How does the IT organization change the perception, and in many cases, reality, of it being looked at as a cost center by the business, rather than a value-add organization? How does a CIO redirect funding from sustainment to innovation? I will discuss an approach to capture baseline operating cost savings and other budget reduction opportunities as part of your company’s annual planning process. The budgeting process should be very transparent to the business. Nothing should be added, or reduced, without an associated business driver. This is a sensible approach to address budget reductions that are linked to specific impacts to the business. Make it a business decision, not a technology decision. A crucial success component to this process is providing decision makers with risks, impacts and options related to both budget reductions and complementary reinvestment strategies.

The Problem

As comprehensive as your cost optimization process may be, the value is only realized if resulting recommendations are truly executable. If the follow-up falls short, then the exercise is for naught. Many times this happens when organizational politics get in the way of decisions about reducing IT costs through service level reductions that impact a current process model, but are not a specific requirement to run the business. Another common obstacle occurs when an IT manager resists a cost-saving opportunity because they are adverse to change, especially if it requires a reduction in staff.

Most expense reduction efforts are based on a percentage or dollar amount that is necessary to achieve the earnings plan. This may result in a “democratic” approach: across-the-board, budget reductions of a similar proportion in every area of the business. When this happens and there is no specific direction provided as to how to reduce the budget, the CIO will often establish a negative contingency assuming the savings will be found during the course of the year. If those savings cannot occur without a reduction in highly-valued project work and/or service levels, the perception will be that IT didn’t deliver.

The annual budgeting process for many IT organizations precedes detailed business planning, so IT is handicapped by not having the technology budget aligned with the business plan. When the budget comes under review by the CFO and business leadership, it often leads to comments like “IT costs too much” and a budget reduction as noted above is directed. This often happens in IT organizations where they keep the IT budget “close-to-the-vest” and are more interested in protecting what they believe are their technology requirements with limited consideration of the holistic business strategy.

In summary, these situations lead to the perception that IT costs too much, is not understood and adds limited value to the business. It also creates the view of IT as a “cost center”. It can lead to budget cuts for projects that support new business and innovation, as IT management has not properly managed the cost of sustainment.

The Solution

Budget reduction targets should not be held as a contingency against the baseline budget. Instead, detail of all budget items (not only line items like travel and training, but projects, services, etc.) should be aggregated in detail with risks/implications to the business and sorted by priority. The CFO, working with the business leadership, then can make intelligent decisions around the IT budget and the impacts it has on the business.

As an example, to drive reinvestments, rather than taking an arbitrary reduction to your baseline budget of $5M to fund new initiatives, identify service level reductions and options in operations that would specifically enable reduction of the $5M from baseline and reallocate to strategic initiatives. It then becomes a joint discussion between IT and the business with the business making the final decision, not IT. It will raise the perception of IT as a strategic partner rather than just a service provider.

The CIO should be prepared with reduction opportunities upfront, through initiatives like a Zero Base Budget exerciseand development of Demand Management controls detailed in previous newsletters. In addition, the CIO should provide as much transparency on the budget as possible. Details on technology items such as storage arrays and processors will only confuse the business. Breaking down costs by services and business consumption is the right presentation with the business to enable meaningful conversations over the IT budget. Project items should be aligned to a business case justifying the investment. See a sample budget presentation to the business that breaks down the budget by service and provides transparency and insights as to how the business can manage consumption and reduce costs.

In my experience, a significant pitfall in the budgeting process lies in a lack of transparency. I learned this while developing and deploying a successful infrastructure integration organization, including relationship managers, project managers and engineers, who worked on application releases and technology deployments. Initially, there was limited transparency on the budget and utilization of the staff, which created the perception that the budget was too high. We put into place a model similar to IBM Consulting Services. Included were time tracking, project management and work intake processes and tools. This led to true resource management of the PMs and engineers who were assigned to specific project activity. After the first year of deployment and improvement in data accuracy, we had historical data to validate projections. This allowed us to create significant transparency of the resources for planning and budgeting for the business. When a reduction was required, projects were delayed, cut back or eliminated, all with collaboration and approval from the business. This made for very meaningful conversations with the business when developing the budget.

Solution Implementation

Following is an approach used in managing to a budget target given to the IT organization by the CFO. It is assumed the initial budget has already been submitted to the CFO and executive leadership. I also assume a position of “Chief of Staff” exists that coordinates all activities between the CIO, IT managers and IT Finance. I played this role and it worked well.

Step 1: Validate Initial Budget Total, Budget Reduction Target

Although this appears obvious, I have been in situations where there were different versions of what was considered the initial budget and mixed messages communicated out of the initial budget meeting where a budget target was directed
Confirm the initial budget total and target with Corporate Finance

Step 2: Working with IT Finance, identify the largest areas of growth in the budget

The analysis should be done in the aggregate at this point. Deeper analysis will be done by the IT Managers in Step 4
This provides an indication of where to expect the most opportunities, either by line item, and/or by IT unit. It can assist in challenges to an IT Manager who has significant growth in the budget but presents limited opportunity

Step 3: Develop a Budget Reduction Template

This can be developed using a tool such as Excel to capture the line items for potential reduction. This would include opportunities to expense items such as training and travel, service level reductions and project deferrals, elimination and sweating assets
Include a description of the proposed opportunity/action, both capital and operating expense impact, business/service level impact, degree of risk, (high/medium/low) difficulty to achieve (high/medium/low), and whether it is a deferral or reduction
See this link for a sample template

Step 4: Distribute the template to the IT Managers for completion

Clearly define each component of the worksheet
Stress the importance of including opportunities/actions that have impact on the budget. At this point, it is not a Zero Base Budget exercise so there is reliance on the IT Manager to serve up the proposals rather than justifying the budget on a zero base
It is also important to communicate that no opportunity should be included on the list without a preliminary action plan
All components of the worksheet should be completed even if the business impact is minimal
If the business impact is unknown, there should be a re-assessment of the opportunity/action. It may highlight an area that provides minimal value to the business (assuming not knowing the business impact implies it has limited business impact) and should be looked at as a leading candidate for reduction

Step 5: Aggregate the data preferably into one file

This makes it easier to aggregate the data and perform data analysis
Data should be sorted based on degree of risk (H/M/L), difficulty to achieve and deferrals/reductions

Step 6: Analyze the data

All opportunities should be summed and compared to the budget reduction target. If it is higher, then you have something to work with at this point. If it is lower, it will require another round of assessments. This may require a closer assessment of the baseline budget, not just areas of growth
The focus should then be the value of each H/M/L risk
If not done by the IT Manager, add the total amounts for each risk level for that unit
Aggregate each degree of risk amounts in total for a summary
Review and clarify data with IT Managers individually
Determine at this point whether low risk items should be automatically considered as part of the budget reduction target

Step 7: Schedule a budget session to agree on priorities and line items to include as part of the budget reduction target

Each IT Manager should be prepared to provide an overview of their opportunities
Assume low risk items are already factored into the budget reduction and require no discussion
Highlight what is high risk and explain impacts to the business. If a line item has obvious detrimental impact to the business, no further discussion is needed and it should be taken off the table
The most preparation should be on the discussion of the medium risk items. These can go either way. There should be further discussion on the size of the opportunity, business impact, difficulty to achieve, and whether it is a deferral or reduction. This should give a sense as to the risk of including it in the budget reduction target
If it is determined that a medium priority will be cut that has some impact to the business, consider how to communicate that to the business
All items tagged to be included in the budget reduction target should be logged and communicated back to the IT Managers after the meeting
Items that require further follow-up should be documented as well with timing of a response
Keep a running total of the opportunities agreed upon during the meeting to assure you reach the target. If not, another round of discussions will be required

Step 8: With IT Finance, meet with the CIO to determine final reductions

Agree on final reduction proposals and discuss preparation of a final budget submission to the CFO, executive management and business leadership

Step 9: Prepare and present final report

Aggregate the data as far as it makes sense for the audience to understand
Low impact items do not need to be itemized
High impact items should be noted separately with business impact and risk
Medium risk items can be grouped together or shown separately, depending on the business impact and relevance of showing data at a lower level. An example would be if a broad decision is made to sweat all servers, then one line item can be included “Delay server refresh”
The report should be completed with a business focus, including recommended opportunities in business terms. An example for delaying a server refresh is to note the higher level of risk for system outages
Log all discussion points and whether leadership directs changes to the proposal

Step 10: Assuming final agreement on the targets, confirm reductions with the IT Managers

IT Finance should proceed to adjust budgets
Action plans to achieve the budget reduction target should be developed by IT Managers and reviewed with the CIO
IT Finance should track against the budget reductions throughout the year

Other Considerations

This exercise will not have the same impact as a Zero Base Budget as the baseline is not as scrutinized. The budget growth is what is highlighted and analyzed
To be successful, this requires that IT establish a strong business partnership to enable the transparency, coordination and trust with the business
Communication of changes to project and service levels should be thoroughly communicated to all key stakeholders within the business. It should follow a confirmation communication from business leadership of the actions necessary to reduce the budget. For example, if onsite technical support hours are reduced from 7:30am-8:00pm to 8:30-5:00pm, a communication is required to all business leadership and end-users
To follow through with the budget reduction targets, action plans are a must for each opportunity identified. Otherwise, it is left to the discretion of the IT Manager how to carry out the reductions and you will fall short of achieving the budget target

I recently was part of a panel discussion sponsored by Info-Tech Research Group titled Create a Budget and Get Approval: Will you get the funding you need? It provides helpful guidance regarding the IT budget process.

MANAGE BUDGET TARGETS WITH ACTIONABLE,

BUSINESS-ALIGNED PRIORITIES

SaVard Solutions, LLC

Results that make a difference