Activity-Based Budgeting

Activity-based budgeting builds a budget from the work an organization expects to do. It starts by identifying the activities required to meet demand, such as resolving support tickets, onboarding employees or running applications, then estimates how much of each activity will be needed and what each unit costs. The budget is the sum of the expected activity volumes multiplied by their costs.

The method is the planning counterpart of activity-based costing, which assigns actual costs to activities after the fact. It helps organizations understand what drives their costs and see the effect of changes in demand or efficiency. For IT financial management, activity-based budgeting fits naturally with service-based planning, since many IT services can be described as activities with measurable volumes and unit costs.

Definition of Activity-Based Budgeting

Activity-based budgeting is a planning approach in which resources are budgeted according to the activities needed to produce the organization's outputs and the cost of performing them. It uses the same principles as activity-based costing, applied to the future rather than the past.

The key elements are activities, the cost drivers that measure how much of each activity is needed, and the cost per unit of each driver.

How It Differs From Traditional Budgeting

Traditional budgets are organized by department and expense type, such as salaries, software and travel, and are often based on last year's figures. They show what is spent but not why.

Activity-based budgets are organized by activity and driven by expected demand. They show how much of each activity is needed and what it will cost, making the reasons for spending visible.

Activity-based budgets can still be converted into department and expense views for financial reporting, so they complement rather than replace the traditional format.

Relationship to Driver-Based Planning

Activity-based budgeting is a form of driver-based planning. Both calculate costs from measurable drivers and rates.

The distinction is one of emphasis. Activity-based budgeting focuses on internal activities and the resources they consume, while driver-based planning may use any business driver, such as headcount or revenue, to project costs.

In practice, IT organizations often use the two together, with business drivers determining activity volumes and activity costs determining the budget.

Importance of Activity-Based Budgeting in IT Financial Management

Many IT costs are the result of activities performed for the business: handling tickets, provisioning accounts, deploying changes and supporting applications. Budgeting by activity connects these costs to the demand that causes them.

This makes the budget easier to explain and easier to manage. Instead of defending a total, IT can show how many tickets, deployments or onboardings it expects to handle and what each one costs, which gives business leaders something concrete to question or adjust.

It also shows where efficiency improvements would have the greatest effect on cost, since high-volume activities with high unit costs stand out clearly.

Linking Demand to Cost

When IT budgets by activity, business leaders can see how their demand affects cost. A plan to hire 400 people translates into a specific number of onboarding activities, devices and accounts, each with a known cost.

This supports IT showback and chargeback, since the same activity costs can be used to show business units what their demand costs.

It also helps IT resist arbitrary cuts, since reducing the budget without reducing demand implies either lower service levels or higher efficiency, both of which can be discussed explicitly.

Identifying Efficiency Opportunities

Activity-based budgets show the cost per unit of each activity. Comparing these costs over time, or with benchmarks, highlights activities that are unusually expensive.

Reducing the cost per ticket through automation, or the cost per deployment through better tooling, directly reduces the budget for the same level of demand.

Reducing unnecessary demand, such as repeat tickets caused by a recurring problem, has a similar effect. Fixing the underlying problem removes the activity altogether, which is often cheaper than making the activity itself more efficient. Activity-based budgets make both options visible, so leaders can compare them on the same basis.