Development Drop-Down Budgeting

Computerworld - Many companies are beginning to increase their budgets for new IT development. Unfortunately, they often underestimate ongoing production costs -- the "drop-down" costs from development efforts. A realistic IT budget must plan for a project's support after it's installed. Drop-down costs include a portion of the infrastructure support expenses for the new system, such as servers, WANs/LANs and desktops. They also include ongoing software license fees and production support staff (production control, security, database administration, help desk). These costs automatically drop down into future operating expenses, whether they are budgeted or not.
Underestimating these drop-down costs is a rampant problem, partly because many IT managers are rusty, not having had the luxury of budgeting for new development for a while. I recently found that several Fortune 500 clients had underestimated these costs by $40 million to $50 million per year. Be sure to examine your drop-down costs carefully, especially if your organization has focused primarily on maintenance for the past few years.
The following phrases (often heard in budget reviews) are drop-down myths and should raise a red flag:
"We already own the server, so it's free." Your current infrastructure may have enough excess capacity for several additional applications. But when you reach its limit, the next new application will require a major infrastructure upgrade. Good budgeting spreads the cost of additional infrastructure equitably, without forcing the new application to bear the entire cost of the required infrastructure purchases.
"We are replacing an existing application, so the cost will be the same." Most new systems offer more functionality, support more users and store significantly more data than the applications they replace, resulting in additional production costs. (Moreover, many applications never totally disappear.)
"We are becoming more efficient, so we can absorb it into the existing budget." During the Internet boom, many companies acquired large amounts of technology but never implemented planned systems. As a result, they had excess capacity. After the Internet bust, these same companies focused on efficiency (a discipline lost during the boom) by consolidating servers, rationalizing software and redesigning their networks. As a result of these efforts, they've had to absorb only limited drop-down lately. Excess capacity will eventually be absorbed, however, and there won't be any fat left to trim.

"We are funding major new development efforts, but our budget will remain flat." Some IT organizations prefer to ignore drop-down costs as long as possible because of corporate and political pressures. But bad news doesn't get better with age, and the drop-down costs will eventually appear