IT Budgeting/ Planning
Authored by Frank Liberio
After 30 years of working in IT,
I have not found one organization that has a strong budgeting/planning process. It seems that we all struggle with this process every year. In some cases, it is so onerous that I have seen IT organizations’ productivity drop as a result of their poor planning process. I had one example while consulting where the final budget was not confirmed until 6 months into the fiscal year. Can you imagine executing your initiatives not knowing if they are approved until mid-year?
We all know that as CIO’s, managing this process is critical in the face of flat or decreasing budgets. The real goal of course is to get the funding you need but can we also make this process more efficient for everyone. Below are a set of recommendations that I have pulled together. I am sure there are more methods, but this is at least a start.
First, how do we get the funding we need to get everything completed? Although IT generally has one of the largest budgets in the organization, must businesses do not understand that the “lights on costs” of the existing portfolio is continuing to grow larger each year as we build new systems. Most leaders understand the one-time cost to build a new IT capability, but the long tail of ongoing support and maintenance is not understood.
Recommendation 1: You should build a financial model that demonstrates what is really fixed versus discretionary costs in your budget. There is a set of costs that just can’t get rid of, e.g., Oracle/Microsoft licenses, network costs, hosting costs, support and maintenance of existing apps. Likely the model will show that anywhere from 50-80% of your budget could be fixed costs, leaving the remainder of discretionary for that year. It is always shocking once you run the numbers, but it important for you and your business leadership to understand this. I just helped a CIO do this analysis on his $21M budget, the result was that $15m was fixed. Now there are strategies to reduce your fixed cost budget, but these generally take 2-3 years to implement.
Next, now that you understand the discretionary component of your budget, the tough decision is how should those funds to be utilized. Also, in cost cutting years, these will be the funds that get targeted for reduction.
Recommendation 2: the best approach when then selecting how to use the remaining discretionary funds, make sure they are tied to business initiatives. If you are not focusing your discretionary budget on the IT capabilities that support the business strategy you are likely at risk. Also, ensure that you include your C-suite colleagues in the prioritization of these initiatives. There is high likelihood that the IT spend is in support of their projects and it is good to get their help in protecting or even growing your budget.
In some cases, I have seen where there is not clear business strategy in place. As a result, we see the budgeting process is really a business strategy setting process, thus the incredibly long duration to get it completed. As the leadership team iterates through the strategy, IT continues to run versions of the budget to support the needs.
Recommendation 3: Try to influence the process such that the business and IT strategy definitions are separate events from the annual budgeting. If you are able get confirmation of the business strategy and then build the IT strategy to support it, you would only have to estimate and plan and set of initiatives once. There would still be some iterations on which projects to do first and a discussion on how to be more efficient with dollars available but his would likely cut a large percentage of the time and effort.
I have also found that the budgeting process is not really defined as we start it. How many times do we get the email at 3pm on Thursday asking for updated numbers by end of day Friday? To be honest, the budgeting process should be defined just like any other project plan that we create in IT. My sense is that the process seems to get redefined every year, which is good if the process is being improved. However, many cases we are not making the process better we are just changing the dates and timing
Recommendation 4: We should request and help build a budget plan that clearly defines key dates/milestone when the budget iterations are due. I have worked with a bunch of finance/accounting folks and they are highly intelligent, I believe that sitting down in June or July with to define the dates/timing for the next 2-3 months seems like it would work.
Getting final approval on your budget is also sometimes an issue. It seems we continue to iterate on budgets for months and then suddenly everything goes quiet. You are not sure if the budget is approved or not, because there is never a confirmation of your next year’s budget. Therefore, in January you just start working on the initiatives you have prioritized for that year. You really are not able to wait for final approval or you will impact productivity, so you have to start.
Recommendation 5: Create a prioritized list of the initiatives you will pursue in the next year. This list becomes your guide for execution in that year. Since the list is prioritized, you can simply draw a line where you run out of capital and/or G&A. This not only helps at the start of the year when you are kicking off but we have also seen our budgets change. In some cases we need to reduce budget during the year but sometimes capital or G&A free up and we get more funding. The prioritized list of initiatives allows you to go back to that baseline and move the line up or down depending if you are getting more or less funding.
Lastly, we all have to struggle with changing priorities throughout the year. I have not ever worked with one IT group that has not been impacted by multiple new number 1 priorities during the year. It is a fact of life in IT and we need to be able to be responsive.
Recommendation 6: Build some form of a governance team that is made up of your colleagues in the business. Determining which projects get delayed or stopped to make room for the new priority is a decision that should be made jointly with the impacted business leaders. There is nothing more gratifying then having the C suite members negotiating on which of their IT projects will get funded.
I hope at least some of these ideas will help. As I mentioned earlier, there are probably a host of other ways to address the budgeting/planning process, so good luck and keep trying to be more productive.