Thursday, December 29, 2005

The Budget Challenge

I recently completed the annual ritual of budgeting for the next fiscal year. It is a tedious process and involves a fair bit of effort comprising of collation of inputs from multiple functions. Not that one minds the effort as it provides another opportunity to create some excitement with IT and help the enterprise with some new ideas, but it has a few challenges too.

Our budgeting exercise is a 3 stage process.

In stage 1, the BAU (business as usual) is addressed comprising of hardware, networking, licenses etc, which is the easy part. Progressing to the second stage, we discuss new solutions/systems for current and future business initiatives. This negotiation is fun and we push each other to the limit on how much more we can get while the business unit heads try to minimize what they need to give away. The real challenge comes in stage 3 !

This is when the leadership team/management team gets together to review the numbers for the new year and go over each department budget with a purpose to reduce Capital Expenses and perceived unfruitful operating expenses. A steady state organization will typically find that IT contributes to a significant portion of their capital expenses and some of the operating expense. My recent experience was interesting from two perspectives which I am highlighting below for you.

Discussion on the capital expense veered into uncharted areas of whether everyone needs a laptop or we can reduce our outlay by providing them with desktops; Is it possible to extend the useful life of a computer by another 12 months if some users only use email and word-processing with occasional internet access; and a few others on similar lines.

When we get into project outlays for development, changes and software solutions, the debate gets interesting. Why does System A require 12 man-month effort ? Can it not be completed in 8 ? Why are we continuously changing System B ? Mr. CFO, can you not ask your people to use Excel instead of this expensive Business Intelligence tool ? Everyone does not require Internet access....

How do you manage this ? One of the things that works is advance communication on what IT proposes to do in the next year and how it will impact business outcomes. This message goes bottom up from line managers to their respective leaders who are aware of what they will be paying for and the benefits that will accrue. Failure to do so will result in endless debates and heartburn when budgets get slashed and the ability to innovate is constrained with limited funds. This is important when every function is under pressure to reduce expenses year on year.

I am sure that there are other ways of managing this phenomena, would love to hear from you on this.

P.S. The high point of a similar exercise narrated by a friend-CIO: "Why do you need to spend $120K for a switch ? By the way what kind of switch is it that costs so much ? The switches in my home come for a lot less. I want to see it" !!

Best wishes for a Happy New Year.

3 comments:

  1. We are entering the budgeting process now and will go through similar excitements. Challanges phased for Phase 2 - new requirments - is similar to that of a new product marketeer. CIO's got to be expert in understanding unstated needs and motivations of his consumers.

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  2. It may be useful to go through an IT strategy exercise, leading to an interactive workshop where business and technology could discuss and agree on what, where and when before getting into the how much. In my experience, budgeting is easier done after there's some kind of a plan, which in turn is easier to arrive at if there's some kind of strategic thinking on the road ahead.

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  3. We face this every year and you have answered it too. It is all about market trend & compelling data (absolutely no fuzziness) and the one who has it wins the negotiation. As a team we always focus on getting absolute clarity on market needs and then define a sensible split of $$ across multiple categories (call it as Strategic Initiatives) like BAU, Filling Competitive Gaps, Creating Differentiation, Research etc. This is to make sure that every category gets funding. After this, we detail out each category by looking at our "Plan of Record" for every fiscal so that eventually we can answer how much money we are spending on doing an initiative/activity and what is the projected $$ impact of it on the business outcome. For example: We intend to fill a competitive gap vis a vis Company A and need to do these 5 things and each of those 5 things will cost c1, c2...c5. We also project how much $$ impact these 5 will make and then it becomes easy to prioritize and pick up the right mix based on the budget allocated to this pool.

    In a nutshell, it is a very intense exercise and done very diligently over 2 QTRs and not as a mere ritual for 3-4 weeks during the budgeting cycle.

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