Eric J. Feldman
Here is a simple question. Are you a PPM professional or an ITFM practitioner?
The answer is typically one or the other, or neither. Many people would not consider themselves experts in IT financial management while also claiming to be an experienced project manager.
But one of the skills required of any project manager is the ability to estimate and calculate the cost of a project. There are several categories of project costs:
Fixed costs – those that do not change throughout the lifecycle of a project. For example, when developing new digital products, these could include any dedicated resources to the project including any physical space and any technology purchased specifically for development. Fixed costs tend to remain static during the duration of the project.
Variable costs – any costs that may change during the project, depending on the phase. For example, there may be quite a difference in labor rates depending upon whether the project is in the planning stage or execution phase.
Direct costs – these are costs that come directly out of the project budget. For the company developing new digital products, the salaries of any developers hired just for the project would be considered direct costs.
Indirect costs – these are also known as overhead costs and can include office space, furniture and fixtures. Indirect costs also include general and administrative expenses including salaries for finance, contracts, and legal services. Expenses for project managers are also typically indirect costs.
But where does technology costs fit into all of this? There are many types of IT expenditures. These include costs for datacenters, hardware, software, cloud infrastructure and storage, SaaS subscriptions, and telecom. What they all have in common is that they are often shared across multiple projects.
For the most part, this makes most IT expenditures indirect costs to a project. And indirect costs are often the most challenging to calculate. Here is why.
Fixed costs, variable costs, and direct costs are typically attributable to a single project. A PM knows the expenditure up front, or typically knows how to calculate the quantities for variable costs. But indirect costs are applied across multiple projects, and companies are challenged to develop a fair and systematic method for this allocation.
According to Deloitte in their 2016–2017 Global CIO Survey, technology spending as a percentage of revenue ranges from more than 7 percent in banking and securities to less than 2 percent in construction and manufacturing. The overall average for all industries is 3.28 percent.
Therefore, according to this survey, a company with $1 billion in revenue will spend an average of $32.8 million on technology in one year. Here are two important questions:
- What part of that $32.8 million will be spent on projects?
- How do we allocate those IT project expenditures to each specific project budget?
The answers to those questions is where IT Financial Management comes in. ITFM practitioners use a little science and a bit of alchemy to allocate an accurate representation of IT costs for each project. ITFM is a discipline that measures consumption of IT services, and then apportions the total cost according to a number of “cost allocation” methods.
Here is a simple example. Let’s take a company with $1 million in annual datacenter costs that is shared across 10 concurrent projects. An allocation method that uses a simple business metric of the number of projects would charge each project’s budget $100,000 (1 million / 10) for their share of datacenter costs. There are many other allocation methods that vary in their degree of complexity and accuracy. The point is that the accurate allocation of IT expenditures can have a significant impact to the project budget.
To truly understand a project’s value, you must consider all costs involved including fixed, variable, direct and indirect costs. And knowing your technology expenditures for each project is essential if you want to accurately calculate project ROI.
If you manage project costs separately from IT costs, you may have committed one of the “7 Deadly Sins of Project and Portfolio Management.” These are the bad habits that turn your project management office into a bottomless pit of cost overruns, deadline despair and resource allocation anguish.
If you would like to read more about how to embrace the changes that ensure projects will align with corporate priorities while delivering a competitive advantage, be sure to read our eBook “7 Deadly Sins of Project and Portfolio Management.”
 Deloitte, Inc. “Technology budgets: From value preservation to value creation.” November 28, 2017. https://www2.deloitte.com/us/en/insights/focus/cio-insider-business-insights/technology-investments-value-creation.html