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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 spending can be broken into a few categories, each with their own impact to the bottom line.

Hardware replacements

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 plan. Power users like engineers get replacements more often. Simple data entry computers on the shop floor, less often.

Smartphones and tablets also have a useful life span. As Microsoft, with Microsoft 365, and Google, with Google Workspace, keep 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 improvements. 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.

Software upgrades

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 add-in or AI assistant that handles work specific to your industry, which probably won't cost a lot, but it can be as complex as a new CAD solution that will help your engineers bring products to market 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, every 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, Lenovo, 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 move data from place to place. This is probably even more important to cloud-first businesses: if you can't 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 likely faster than your upstream. Cable Internet was originally 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. Fiber providers now serve much of West Michigan and can deliver 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.

Cloud services

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. Most of them replace a large, one-time purchase with a predictable monthly subscription, which is much easier to budget for.

Microsoft 365

It is a given that we must keep software up to date, and that includes our productivity software such as Microsoft Office. Rather than buying Office outright and replacing it with each computer, a Microsoft 365 subscription spreads the cost into a monthly per-user fee and adds:

Google Workspace

Similar to Microsoft 365, Google Workspace 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 Google has since added Drive, Meet and other services optimized for all devices and web browsers. It can operate as a complete Microsoft Office replacement and includes email with excellent spam filtering. 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. Bought outright, an ERP system means a large per-seat license cost, a yearly maintenance fee (typically around 20% of the original cost), server hardware, database licensing, and the time spent on upgrades and training. Cloud ERP such as Microsoft Dynamics 365 Business Central replaces that with a per-user monthly subscription, plus:

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

An often overlooked part of the budget is telephones. Replacing an aging, unsupported phone system outright is a real capital expense once hardware and installation labor are added, and every move, add or change means calling a telecom vendor or asking someone on staff to learn the system.

Our Managed VoIP service replaces that purchase with a monthly fee. We supply the phones and the phone system, set up extensions, voicemail and call routing, and handle changes on request. Your phone service stays with a carrier you choose, whether that's the one you already have or a VoIP.ms bundle we set up for you. Phone costs become a predictable monthly line item, and the carrier bill stays separate and in your name.

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. Paying by the hour makes this hard to budget for: a single malware incident or a busy month of small projects can swing the number considerably, and the business absorbs the downtime on top of the labor.

Our managed services are billed at a flat rate per end user per month. This 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. Our Services page covers what clients typically spend.

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. 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 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? That's why 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. 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.

Summary

If you're creating a budget for next year, the categories above give you a list of things to consider: hardware replacements, software upgrades, servers and infrastructure, cloud services, and consulting and support. By modernizing services and embracing the cloud, many businesses can both lower their IT spending and make it more predictable month to month. Every business is different, so we'd be happy to discuss specifics with you at any time.

Contact us for more info.

Questions about your own setup? Talk to us