Beating the (IT) budget blues
The most common response on hearing the phrase “It’s time to start the IT budget planning process” is often one of despair. The thought of the endless meetings, spreadsheets and planning workshops, coupled with the knowledge that you’ll almost certainly be asked to do more with less, is enough to drive many an IT executive to reach for the antacid tablets, writes David Brown. This need not be the case, and if a technology department can implement an efficient IT budget and forecasting framework, this can result in real benefits to not just the IT department but to the wider business in general.
The situation most chief information officers and IT managers are faced with is one of increasing regulatory pressure diverting resources with a constant drive to reduce costs and improve efficiency, whilst at the same time trying to provide the technology services required to steer the business towards its stated strategy. Producing a meaningful IT budget in this environment would be challenging in its own right, but this overall state of affairs is then complicated by the following factors and inefficiencies that usually affect the IT planning process and often result in the despair outlined in the first paragraph.
Firstly, the IT estate is becoming increasingly complicated. IT resources and services can be outsourced, off-shored, near-shored or hosted in the cloud, increasing the complexity of the budgeting process. And even with the best intentions, these differences are often accentuated across product lines, with the front office often going its own way due to the need for agility. Also, the larger a firm is, the greater the likely difference across various areas in the source, accuracy and granularity of the data being used in the planning process. And even if a whole business function is outsourced along with its IT element, such as fund administration to a third party provider, this can lead to complexities in joining up the IT costs in the operating models and uncertainty over future change requests.
Secondly, the planning process is often fragmented and not well understood at all the required levels within IT and within the relevant business and finance areas. The penchant within financial services firms for having relatively complex IT organisational structures with group level, product level and functional level areas within the IT department, often with a different structure for run-the-bank and change-the-bank areas, coupled with the resultant matrix management structure often accentuates the issue. The impact on business as usual activity can be significant, with management spending – or even wasting – copious amounts of time chasing data, aggregating disparate information and revising previous estimates.
Common issues with budgeting processes include: difficulty in collaborating; revision fatigue; lack of business context; and attempts to “game” the process.
Generally, the more difficult the budget process is, the more difficult the forecasting will be, and the more difficult the forecasting is, the more likely it is that budgets and forecasts will be padded out to err on the side of caution. The resulting inaccurate forecasts generated throughout the year lead to bad decisions about next year’s budget, especially given the fact that the planning cycle usually starts in the third quarter.
Thirdly, anything but the most simple of financial services firms will be implementing some form of cost allocation across the group and business unit IT departments. The cyclical trend of centralising functions like compliance, finance, risk and even certain areas of operations adds to the complexities of cross charging. So whilst making no difference to the overall IT budget, the cost allocation process can profoundly affect an individual area’s budget and can lead to sub-optimal decisions being made in the attempt to protect one area’s IT budget at the expense of another. For example, it is often the case that the first business unit to adopt a new technology will be disproportionately hit with start-up costs compared to subsequent adopters, even if it is intended that the new technology be rolled out across other business units. This can lead to business unit IT areas delaying the adoption of technology that would benefit the business and firm, in the hope that another business unit will pick up the start-up costs.
While each IT department will have its own specific goals, there are usually a number of common themes above and beyond the overall situation outlined above. For example, there is always a drive from the business to reduce RTB costs in the hope of freeing up budget for further CTB spend, notwithstanding the aforementioned cost reduction programmes. This is particularly true in the current environment where regulatory pressure has resulted in very little discretionary spend being available for CTB projects (by some estimates, 70-80% of current CTB spend is dedicated to regulatory projects). Also, the increasing amount of shadow IT spend on “in business” IT and End User Computing creates additional challenges on correctly defining the scope of an IT budget. Increasing focus on areas such as information security and operational risk means IT departments no longer have the option of ignoring EUC and other business IT activity.
So what does all this mean for the hard pressed CIO? Given the complexities and challenges outlined above, there are a number of questions that CIOs, IT and finance managers need to ask themselves, and their managers.
Fundamentally, CIOs have to understand if their IT planning process allows them to move the business on its strategic journey. Complicated, inflexible and time-consuming budgeting and forecasting processes restrict the ability of a CIO to deliver the business strategy. In addition, IT management have to question if the IT budgeting and forecasting process takes up too much time and effort. Drawn out processes with endless revisions get in the way of actually running the IT department – and have knock-on effects on the business. Everyone involved in the budget setting process should have the right level and granularity of the transparency they need on the budget process, adjustments and decisions. Too often decisions either turn out not to have been ratified or even get lost in the endless revisions of the budget. Another area management need to question is whether the forecasting process provides the agility to correctly manage changes to direction mid-year. While historically it’s often been the case of whosever shouts the loudest gets the goodies (particularly with the front office IT areas seemingly having megaphones), a lack of accurate forecasts makes reprioritising even harder.
Although not rocket science, establishing a fit for purpose IT planning process does at least require commitment from management. The time, effort and, yes, money spent creating and implementing a quality IT planning process will reap both hard and soft benefits throughout the organisation. By adopting the following principles an IT organisation should produce an IT budgeting and forecasting process that really adds value to the goals of the CIO.
As a starting point the budget setting process needs to be focussed on creating a single source of truth. Controls need to be established that enable a master version of the current budget to be created, maintained and communicated, with robust versioning procedures, whilst still allowing the flexibility to update as required. The mantra should be: one process; one plan. Even if the planning needs to be done in a hierarchical manner, either bottom up or top down, the embedded process should be as near as possible the same at each level.
Whatever process and tools are used to manage the budgeting and forecasting, it should be workflow based with the aim of streamlining the planning and forecasting cycles. There’s no reason that with the right process and tools the planning cycles can’t be streamlined and simplified and still maintain a strong governance aspect. The right workflow will minimise the amount of time and effort that management spend on the planning cycles, for example by reducing the amount of wasted effort on miscommunication and working on the ‘wrong’ version. A good IT planning process also needs to be collaborative at its heart. The process and associated tools need to promote collaboration, but in a controlled manner. For example, allowing individuals to work on their own figures whilst maintaining the overall picture, or being able to assign tasks to people and understand their status. The process should also promote good communication of the right data to the right people at the right time.
The process and tools should allow for budgeting beyond the cost centre level. A process that encourages people to plan at the level at which they normally manage, e.g. headcount, transactional, etc. will result in more accurate budgets and forecasts. Taking headcount as an example, the process should allow for planning to take into account not just number of resources, but also breaking it down by resource type, and including separate detail of base salary, bonus and so on . Ideally, the planning process should allow for a degree of what-if analysis, both during the budgeting and the forecasting cycles. This requires the data to be as near real-time as possible, again with strong versioning control. Having a single version of the truth enables valid scenario planning. From a forecasting perspective, the goal would be to achieve rolling forecasts using fact based justifications. In order to achieve a valid forecasting process, there’s a strong dependency on timely and accurate recording of spend against budget. The planning process needs to take this into account, whilst being realistic about inherent time lags involved in producing monthly or year-to-date actuals figures. The process should be able to cope both with initial estimates of spend and follow-up revisions to record actual spend figures.
The IT planning process and tools should be capable of producing the right information and reporting. Not just the obvious reports of the budget figures, both current, deltas and final, but also reporting around the status of the budget process. This should be more than a simple traffic-light report on the overall process, and ideally linked to the individual workflow tasks and processes throughout the cycle.
Finally, using a dedicated IT planning tool will greatly enhance the process. Whilst it may be possible to implement a fit-for-purpose process utilising standard software such as Excel, there will still be difficulty in formulating a truly collaborative and streamlined process without a dedicated planning tool. The benefits these tools provide usually far outweigh their cost.
Following these principles in creating and implementing an IT planning process should enable the organisation to realise significant hard and soft benefits. Simplifying and streamlining the process should free management’s time both for the value-add elements of consultation and prioritisation in relation to the budgets and forecasts as well as for doing the day job. The budgets that the process produces should therefore be more accurate and representative of what the business actually wants to do. A more robust forecasting process should enable an organisation to react more quickly to changes in demand throughout the year, enabling valid prioritisation calls to be made based on justifiable data, not just the prevalence of the front office megaphone.
A better forecasting process will inevitably result in less padding in budgets, and therefore lead to valuable budget actually being spent on the correct services and deliverables that the organisation requires, rather than the year-end dash to spend money from budgets on marginal activities to “use up the budget in case we lose it next year”. A successful IT planning process should also lead to improved visibility into the demand vs. supply equation, both for the IT and Business management. If an improved IT planning process is also coupled with better IT cost transparency then this can lead to significant savings in the IT budget and a real increase in the value businesses see from their IT spend.
In conclusion, taming the IT budget and forecast planning process will provide real benefit to both the IT department and to the business it serves. An efficient, understood and collaborative process enables all levels of an IT organisation, from a cost centre owner to the CIO, to add real value to creating and maintaining a relevant and respected IT budget, which in turn helps the business to reach its strategic goals. Maybe one day, instead of instilling a feeling of despair, the start of the IT budget cycle will be greeted with just the anticipation of understanding what is to be done next year – and a reduction in sales of antacid tablets.
The author is senior manager, financial services advisory, at Grant Thornton UK LLP