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Preparing a budget for service-oriented departments in three steps

HR and IT provide services to other departments, which makes preparing a budget a bit more complicated than usual.

Preparing a budget for the centralized departments in an organization is relatively straightforward. Consider the...

accounting department, for example. Its role is to collect data from other departments, close the books, manage consolidation and provide financial reporting, among other things. What distinguishes these departments is that they generally do not provide ongoing, active services to other departments, and instead collect and process data from them.

However, the budgeting for these departments is not trivial, and care must be taken to understand how they should grow as the corporation grows. If the corporation adds three new product lines and opens a new geographic area, accounting will have to expand, too. From a budgeting perspective, driver-based planning and rolling forecasts are quite valuable here.

Contrast this with preparing a budget for departments that are heavily service-oriented, such as IT and human resources.

A few things are special about preparing a budget for service-oriented departments, which I'll explain.

But first, there are three critical components to preparing a budget for service-oriented departments:

  1. Defining a menu of services offered
  2. Budgeting for services (estimating services required)
  3. Making service strategic to the organization

Defining a menu of services offered

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Every service the department offers should get its own section of the budget. For IT, it will include application acquisition and management, servers, storage, security, programming, project management, and so on. For HR, it will include items such as payroll administration, benefits management and recruitment. Defining a menu of functions is critical for any department, but it's more complicated to do it when creating budgets for service-oriented departments than it is for centralized departments such as accounting.

When it comes time to automate departmental budgets, it is critical that the technology vendors understand how to automate these horizontal departments. Key questions to ask include the following: Is there special software for service departments? Do the vendor's consultants understand these functions? Do third-party partners understand them? Are case studies about similar organizations available?

Sources of specialized budgeting software for service departments can include ERP vendors such as SAP and Oracle, specialized HR vendors, including Workday and Ultimate Software, and budgeting software vendors, among them Anaplan, Host Analytics and Tidemark.

Budgeting for services

Budgeting for services is complex for two main reasons.

The department that provides the services must collaborate with the departments it serves to figure out its budget. For example, IT will work with the sales department to help improve the website the company uses for online sales. Similarly, the HR department might develop a plan with marketing to manage new recruiting efforts.

Modeling software is required to do this kind of budgeting correctly. It provides the ability to write English-like equations and combine them into a working set (Anaplan's technology is a good example). The business model that is created is useful to both the department providing service and the ones receiving it.

Once the model has been created, allocation issues must be worked out. If IT provides services to the sales department, do they become part of the IT budget or the sales budget? In many cases, it will be the sales budget, but certain companies might choose IT. If items are allocable, the budgeting software's report writer must be able to show results both ways.

Once actuals start coming in, the two departments have a joint responsibility to analyze them, comparing them to the budgets and making short-term corrections, which is best done with rolling forecasts.

Making service strategic to the organization

Strategy Maps: Converting Intangible Assets into Tangible Outcomes

Figure. Strategy map showing how investments in human and information capital (analogous to the value created by the HR and IT departments) influence financial outcomes.

A well-defined budgeting process is not only key to corporate success, it helps define the relationship between the servicing department and its internal customers. And at a higher level, both the HR and IT budgets must reflect the long-term strategy of the corporation. This is well-illustrated by the strategy-map diagram in the figure.

As you can see from the diagram, human, informational and organizational capital feed into the learning and growth aspects of the organization. They are foundational to the layers above them, which then lead to strategy at the financial level. The point is that strategy has implications for short-term budgeting, and all departments must be keenly aware of how they add value.

About the author:
Barry Wilderman has more than 30 years of experience as an industry analyst, researcher and consultant at such companies as Meta Group, Lawson Software, SalesOps Analytics, and McKinsey and Co. He is currently president of Wilderman Associates. Contact him at Barry@WildermanAssociates.com and on Twitter at @BarryWilderman.

Image credit: From The Balanced Scorecard Framework in Strategy Maps: Converting Intangible Assets into Tangible Outcomes, Robert S. Kaplan and David P. Norton, Harvard Business Press (2004).

This was last published in January 2014

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