Community IT Innovators - IT Budgeting for Nonprofits 022714

Community IT Innovators Webinar Series

IT Budgeting for Nonprofits
Donny Shimamoto
February 27, 2014

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About Community IT
Community IT Innovators partners with nonprofits to help them solve
their strategic & day-to-day IT challenges.

Strategic

Proactive approach so you can make IT decisions that support your
mission and grow with you

Collaborative

Team of over 40 staff who empower you to make informed IT choices

Invested

We are committed to supporting your mission, and take care of your IT
network as if it were our own

Nonprofit focus

Worked with over 900 nonprofits since 1993

About the Presenter
Donny Shimamoto
Founder & Managing Director
IntrapriseTechKnowlogies

donny@intraprisetechknowlogies.com
@donnyitk

IT Budgeting
for Nonprofits
February 27, 2014
Community IT Innovators
Presented by

Donny C. Shimamoto, CPA.CITP, CGMA

v1.3

Speaker Biography
Donny C. Shimamoto,




CPA/CITP, CGMA

Donny Shimamoto, CPA.CITP, CGMA, is the founder and managing director
of IntrapriseTechKnowlogies LLC, a CPA consultancy focused on
organizational development and advisory services for the middle market and
nonprofits. Donny is a recognized national expert in IT management and
international author/speaker on business intelligence initiatives. Donny
helps many nonprofits by bridging accounting and IT to strengthen
organizational governance and risk management, improve business
processes through technology, and increase the effectiveness of
decision through business intelligence and evidence-based management.
Donny was a member of the AICPA Governing Council and is the chairman of
its Information Management & Technology Assurance Executive Committee.
Donny was recognized as one of 2013’s Top 100 Most Influential People in
Accounting by Accounting Today, Top Thought Leaders in Public Accounting
by CPA Practice Advisor in 2012, 2013 and 2014, received the 2009-2010
President’s Award from the Hawaii Society of CPAs, was named to CPA
Technology Advisor’s 40 Under 40 list in 2007 & 2009, and was also a
Hawaii Top High Tech Leader in 2004.

Audience Polls – Demographics


Organization Type/Size
–
–
–
–

–



Small Organization
Medium Organization
Large Organization
Government
CPA Firm



Role in Organization
–
–
–
–

–

Lead Executive
Executive Leadership
Dept Director/Manager
Dept Staff
Auditor or Consultant

Part of Organization
–
–
–
–

Accounting/Finance
Information Technology
Line of Business,
Programs/Departments
Consultant or Auditor

Choose one from each set of
options that best matches how
you view your organization
and your role at work.

A Systematic Approach to IT Budgeting


Anatomy of an IT Budget
–
–
–



IT Asset Lifecycle Planning
–
–




Tying IT Risk to Hardware Refresh Cycles
Software Licensing Explained

Understanding Managed Service Providers
Adding some Cloud into the Budget
–



Types of Expenditures
Categories of Expenditures
Classes of Expenditures

Comparing Cloud vs. On-Premise Solutions via the
Budget

Summary

A Systematic Approach to IT Budgeting


Challenges with IT Budgeting
–

Personnel knowledge challenges



–

Many IT decisions have multi-year impacts, but many IT
budgets focus on only one year at a time




–

IT costs incurred at varying times and recur in multi-year
patterns; single year focus can result higher long term cost
Not just standard personnel and non-personnel costs
May not be the same from year to year

Unable to distinguish mandatory and discretionary IT costs


–

Accounting doesn’t understand IT
IT doesn’t understand Accounting

Often all intermingled and inseparable

Apples-to-apples comparison often difficult due to lack of
consistency in vendor quoting and technical nuances

Let’s deconstruct the anatomy of an IT Budget to see
how we can address the above challenges

Anatomy of an IT Budget – Types of Spend


Types of IT Spend
–

Personnel


–

Salaries & Benefits – employees and associated costs

Non-Personnel






Hardware – equipment and other fixed assets,
installation costs, maintenance contracts, warranties
Software – licenses and support contracts
Subscriptions – could be associated with hardware,
software, training, cloud computing and managed
service providers
Services – advisors, consultants, service providers,
auditors, legal counsel

Once you identify the Type of Spend then you ask the
right questions to better understand the cost

Anatomy of an IT Budget – Personnel


Personnel Budget Questions
–
–
–

Are there any anticipated changes to salaries?
Are there any anticipated change to benefits/benefits
eligibility?
Are there any licenses/certifications to add/maintain/end?



–

Are there any terminations / layoffs planned?


–

Which positions and when?

Are there any new hires anticipated?






Do any of those have training associated with them?
Do any of them have exam or license renewals?

Is this a full-time or part-time position?
What benefits would the person be eligible for?
Is there any training that needs to be budgeted for?

Competitive Analysis Question:
–

How does our compensation package compare to market?

Anatomy of an IT Budget – Hardware


Hardware Budget Questions
–
–
–
–

–



Additional Hardware Questions
–
–
–



What hardware is at end-of-life?
How long will new hardware last?
Are there any maintenance or support contracts needed?
Are there any subscriptions associated with the hardware?
Which costs have to be capitalized?
Do we have enough computers for planned new hires?
Are there any other dept plans that will require hardware?
Are there any projects that may impact current hardware?

–
–

What is our competition doing—what HW are they using?
Have we considered virtualization or cloud-based
alternatives to hardware/infrastructure?

Anatomy of an IT Budget – Software


Software Budget Questions
–
–
–
–

–



Additional Software Questions
–
–
–



Are there any software licenses that need to be renewed?
What period is the software license valid for?
Are there any subscriptions associated with the software?
Are there any installation costs?
Do we have enough software licenses for new hires?
Are there any other dept plans that will require software?
Are there any projects that may impact current software?

–
–

What is our competition doing—what SW are they using?
Have we considered cloud-based alternatives to software?

Anatomy of an IT Budget – Services


Services Budget Questions
–
–
–
–

–



Additional Services Questions
–
–
–



Is the service level adequate for our coming needs?
Are the services provided still needed?
Are there additional services needed?
Has our volume of services changed? Impact to price?
Does the service have a required period associated with it?
Are there any other dept plans that will require services?
Are there any IT projects that may impact current services?
Have services associated with projects been isolated from
operational costs?

–
–

Have we considered outsourcing non-core IT functions?
Have we considered managed service providers?

Anatomy of an IT Budget – Subscriptions


Subscriptions Budget Questions
–
–
–
–

–



Additional Subscriptions Questions
–
–
–



What is the level of usage of the subscription?
Should we renew at a different subscription level?
Does the subscription have a period required by contract?
Are there any installation costs?
Do we have enough subscriptions for planned new hires?
Should we convert any software to subscriptions?
Have all subscriptions associated with hardware and
software been included in the budget?

–

Have we looked a new subscription offerings/pricing
models to validate that we are optimizing our software and
subscriptions cost?

Anatomy of an IT Budget – Types of Spend


Types of IT Spend
–

Personnel


–

Salaries & Benefits – employees and associated costs

Non-Personnel






Hardware – equipment and other fixed assets,
installation costs, maintenance contracts, warranties
Software – licenses and support contracts
Subscriptions – could be associated with hardware,
software, training, cloud computing and managed
service providers
Services – advisors, consultants, service providers,
auditors, legal counsel

Remember to focus on the coming year and also on
future periods that may impact purchase decisions

Anatomy of an IT Budget – Categories


Categories of IT Spend – Defined
–

Capital – expenditures that will need to be considered as
part of the capital budget (usually needs to be capitalized)



–

Operating – expenditures that are related to operations


–

Subscriptions, maintenance, support for HW/SW usually here

Project – expenditures that are tied to a discreet effort





Hardware and large software license purchases usually here
Significant repairs, parts replacements, upgrades

May or may not need to be capitalized
May be required or discretionary expenditures

Consider allocating personnel costs among these
categories to better understand how IT personnel
resources are being deployed

Anatomy of an IT Budget – Categories


Categories of IT Spend – Considerations
–

Capital – expenditures that will need to be considered as
part of the capital budget (usually needs to be capitalized)



–

Operating – expenditures that are related to operations



–

Has a greater cash flow impact, but may also be eligible for
financing from vendors or banks
Consider impact to the financial statements
Usually “required” expenditures related to day-to-day ops
Usually somewhat of a fixed cost; focus usually to minimize

Project – expenditures that are tied to a discreet effort




May have associated capital or operating expenditures
Usually discretionary, but not executing may have impact too
Timing may be adjusted for cash flow

Proper categorization can help to analyze impact to
cash flow and financial statements

Anatomy of an IT Budget – Classes


Classes of IT Spend (Run – Optimize – Innovate)
–

Run – activities and projects that keep the organization
running at its current level of service/operations



–

Optimize – projects and initiatives that help to improve
organizational efficiencies and effectiveness



–

Most Operating expenditures fall here
Project expenditures related to support and maintenance of
the IT infrastructure also fall here

Many Project expenditures fall here, particularly when they
are related to business improvement activities
Many Capital expenditures fall here

Innovate – providing new capabilities, products, or services



Also thought of as ‘Research & Development”
Some Project and Capital expenditures fall here

When trying to “tweak” the IT budget, Run usually should be
kept, Optimize and Innovate should be prioritized

Anatomy of an IT Budget – Classes


Classes of IT Spend – Analyzing your budget
(Laggards)

(Mainstream)

(Leaders)

Your
Org?

Run

80%

60%

50%

??

Optimize

20%

30%

30%

??

Innovate

0%

10%

20%

??

IT Budget

Entity C

Entity B

Entity A

None of these spending patterns are “wrong”.
They just represent different types of IT
roles/investment.

Audience Poll


Which entity are you most similar to?
a)
b)
c)
d)

e)

Entity A (Run = 50; Optimize=30; Innovate=20)
Entity B (Run = 60; Optimize=30; Innovate=10)
Entity C (Run=80; Optimize=20; Innovate=0)
Other
Not sure

Remember
None of these spending patterns are “wrong”.
They just represent different types of
IT roles/investment.



What is an “IT Asset Lifecycle”?
–

IT Assets follow a general “life” pattern



–

IT Assets have different timelines for their life cycles







From Acquisition (“birth”)
To Disposal/Discontinuance (“death”)

Hardware – 3-5 years
Software – depends on license agreement
Subscriptions – usually monthly to annually, depends on
agreement
Services – depends on contract

Understanding the IT Asset Lifecycle helps to
–
–
–
–

Identify the total cost of an IT Asset over its life
Identify points in time with option to change cost structure
Identify future impact of current decisions
Ensure the IT decisions balance short & long term value

IT Asset Lifecycle Planning – Hardware





Acquisition costs usually capitalized
Costs in other phases usually expensed
Option to Repurpose usually forgotten/skipped

Acquire

Maintain

Dispose

Replace

Repurpose



How often an organizations refreshes its hardware
depends on its level of risk tolerance
–
–
–

Different IT Assets have varying risk of failure as they age
Consider the criticality of the IT Asset to operations
Consider the ease of replacement in the event of failure

Risk of
Failure

Laptop

Desktop

Virtual
Terminal

Servers

Firewall

Low

<2 yrs

<3 yrs

<6 yrs

<3 yrs

<4 yrs

Moderate

2-3 yrs

3-5 yrs

6-8 yrs

3-4 yrs

4-6 yrs

High

4+ yrs

5+ yrs

8+ yrs

4+ yrs

6+ yrs

Ease of
Replacement

Moderate

Moderate

Easy

Hard

Moderate



Consider repurposing servers and workstations into
a lower risk role (e.g. login/DNS/file/print server,
etc.) when they reach a Moderate risk of failure

Acquire

Maintain

Dispose

Replace

Repurpose

IT Asset Lifecycle Planning – Software






Acquire/Replace costs may be capitalized
Maintain/Renew/Dispose costs usually expensed
Upgrade costs might be capitalized
Replace/Renew/Upgrade is a key decision point
usually tied to the software license agreement
Acquire

Maintain

Replace / Renew
/ Upgrade

Dispose



Types of License Programs
–

Outright Purchase


–

Defined Period


–

“retail” software license – one time cost
One time cost; Only valid for a defined period

Defined Period + Subscription


Usually large one time cost, plus subscription
–



–

annually usually 15-20% or original purchase price

Only valid for a defined period, subscription = renewal

Subscription





May have one-time activation cost
Usually has regularly recurring payments
(annually/monthly)
Usually has a defined period with renewal option
Upgrades usually included / available



Types of License Programs – Impact to Budget
–

Outright Purchase


–

Defined Period



–



One time expenditure in year of acquisition
Recurring subscription cost in subsequent years

Subscription





Potential renewal cost at end of period

Defined Period + Subscription


–


May have one-time expenditure in year of acquisition
Recurring subscription cost in subsequent years

When analyzing a purchase decision be sure to
look at the costs in out years / total cost



Microsoft License Programs
–

OEM = provided with purchased equipment




–

Retail = purchased from a “store”




–

Only valid for that equipment (can’t be moved/transferred)
Can’t transfer to virtualized environment
No previous version rights
Can be moved/transferred between equipment
Can transfer into virtualized environment
No previous version rights

Open License = purchased from a “retailer”





Can be moved/transferred between equipment
Can transfer into virtualized environment
Rights to use previous versions with Software Assurance
Has a license period, may be treated like a subscription



Microsoft Open License
–

Open Business



–

Open Value / Open Value Subscription







Two-year periods, pay upfront
Software Assurance optional

Three-year periods (one-year allowed for subscription)
Pay upfront or pay annually (subscription)
Must include Software Assurance
Can purchase Online Subscriptions, but must pay annually

Microsoft Online Subscriptions
–
–
–

Priced monthly, pay monthly
Different plan levels with different costs
Annual contracts, increases allowed at any time,
decreases only at annual renewal point

IT Asset Lifecycle Planning – Subscriptions






All costs usually expensed
Replace/Renew/Upgrade is a key decision point
usually tied to the subscription agreement
Increases usually allowed at any time
Decreases usually only at Renew point
Acquire

Maintain

Replace / Renew
/ Upgrade

Discontinue

IT Asset Lifecycle Planning – Services





Capitalize/expense depending on type of work
Lifecycle depends on contract with service provider
Managed Service Provider contracts often behave
like Subscriptions; and may have software
associated with it
Acquire

Maintain

Replace /
Renew

Discontinue



Managed Services is the practice of transferring day-to-day
related management responsibility as a strategic method for
improved effective and efficient operations inclusive of
Production Support & lifecycle build/maintenance activities.
–



A Managed Services Provider (MSP), is typically an IT services
provider, who manages and assumes responsibility for
providing a defined set of services to their clients either
proactively or as they (not the client) determine that the
services are needed.
– Most MSPs bill an upfront setup or transition and an
ongoing flat or near-fixed monthly fee, which benefits
clients by providing them with predictable IT support costs
–



Source: Wikipedia, http://en.wikipedia.org/wiki/Managed_services

Source: Wikipedia, http://en.wikipedia.org/wiki/Managed_services

Could bookkeeping be considered a managed service?



Benefits of a Managed Service Provider (MSP)
–
–
–

MSP usually specializes in the services provided
MSP usually incorporates best practices into their service
model
Services automatically provided as needed within scope




E.g., when there is a problem applying a system patch, MSP
will automatically go in and fix it; without additional cost

Considerations when using an MSP
–

Usually requires that you conform to their model /
software suite


–

Works well for standardized environments

When IT staff are employed by organization



Usually shifts non-value-added tasks to MSP
May not decrease staffing cost, but allows staff to focus on
more value-added activities



Impact of an MSP to the IT Budget
–
–

Usually increases predictability in service costs
Usually setup cost, then recurring monthly payments





–

Usually higher recurring cost



–

Cost driven by number of supported devices
May have software licenses included in cost
May offer reduced cost of hourly services w/ higher level plan
Higher level plans normally include more managed services
But total cost can be less depending on level of incidences
Total cost may be higher if there is variability in the
environment

Review the MSP contract to determine



How much flexibility you have for increases/decreases
Renewal points and plan levels (options/service levels)

MSPs aren’t right for everyone, requires a leap of faith

Adding Some Cloud to the Budget


Cloud Computing / Software-as-a-Service (SaaS)
–

Reduces the need for equipment purchases



–

Reduces up-front implementation costs




–

Don’t need to pay for setup/config of hardware
Don’t need to incur full platform install/setup
Sometimes user setup is included with subscription fee

Reduces on-going support & maintenance costs



–

Vendor is responsible for server equipment / infrastructure
However, may require bandwidth/network equip upgrade

Vendor is usually responsible for system operations, patches,
backups, business continuity, software upgrades
Don’t need to worry about hardware lifecycle risks

Reduces cost of Replacement phase




Don’t need to incur costs of server upgrade/replacement
Don’t need to incur costs of software upgrade/install

Adding Some Cloud to the Budget


Impacts of Cloud / SaaS to the Budget / Cash Flow
–

Usually reduces overall cost of acquisition


–

Usually follows subscription lifecycle model





Implementation costs usually expensed
Many vendors allow monthly payments
Many vendors offer discount for annual payment up-front

Budget / Cash Flow Considerations
–

–
–
–

No “asset” created, so usually not eligible for financing
What is the impact to funding eligibility if cost is spread
over time instead of up-front?
What is the impact to the financial statements (and related
performance incentives) if expensed?
Does a conversion to a cloud/SaaS solution reduce costs
in other areas?



Understanding the IT Asset Lifecycle helps to
–
–
–
–



Identify the total cost of an IT Asset over its life
Identify points in time with option to change cost structure
Identify future impact of current decisions
Ensure the IT budget decisions balance short and long
term value

Create a multi-year IT Budget to analyze total cost
–

Note replacement / renewal points and costs


–
–
–

–

Remember to include any associated services with changes

Remember to determine if there are disposal costs
Balance risk and cost over time
Consider the use of an MSP for cost management and
better IT staff utilization
Consider the impact of Cloud Computing to funding, cash
flow, and financial statements

Now you have your IT budget created…




After completing the entire budget, go back and
look at the big picture that it shows
Use multiple versions of the IT budget to do “what
if” scenarios
–
–



Compare costs of physical vs. virtual servers
Compare costs of on-premise vs. cloud solutions

Creating the budget the first time can be a big
endeavor
–

Maintaining it usually required less effort

Call to Action – IT Budgeting for Nonprofits


CEOs/EDs, CFOs/Controllers, and Dept/Program
Managers should work with their IT Manager or
Service Provider to develop an IT Budget that
–

Ensures alignment of IT with business strategy & mission

–

Balances both short-term and long-term IT costs

–

Balances IT-related risks, costs, and value

–

Helps with organizational planning for cash flow,
funding sources, and financial statements


–

Separates discretionary from non-discretionary IT costs

Enables informed decision-making for IT projects

A good IT budget is both a planning and decision-making tool
that can help to maximize the benefits of your IT investments
and enable your organization to better achieve its mission

Thank you for your
attention and participation!
Any Questions?
Donny C. Shimamoto, CPA/CITP, CGMA
IntrapriseTechKnowlogies LLC
email: donny808@cpa.com
voice: (808) 735-8324
twitter: @donnyitk

See also March 2012 Journal of Accountancy article:
“A Strategic Approach to IT Budgeting” @ http://www.journalofaccountancy.com/Issues/2012/Mar/20114439.htm

Upcoming Webinar

March 27
Best of Nonprofit Tech (14NTC)

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