IT Budgets Struggle to Keep Up with Change
In a period of economic uncertainty, accurate budgeting is a challenge for many CIOs. During the downturn newly compiled budgets became obsolete and, more often then not, had to be painstakingly redone as business priorities shifted overnight.
Despite optimism about an upturn, a recent survey of nearly 200 CIOs by the CIO Executive Board, a program of the Corporate Executive Board, shows that budgets are projected to remain flat in 2010. So, with no additional funds available, are existing budgeting processes flexible and transparent enough to make the most of what there is?
Embed greater flexibility and transparency into the IT budgeting processes
Usually IT budgeting conversations focus on how much money is spent. Executives often forget that, the process by which it's spent is important too. In fact, CIO Executive Board research shows that the budgeting process itself can actually erode the value of IT spend by up to 11.3 per cent due to wasted effort, missed cost savings opportunities, and disruption to ongoing projects (see graphic below). Nonetheless, if managed appropriately the IT budget can become a key tool for setting priorities and managing spend. To achieve this, the budgeting process must become more flexible and transparent; allowing changes to be absorbed efficiently and maintaining the link between spending decisions and strategic outcomes intact.
Estimated Loses from Inefficient and Ineffective IT Planning and Budgeting, (Click on the image to expand)
Make Budgets Simple, Flexible, and Responsive to Change
CIOs can increase the speed of budget creation, the responsiveness of budgets to volatility, and the impact on cost-cutting by adopting the following budgeting practices:
1. Lean Planning: Simplify the budgeting and planning methodology to quickly develop the IT budget.
Lean planning is increasingly common in IT budgeting and across the finance function. It involves creating a high level plan based on top down assumptions and tight time limitations, often only a couple of weeks. By avoiding excessive detail, lean planning allows agility to respond to changes to new market conditions. This approach also cuts the scope for gaming and emphasizes increased quality, not quantity, of communications.
2. Rolling Budgets: Adopt a rolling budgeting process to sustain visibility into spending plans and maintain budget and roadmap alignment throughout the year.
Rolling budgeting involves regularly revisiting and extending the budget at fixed quarterly points across the year, allowing four quarters of visibility into future spending. The budget is then revised each quarter based on business performance measures (e.g. projected versus actual business unit revenue) creating a recurring opportunity to demonstrate efficiency and value to business partners, or to flag areas requiring adjustment. This approach also allows organisations to align roadmaps with quarterly budget adjustments, focusing amendments on areas of change.
3. Scenario Based Budgeting: Use multiple scenarios to adapt IT spending priorities to changing market conditions across the year.
If rolling budgeting isn't practical, scenario based budgeting is an alternative. Scenario-based budgeting involves constructing high-level but actionable budget growth and shrinkage scenarios which outline IT spending priorities under a range of market conditions. When using scenarios it is important to develop triggers based on business performance drivers (e.g., revenue data, market data, or major events) as indicators of when to switch between scenarios. Everyone concerned should know in advance when to switch from one scenario to another.
The Payoff from Better Budgeting
By adopting more efficient and flexible budgeting processes, IT organisations can quickly and effectively plan IT spending and ensure that IT budgets withstand the changes that will inevitably occur across 2010. As we have seen, IT organisations can save as much as 11.3 per cent of their budgets through reduced wastage and better alignment with business needs. In making these changes, CIOs can ensure that the budgeting process helps, not hinders, IT planning and execution.
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For additional information about the CIO Executive Board's 2010 IT Budget Benchmarking findings and CIO priorities for 2010, or for insight into how the CIO Executive Board can help with your 2010 budgeting and planning process, please visit www.exbd.com/IT. The Corporate Executive Board (NASDAQ: EXBD) drives faster, more effective decision-making among the world's leading executives and business professionals. As the premier, network-based knowledge resource, it provides them with the authoritative and timely guidance needed to excel in their roles, take decisive action and improve company performance.