The IT Forecasting Maturity Model

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The IT Forecasting Maturity Model Adopt the right stage of forecasting maturity for your organization today and recognize when you are ready to move to the next stage.

4 stages of forecasting maturity Annual budget without forecasting

Annual budget with quarterly forecasting

Annual budget with monthly forecasting

Rolling (continuous) forecasts

Organizations struggle to use traditional budgeting methods to manage technology finances with agility. The challenge starts with the shortcomings of the most widely used budgeting tool—spreadsheets. When changing business priorities come into view, and the brittleness of intertwined spreadsheets and nested formulas is rudely exposed, all bets are off on whether a spreadsheet can cope. You deserve better than this. Traditional budgeting success is measured by negligible spend-to-budget variance and manageable true-ups. Today, expectations are different. Business partners need IT to offer agility, accountability, and choice. Forecasting maturity offers an incremental approach to meeting these expectations. This whitepaper discusses the four stages of forecasting maturity and how (and when) IT organizations should move from one stage to another.

Annual budget without forecasting The annual budget asks organizations to rise out of the day-to-day and think in the long-term. It forces a re-evaluation of priorities, aligns resources to business initiatives, and defines key performance indicators (KPIs) that align to your IT strategic planning process. WHO USES THIS? An annual budget with no forecasting serves organizations who look at IT spend as overhead. When IT isn’t seen as an enabler of business value, organizations want to stay on budget and avoid surprises. In this view, IT is seen as a cost center, not a value creator. IT isn’t expected to be a business differentiator, it’s utility. CIOs in these organizations rarely drive C-suite strategy conversations. They are measured against “keep the lights on” success and trimming costs. They deliver value—just not strategic value. WHAT CHALLENGES DO YOU ENCOUNTER? Complexity. Management of IT spend-to-plan defaults to spreadsheets, corporate performance solutions, email: all are inadequate to manage the most complex and expensive domain in your organization. IT finance spends too much time wrangling complex, error-prone spreadsheets and too little time delivering financial agility.

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The IT Forecasting Maturity Model

finance will put up with. Without a purpose-built IT planning solution,

Annual budgeting with quarterly forecasting

no one has the time (or tools) to elevate the annual budgeting process

The annual budgeting process with a quarterly forecast incorporates

Too much effort. You endure annual budgeting with poor tools as it’s seen as the cost of doing business. But there are limits to what IT

beyond an act of governance. Complete the budget process first, and (if there’s time) layer in strategic value later. Which, to be self-aware, there never is.

actuals into an assessment of IT spend and re-plans the budget for the balance of the year. Annual budgeting with quarterly forecasts couples the planned view of IT priorities with the reality of what has already been spent. IT finance responds to the unexpected by embracing the

“We’ve seen the following operational impacts: A more structured planning process, clearer approval/reject rules, one source of truth, no spreadsheet adjustments after planning

agility of a re-plan. WHO USES THIS?

cycle was closed, and industrial standard approach for

Annual budgeting with quarterly forecasting serves organizations

capabilities/services offered by IT.”

who need spend agility. Reviewing actuals and tweaking spend for the balance of the year (while staying on budget) makes IT more responsive Steffen Kaefer Controller

Source: TechValidate. TVID: 0AB-230-89C

to new opportunities or shifts in priorities. Quarterly forecasts make IT a true business partner and not just a cost center. WHAT CHALLENGES DO YOU ENCOUNTER? Too much effort. Organizations drowning in complex spreadsheets

Poor strategic value. The limitations of annual budgeting reinforces the view that IT spend is overhead. Budgets in spreadsheets hide composite IT costs and do not give business units levers to control their spend. Business partners aren’t happy with their lack of options. When they don’t know a better way, or are skeptical there is a better way, they suffer in silence and accept the (annual budgeting) status quo. No agility. Spend-to-budget analysis shows the execution of your plan. But plans change. IT must respond to unexpected events by repurposing resources (while still meeting other commitments). Annual budgets do not give IT finance the necessary way to course-correct spend surprises. The business needs IT spend agility not provided by annual budgets.

struggle to adopt a forecasting cadence. Annual budgeting in spreadsheets is tolerated but quarterly forecasts add too much burden for organizations relying on manually-updated, error-prone spreadsheets. The resources needed to roll-out a quarterly forecasts make the process look too burdensome. Wrong focus. A quarterly forecast is not the annual budget in quadruplicate. Organizations must focus their forecasts for the biggest impact. Focus on outsourced spend if the majority of IT spend is tied up in managed services agreements; focus on cloud service providers if your primary strategic initiative is “cloud-first.” Quarterly forecasting should cover a sub-set of the total annual budget. Too many organizations pick the wrong focus (at too detailed a level) and dilute the value. Wrong cadence. A quarterly forecast isn’t valuable if there aren’t

You have matured out from annual budgets with no forecasting, when:

opportunities to pivot spend. An opportunity is defined by moving the spend needle. Organizations undercut quarterly forecasting by looking at the wrong spend at the wrong cadence. A quarterly forecasting cadence needs to call out spend that can be altered from one forecast

Keeping the lights on isn’t enough. Business partners need IT spend

period to another. IT spend on hardware locked up in three-year

to align to business priorities and quickly adjust to changes. Annual

depreciation cycle isn’t a good candidate for a quarterly forecast

budgets are fixed historical documents that don’t deliver the agility

cadence. It’s a sizeable spend. But it’s a fixed cost that you can’t alter in

your business partners are asking for.

a quarterly forecast.

The department of “no” needs a make-over. IT finance’s poor line of sight

No buy-in. Too many quarterly forecasts focus on spend-to-budget

into actuals drives overly conservative spend commitments. Under-

variance and fail to show KPIs of the bigger picture. A KPI-focus

spend surfaced at the end of a year drives hasty use-it-or-lose-it

shrinks the real estate for analysis and pulls the business toward non-

procurement.

technical language (e.g., spend vs. plan and/or application and service

Uninformed emotional decisions rule. Year-end true-ups eat into IT finance’s credibility. An annual plan doesn’t help you control the size of

total costs). Communicating to business partners in language they understand builds buy-in for the quarterly forecasting process.

that true-up. You are flying blind—absence of facts, emotions dictate.

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You have matured out from annual budgets with quarterly forecasting, when: The business wants to pivot faster. Business stakeholders see the value in agility—and want more of it. Quarterly forecasts whet the appetite for monthly forecasts.

“By reducing the effort needed to prepare the IT budget and ensuring everything was in sync, [our cost center managers] could spend more time analyzing the actual spend and making better decisions for the business. Really, the biggest impact is the time we’re now able to spend helping our senior leaders of IT better analyze the impact of future changes to their budget.” Robert Winchester IT Financial Consultant

You’ve worked out automation. Annual budgeting in spreadsheets takes a lot time and effort. But at least it’s only done once a year. Using the same spreadsheet solution for quarterly forecasts is a leap into the unknown. Do you have the time and resources to support this effort long-term? Probably not. Sustainable monthly forecasting needs process automation (e.g., resource planning capabilities, multiyear plans). Once automation is in place, IT finance scopes the right forecasting cadence. You understand spend drivers. Quarterly forecasts are quite the eyeopener—facts replace guesswork. Seeing spend drivers over a quarter dials in the right cadence for forecasting (e.g., quarterly forecasting is sufficient for most vendor spend but a monthly forecast may be the best leash to restrain cloud spend). You are confident in the forecast process. A quarterly forecast is often a test-case. IT finance needs to work out if it can run the process in addition to it’s current FP&A processes. Business stakeholders need to see the benefits they were promised. Successful quarterly forecasts allow organizations to feel good about the process and make an informed decision on whether to adopt monthly forecasting.

WHAT CHALLENGES DO YOU ENCOUNTER? Too much detail. Monthly forecasting can overwhelm an IT finance team. Organizations looking to maximize the benefit of monthly forecasting often default to including more detail than is needed (e.g., exclude fixed costs that do not vary month-to-month). Too much effort. A commitment to a monthly forecast should be paired with a commitment to a purpose-built IT forecasting solution. Spend for a monthly forecast should be justified around why it should be included rather than why it shouldn’t be included. Organizations with a bias to include all spend in a monthly forecast sign-up for more effort than is justified by the outcome. Proxy targets. Monthly forecasts are often repurposed as measurement rather than management tools. A monthly forecast shines a light on spend and offers up time and space to course-correct. It isn’t a

Annual budgeting with monthly forecasting

reporting tool to measure success of staying on budget. Wrong cadence. Is a monthly forecast better than a quarterly forecast? That depends on what “better” means. The right forecasting cadence

An annual budget with monthly forecasting delivers the most accurate

is dictated by a business’ ability to pivot spend. An organization’s IT

view of spend-to-budget variance—providing the most time to course-

spend will fluctuate month-to-month (e.g., contract labor) and quarter

correct spend before the end of the financial year.

to quarter (e.g., a tech-refresh) but the right forecasting cadence

WHO USES THIS? Annual budgeting with monthly forecasting serves organizations with

focuses on where the spend needle can be moved the most effectively. The amount variability you have in certain areas of your spend is an indicator of whether it’s time to stick-or-twist on monthly forecasting.

spend drivers that vary month to month. Quarterly pivots on spend aren’t fast enough for the pace of the business.

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You have matured out from annual budgets with monthly forecasting, when: You want on-going agility. IT finance must provide good financial stewardship for all IT spend—regardless of which financial year it falls into. Annual budgeting with a forecasting cadence looks at each year in isolation and doesn’t consider long-term agility. Contract spend commitments straddle financial years. Financial commitments for vendor spend do not easily align to one financial year. A 36-month managed services agreement could cover four separate financial years. An annual forecast doesn’t capture the full financial commitment of that contract. You need to see the long-tail of CapEx spend. Project run costs extend beyond the life of the project. A capital investment in a data center creates on-going OpEx spend when the data-center goes live—both the depreciated costs and the on-going costs to support and run it. An annual budget (regardless of forecasting cadence) doesn’t provide line of sight into those commitments.

WHO USES THIS? Rolling forecasts serve organizations the agility they need to respond to unforeseen challenges—regardless of the fiscal year. WHAT CHALLENGES DO YOU ENCOUNTER? Too much change management. Entire careers are tied to building and reporting out annual budgets. IT finance must prepare the broader organization for the impact of rolling forecasts but also the finance teams tasked with delivering it. Change isn’t easy. Rolling forecasts fail when there isn’t sufficient change management to support it. Too much effort. Every planning process collapses when the effort to execute it becomes too burdensome. The annual budget process, for all its deficiencies, is a reliable and understandable process. Efforts to replace it fail if the “improvement” needs more effort than the solution already in place. Rolling forecasts, like all the budgeting and forecasting process, benefit from a purpose-built IT planning solution. Wrong cadence. Rolling forecasts take a long-term view on IT spend outside the artificial boundary of a financial year. Organizations undercut their rolling forecasts by selecting the wrong forecast cadence. No buy-in. Many managers believe that taking on rolling forecasts means completing an entire budget several times a year. This is an education issue—and an opportunity to align with management rather than measurement metrics. (Build buy-in for rolling forecasts by socializing KPIs to measure the value of IT strategic planning.)

TRY THIS Read real-life examples of IT finance teams who have committed the top IT budgeting & forecasting sins and how they came back from the depths of IT finance hell. Read the ebook

Rolling forecasting Rolling (or continuous) forecasts offer a complete planning solution, giving organizations the agility they need to respond to unforeseen challenges. Rolling forecasts remove the arbitrary cut-off between one financial year and another and codify continuous alignment to IT strategy. This changes planning from a one-and-done exercise to an ongoing process that is always looking forward with the most recent actuals.

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The IT Forecasting Maturity Model

Forecasting with Apptio Organizations trust Apptio for their forecasting process. Apptio IT Financial Management Foundation automates IT planning and variance

IMPACT: • Use Apptio instead of a CPM to drill down to the vendor/ contract level and to make daily changes.

forecast process, foster accountability of budget owners, and increase

• Daily updates to quarterly budget align spend with strategic imperatives and redeploy unused funds.

plan accuracy. Apptio IT Financial Management Foundation supports

• Accept or reject budget changes in real-time.

analysis, enabling IT organizations to accelerate the budget and

every level of forecasting maturity—from monthly and quarterly in individual financial years through to continuous forecasting across multiple years.

RESULTS:

HOMEAWAY CASE STUDY HomeAway, a market leader in vacation rentals, runs very lean at .5% budget variance and captures $10M (10%) in operational cost savings each year.

• Freed up $10M of unspent budget (cost savings) to pour into other initiatives. • Time spent aggregating data is now spent on analysis and redistributing savings. • Maintain a 0.5% variance in the overall budget.

“Apptio allows us to maneuver and manipulate data quickly, to identify areas to redistribute the budget, and provide budget owners with the confidence to make decisions with the data to back it up.” Jeff Blume Technology Business Management Analyst

HOW DO THEY DO IT? IT finance looks for opportunities to save money and then makes those savings available to the CIO to allocate to un-funded budgets. This “give and ask” process updates their quarterly forecast up to 50 times per month. They are constantly changing funding between cost centers and releasing “approval to spend” dollars that align with strategic imperatives. It ensures that they use all the dry gunpowder in their arsenal so that every dollar is spent, and is spent on the highest impact areas.

Get started Apptio fuels digital business transformation. Technology leaders use Apptio’s machine learning to analyze and plan their technology spend so they can invest in products that increase the speed of business and deliver innovation. By translating raw costs, utilization, and billing data into business-centric views, IT leaders shift spending from maintenance to growth. For more information, please visit apptio.com.

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