Why IT Budgets Are Like Government Entitlements

So here’s the question: what do IT budgets and government entitlement programs have in common? And here’s the answer: both are budgeted and funded on the basis of entitlement. While government budgeting for entitlement programs is familiar, the IT corollary, and its implications for software development processes, is what we intend to focus on here.

How can an IT organization determine and justify its software development budget? In principle, budgets should tie business requirements to the effort necessary to deliver those requirements in new or existing systems. The results should be reliable, with the business having every expectation that high-quality software will be consistently delivered within the budget allocated.

Unfortunately, most IT organizations cannot do this type of budgeting. After all, how does the developmental budget document the fact that 20% of development projects are never delivered at all, or that 40% will substantially exceed project-level cost estimates and timeframes? How many CIOs could get approval for a budget that explicitly allocates 40–50% of development resources to rework (again, the industry average)? Obviously, another rationale for funding is needed.

Our observation is that IT budgets end up being derived from past spending patterns rather than clear cost-to-deliver calculations. The budget is loosely based on head-count and fixed costs, with adjustments for the corporate cost goals or special funding for large, high-visibility software initiatives. In effect, like government entitlement, funding is largely predetermined. If the budget last year was $2 million, then, unless there is a major business disruption, it will be about the same the following year.

Unfortunately, this budget approach hides the core drivers that determine how ineffective the organization’s software development processes really are. In a disruptive economic situation such as we are now experiencing, this leaves CIOs without a meaningful way to price and guarantee delivery of high-quality software at the lowest cost. Technologies and processes that could eliminate substantial rework costs or improve quality get ignored because those costs are not directly evaluated in the budget process.

We strongly encourage our clients to start measuring and understanding the cost drivers that truly impact their software development budgets. It’s also important that they measure rework rates and root causes of major quality problems. This gives CIOs the information to make the right technology and process investments for a more reliable and higher quality software delivery. And that is the best way to ensure adequate, rational IT budgets that everyone’s entitled to.

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