The Budget Cut Dilemma
During budget shortfalls, IT departments are frequently mandated to cut spending by a fixed percentage — 5 percent, 10 percent or even 15 percent — with little consideration of the consequences. CIOs are left to determine where to make cuts, often under constraints that prohibit hiring, travel or training. Security positions vital to protecting enterprise systems are put on hold, and long-term initiatives are sacrificed to meet short-term fiscal demands.
Some organizations take an even more prescriptive approach, mandating across-the-board freezes on training, travel and new purchases. While such measures may make sense in some departments, they pose serious risks for IT teams tasked with maintaining critical infrastructure, executing multiyear projects, and supporting dozens of departmental systems — often with only a single subject matter expert in each area.
The Real Impact of Cuts
For CIOs, budget reductions often mean impossible tradeoffs: Do we lay off the only IT specialist supporting the sheriff’s applications, or cut the person ensuring payroll is processed on time? Do we delay the district attorney’s case management system upgrade or halt a security project that protects our water infrastructure? No matter where the cuts land, there are operational and organizational consequences.
The complexity is compounded when cuts do not come with a corresponding reduction in service expectations. Even as budgets shrink, IT is still expected to deliver high-priority projects — without additional resources. The message to CIOs is clear: "Do more with less."
Rethinking IT Budgeting: From Cost Buckets to Investment-Based Models
Traditional IT budgeting follows a categorical model: funds are allocated by expense type — staff, servers, network, security, storage, mobile devices, software, training, travel and so on. This approach makes IT an easy target for cuts, particularly in discretionary-looking categories such as training. A $200,000 training budget, for instance, can be an easy 20 percent cut for a CFO with no insight into its necessity. Since the training budget is not directly tied to specific projects or services, it appears as an expendable line item rather than an essential investment.
A better approach is investment-based budgeting — sometimes called “full-cost” budgeting. This method flips the traditional IT budget structure by aligning costs with specific services, applications, and customer projects rather than broad expense categories.
Instead of listing IT expenses in rows and departments in columns, this model inverts the structure:
- Rows represent major services, applications and initiatives (e.g., ERP, sheriff’s computer-aided dispatch system, cybersecurity, water system monitoring, and HR systems).
- Columns represent cost categories (e.g., IT staff, network, storage, security, training, supplies).
Benefits of Investment-Based Budgeting
- Improved transparency and accountability: Department leaders and elected officials gain a clear view of how IT costs support specific services. And IT is no longer seen as a generic overhead cost but as a strategic partner enabling essential functions.
- Informed decision-making: Budget reductions become discussions about service tradeoffs rather than arbitrary percentage cuts. If $20,000 needs to be cut from training, decision-makers must determine which project — ERP, CAD or cybersecurity — will absorb the impact.
- Stronger business alignment: IT investments are prioritized based on their direct impact on departmental operations and strategic goals. CIOs can present data-driven arguments for maintaining essential services, using metrics such as increased service desk response times due to staffing cuts.
Lessons From Real-World Implementations
A case study on investment-based budgeting illustrates its effectiveness in local government. One California county faced a directive to reduce IT spending while maintaining service levels. By shifting to a full-cost budgeting model, IT leaders provided department heads with a transparent breakdown of costs associated with their respective services. This approach transformed budget discussions from top-down mandates to collaborative decision-making, ensuring that reductions were made with a full understanding of their operational consequences.
For instance, when training cuts were proposed, IT leadership demonstrated that reducing cybersecurity training would increase vulnerability risks and potential recovery costs. With this visibility, decision-makers reconsidered and opted for alternative reductions that had less critical impact.
The Path Forward
Transitioning to investment-based budgeting requires a cultural shift within government agencies. It demands that IT leaders engage in continuous dialog with department heads, provide detailed service cost metrics, and advocate for budget decisions that align with organizational priorities.
By adopting this approach, CIOs can move away from the “cost center” label and position IT as a strategic partner. Instead of reactive budget cuts that jeopardize essential services, IT budgeting can become a proactive exercise in aligning technology investments with business needs.
In an era where local governments are being asked to do more with less, investment-based budgeting offers a sustainable path forward. It replaces the traditional lose-lose scenario with informed, strategic decision-making — ensuring that IT continues to drive innovation, efficiency, and high-quality service delivery.
I was first exposed to this concept 20-plus years ago by my friend and mentor N. Dean Meyer, who wrote about investment-based budgeting in his book Internal Market Economics. At that time, Dean’s model was geared more for Fortune 1,000-sized organizations and not a fit for my much smaller local government IT organization. Recently, Dean has created a Full Cost Light version of his more in-depth model which was implemented by the California county mentioned in this article. Please reach out to me if you would like to learn more about it.
