case scenario is going to eBay for refurbished parts. Who really wants to run their business on a server repaired with eBay-sourced parts?
Infrastructure is important too, as this refers to the switches, routers and wiring that moves data from place to place. Probably more important to cloud-first businesses, if you can get the data from the cloud to your device, both become kind of worthless.
Cabling is something to think about when building new construction or adding on. We recommend using the best cabling available at the time, and installing as many drops as feasible. This might sound odd in a WiFi saturated world, but cable is still king, and when it comes to reliability and speed, wireless tech will likely never outpace it.
For switches, routers, firewalls and the rest, we also recommend a five-year replacement policy. In general, when it is time to replace one of these devices, we try to group them into functional groups. In other words, we’d like to replace all the switches in a company at the same time. This keeps things on the same management platform and ensures interoperability.
The last aspect of infrastructure we must look at is the connection to outside services: the Internet connection. If your ISP is your cable company, your downstream speed is faster than your upstream. When cable Internet was originally designed, it was designed for consumers, meaning users that mostly consume data (e.g., watch Netflix). Your business likely produces a lot of data and needs to send that out to customers and vendors. So, when you develop your budget, perhaps it’s time to consider a more business-centric solution. In the West Michigan area, we are fortunate to have Everstream, a company that owns a massive fiber optic network and can deliver businesses symmetric Internet connections, where downstream and upstream speeds match.
So, as Michigan companies know, the roads on which we drive are at least as important as the vehicles we drive on them. Similarly, in IT, laying a good infrastructure for your data to travel on, and devices to connect, is often as important as any other part of your investment.
Once you have good roads for your data, performant devices to use, and an appropriate connection to the outside world, let’s talk about what services businesses use in the cloud. We’re going to cherry pick some examples out of the wide range of cloud services available so we can talk about costs.
Microsoft Office 365
It is a given that we must keep software up to date, and that includes our productivity software such as Microsoft Office. A license of Microsoft Office costs around $360. Let’s assume that we’re going to upgrade that when we replace a computer, or in other words about every four years. That comes down to $7.50/month.
The comparable subscription from Microsoft, Office 365 Business, costs $8.25/month. Only slightly higher than buying it outright, and consider the following additional features:
- Only a month-to-month commitment
- Includes 1 TB of cloud storage per user
- Adds SharePoint online, Microsoft’s stellar collaboration platform
- Installable on 5 user devices (laptop, smartphones, tablets, etc.)
- Includes web-based versions for online collaboration
- Constantly upgraded to the latest version
So, rather than a one time lump sum purchase, that isn’t upgraded for years and is only designed to work on a local computer (no devices), the Office 365 option really shines and is very smooth from a budget perspective.
G Suite by Google
Similar to Office 365, G Suite by Google offers a collaboration-first cloud solution, empowering users that prefer to do everything in the cloud. It started out as a way for companies to get branded Gmail services, and since Google has added Google Drive, Hangouts and other services optimized for all devices and web browsers.
G Suite Basic runs $5/month, with savings available for annual commitments, and can operate as a complete MS Office replacement. So, rather than a $360 lump sum outlay, replace that with a simple $5/month subscription that offers email (with excellent spam filtering) in addition to office productivity apps. If your workforce is distributed, this is really an option to consider and is easy to budget for.
Microsoft Dynamics 365
We spoke earlier about line-of-business applications. Let’s take an ERP system for example. To buy outright, an ERP system can cost in the $4000/seat range, and a typical yearly maintenance fee is around 20% of the original cost. So, for an office of 10 users, you’re looking at a $40,000 initial cost plus $8000 in annual fees. Over 5 years, that’s $72,000 and you’d be on the hook for any time spent on upgrades, training, etc. That cost also doesn’t include server hardware, database software or licensing which will run in excess of $20,000.
Contrast that with the Dynamics 365 Business Central Premium at $100/month/user. That same 10 user office would now pay $60,000 over five years. Less overall, plus:
- No lump sum investment
- No servers to maintain
- Month-to-month commitment
- Grows and shinks with your business
- Integrated collaboration with MS Outlook
- Automatic upgrades
Dynamics 365 really exemplifies how cloud-first operations are changing business budgeting. Instead of tying up capital in a monolithic ERP solution that inevitably will need to be upgraded, the world is shifting towards simple monthly subscriptions.
Telephones and Cloud PBX
An often overlooked portion of the budget that can also be cloud-transitioned is telephones and your business PBX. This is idea for any company that is looking to replace an aging, unsupported PBX or simply looking to communicate better. To buy a PBX system outright is a capital expense well over $20,000 by the time the hardware and labor is considered. Then you have to bring phone service into it, often costing another $500-$1000/month. When it comes to moves, adds and changes, you either have to bring in your telecom vendor, or burden someone internally to learn the system.
The Cloud PBX alternative, as is typical with a cloud based solution, has no upfront investment, only the monthly operating expense. Everything is managed through a web interface, and the phones simply plug into the existing network. Solutions vary, but our system costs $35/month per number (which includes one extension), plus $25/month per additional extension. So, the total telecom cost for a typical 10 user office would be around $260/month. That includes all usage. All of a sudden that $20,000 in-house PBX system is a hard pill to swallow.
Consulting and Support
Now that we have the hardware, infrastructure, and cloud services addressed, let’s talk about consulting and support. Systems run pretty well on their own, but regular maintenance and improvements are important. Companies often bring in third parties to help with these things, as well as remediating the occasional emergency. If your company has a single malware incident that requires remediation once a year, you’d be looking at an estimated $2000 in labor costs, plus the downtime it costs the business. Let’s also say that you spend $1000/month in miscellaneous services to maintain and improve systems. Over the year, that comes to around $14,000 just to maintain your systems.
Our base package (as seen on our pricing page), costs $95/user/month. We have other packages that include more features, but for the purposes of this budget discussion, let’s keep it simple. If we look at our example 10 user office again, total yearly cost would be $11,400. This also brings stability to the table as we put in tools to head off problems before they happen, which is why we can charge a flat rate without risk to our business. In addition to just support, maintenance and monitoring, we also include on and offsite backup, and antivirus in our basic offering.
Paying by the hour for break-fix services just doesn’t make sense anymore, at least for businesses that rely on their technology to work well.
CapEx vs OpEx
Before we end this discussion, let’s cover capital expenses vs operational expenses. Again, we aren’t accountants, but we’ve seen the smile on enough accountants faces to know that they’d rather write a check at the end of the month rather than deal with depreciation and fixed asset accounting. Every server, workstation, printer, and other capital device needs to be dealt with on the books, but what if there was a way to move all of those items to an operating expense. Again, if you notice on our pricing page, we also offer hardware as a service. That means that whatever hardware your business needs to operate we include in the monthly fee. This isn’t new, and other MSPs do it as well, but often they write their agreements as leases. We don’t. We own the hardware, track it, pay any property taxes on it, and depreciate it on our books. Again, we’re optimized to do this, so it isn’t a huge cost for us, but it becomes a huge benefit to you.
So, on top of all the cloud services we talked about above, you have the opportunity to have your hardware as a service too.
Now, you’re probably looking to create a budget for next year, and given the list above you now have a list of things to consider. However, let’s look at all the possible expenses mentioned above over a five-year time frame, broken down into monthly expenses. We’re going to use our 10 user office example again, and keep in mind this is a very general example. We’d be happy to discuss specifics with you at any time.
|Category||Conventional Monthly Cost||Cloud or Service Alternative||Alternative Monthly Cost|
|1⁄3 Computer replacements/year||$333|
|General Server Replacement (3yr)||$222||Hardware as a Service||$750|
|ERP Software||$1,200||Dynamics 365||$1,000|
|ERP Server & Licensing||$555||N/A||$0|
|MS Office||$100||Office 365||$83|
|Telephones/PBX Hardware||$833||Cloud PBX||$260|
|IT Support||$1,167||Managed Services||$950|
By modernizing services and embracing the cloud, this example company would save around $1367 per month. Of course, every business is different, so there may be better opportunities in your organization, so do let us know if you think we can help you.
Contact Us for more info.