Agility to fund IT budget shortfalls or reductions during the fiscal year
As we all know, budgeting is never 100% perfect & when completed, it is immediately out of date and not aligned to the strategic needs of the business. So as the business is dynamically changing, many decisions are required to align funding to the latest needs of the business, and it must be done within the confines of the approved budget. However, from time to time, required budget for a project runs out or there is a requirement to reduce budgets coming down from the CEO. So, what can you do to manage these and do so in a way that is least disruptive to the organisation? The following are some thoughts that can help you.
1. During Budgeting:
Let’s assume the CEO has set a target for IT to be flat year over year
a. Set targets for each IT group that is 90% of what they are forecasted to spend for the current fiscal year and ask for a plan that would make this possible. Each group then presents to the CIO what services/products would need to be changed to achieve a 10% reduction and how they would spend the additional 10% if they were given it back. The CIO would then prioritize what is critical and fund these and at the same time hold back 5% for funding requirements that come up during the fiscal year
b. Identify short term (1 year) fixed costs e.g. labor (and associated increases), locked in contracts that cannot be terminated or changed, and estimated depreciation/amortization. Identify these as the base budget required and review and prioritize additional (discretionary) spend based on the needs of the business holding back a few % for unexpected requirements
2. Post Budgeting (when Budget is locked):
a. Track spend and updated forecast on a monthly basis to ensure no surprises and identify areas of underspend as they are happening to be able to fund any new funding needs
b. A way to create headroom in the budget is by pushing out hiring & projects but this should only be done if projects/deliverables can still be delivered on time with quality. Remember hiring the right person takes time and should not be delayed unless required
c. Self-funding should always be the first way to address any budget shortfall. i.e. looking at your own portfolio (for your cost centers) and making trade-offs. This may entail ensuring the business(es)that will be affected are also in agreement
d. If you cannot self-fund, then collaborating with your peers and the Business Units you serve and identifying opportunities for another group to transfer budget
e. In the short term, the biggest area of opportunities to reduce spend is in App Development or Transformation. This is because these are investments that the organisation may not have deployed and can be stopped or slowed reasonably quickly. However, there are long term consequences to these decisions that may prove detrimental to driving market share and profitability. In the longer term, it is appropriate to look at “Run” costs and ensuring as much of your maintenance spend is agile such as moving apps to the Cloud and operating directly in line with the needs of the business
f. Focus on real cost savings (i.e. reductions against prior months spend) and not just cost avoidance (i.e. future costs that can be avoided). Cost avoidance is still good to go after if it has been budgeted at a future date (and does not have a detrimental effect on the business).
g. Request to use the CIO’s “budget buffer”. It will be important to show that you have done everything you can to self-fund or fund through collaboration, and to show how you have efficiently spent $’s and can show value for the $’s invested to date
3. Other
a. You want to make sure that you are buying Capital Assets as early as possible in the year. By buying later in the year, the following year you will see a higher year over year budget need (depreciation for a full year versus part of a year) which may mean having to cut core services
4. Tools & processes:
a. Having the right tools and processes is critical to ensuring agility in funding changes. Since the single largest area of spend tends to be around labor and application development, this is a core area to focus on.
b. Targetprocess can identify by individual and $’s the app dev investments required of the business by Initiative, Portfolio, EPIC, Feature, Story, and ultimately the “Value” and give the organisation the agility to move funding as needed to maximize the demands of an ever-changing business
c. IT Planning can set the platform for a agile process to budget and ensure forecasts stay aligned across the organisation to the changes in demand by the business
d. Cost Transparency can help your leaders and budget owners to manage their spend against their budget and forecast to ensure that they are spending effectively and delivering services as agreed to by the business and quickly re-align to new initiatives &/or budget shortfalls
e. Having a simplified and streamlined process along with a tool to support the process, ensures everyone has transparency to the data and the decisions taken and that they can quickly and efficiently shift their spending patterns to the new priorities of the business
In summary, I think it is helpful to recognize that to put it simply, there are only 3 levers to manage spend:
1. #/type of resources, be it people or physical assets;
2. The price at which you buy those assets and services;
3. The utilization of the resources/assets
The more these variables are transparent and available to your decision makers, the more agile and better will be your decisions to optimize and adjust funding to drive market share and shareholder wealth by delivering the best services at the right time and price
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