IT Budgeting- Part II: Shift the Paradigm: Save More Nickels and Dimes

Where do traditional budgets work?

Traditional budgets are still good things to have. They lend themselves to planning and discipline; two things that are critical to any business as they move forward. But the traditional budgeting system really only excels in three areas.

Capital Expenditures:

Now, capital expenditures are a fairly broad category. So let me be more specific. I’m not talking about finite planning for every capital expense. I’m talking about the real big ticket items. The one that will hurt you if you find yourself in a situation where you need to spend the money to expand to gain market share. The things that are your major assets. Think of these capital expenditures as your monthly bills. If you don’t set aside enough at the beginning to make sure your mortgage is paid, it just doesn’t matter how well you perform at the grocery store.

Head Count:

This too is an expense you don’t want to be too dynamic in. Even though we, as managers, have a responsibility to the bottom line and our company's ultimate profitability, playing with head count is playing with people’s lives; the very people you depend on every day to make sure that your company succeeds.

We all know there are times and places where job cuts are called for, it keeps the company healthy which in turn provides stronger jobs to those who remain. But how, when and how often you do it can cause great turmoil in your organization. If your surviving employees are always waiting for the other shoe to drop you’re not going to get your best work from them. And in today’s society no company can afford to be seen as heartless. A bad image can be worse than a bad product and harder to fix!

Borrowing Money:

Perhaps nobody loves seeing a fully formed budget more than a banker. In general bankers want to know two things: How much you can afford to borrow and how long until you pay it back. Thus, if you have to approach a banker to get capital injections to keep your business operating, a banker will want to see your business plan, your budget and the closer you preform to those numbers the more likely you are to get capital when you need it the most.

But if budgets work so well, why did I spend the first half of this series telling you not to do them? Because, while those three areas are important they’re not the whole picture. As we discussed, we know that the budget process is long, complex, and frequently wrong. But if that weren’t bad enough, it goes so far, at times, to become harmful to your business.

Where traditional budgets break down:

In the process of budgeting, your leadership team takes all of the money they expect to receive and pay out and locks it into neat little cost center categories. These categories, sometimes affectionately known as “buckets” get an inflow of money into them as the year goes along.

Each department, then uses their bucket to pay for the things it needs and at the end of the year, ostensibly, that money is returned to the general company coffers. This would be like breaking down your family budget to the point where you budget for specific products. You might have $500.00 a year to buy eggs, $104.00 to buy pop-tarts, $72.00 to buy milk… etc.

However, because of the way that the budget locks these numbers into place it’s unlikely that you can shift money easily from those cost centers. Each bucket represents the operating money for each department, thus you have built in defenders of each cost center. So, to use the shopping metaphor again, when you run out of egg money it may be very difficult (or even impossible) to buy more eggs this year even if there’s $20 extra dollars in the pop-tart bucket.

Additionally, the base number you typically use when making next year’s budget is last year’s budget. Thus, a standing rule of traditional budget spending is: spend all of your allotted money each year or you won’t be able to request the same amount next year. This means that little Johnny cannot have $104 worth of pop-tarts next year unless he spends all $104 this year. So at the end of the year, even though the family needs more eggs and has $20 in the pop-tart budget, Mom can’t buy eggs and Johnny has to spend $20 on pop tart buying 10 packages (8 of which he doesn't even like and won’t eat) so he can have pop tart money next year. No one would run their family budget this way, but it’s the way almost every large company handles one of its most valuable resources.

How to shift the paradigm:

Step 1:

Take stock of your major asset expenditures you’ll need to make this year and set that money aside. Plan for head count, buildings and major infrastructure improvements. This should be done in the traditional way. But don’t lock the rest away in the separate cost centers. Leave it as a lump sum to be spent dynamically when it’s most advantageous to do so.

Step 2:

Identify your Key Performance Indicators (KPI). Every business knows their success depends on several key statistics. These are your major business lines that can give you an indication on the trends of your business at any given time. Your company is likely already aware of these KPI and keeps a close eye on them.

Step 3:

Set up a dashboard to keep an eye on these dynamic ebbs and flows of your KPI. There are several cost effective software solutions on the market already to solve this need. http://www.klipfolio.com/, for example, can make custom dashboards from your own dynamic KPI for a very reasonable cost.

Step 4:

Design your software for immediate action. The strength of a dashboard is the ability to get critical metrics in the hands of your decision makers. When an alert is issued make sure they know that a decision is required. The nature of this reaction can vary, it could be the sounding of an all-hands alarm or simply a note to bring up at the next staff meeting. Your indicators must be well thought out and your design consistent so everyone knows what to do when an indicator drops below or reaches a specific threshold.

Step 5:

Make your contingency plans. As you strategize around your KPI metrics and thresholds think for a few minutes how you might best mitigate a slide or capitalize on an opportunity. Design your contingency plans around your data points, identifying what resources you’ll need to accomplish each plan.

Step 6:

With your contingency plans in hand, seek senior leadership buy in. You’ll want to make sure your senior leadership understands the KPIs you’re looking at and your plans for dealing with issues or opportunities. You want to make sure when you try to activate one of your contingency plans it’s not the first time senior leadership has set eyes on it!

Step 7:

Look holistically at your business needs. It’s easy to rob from Peter to pay Paul when you’re looking to balance a budget. But remember even if something is a true expense, something that does not help to generate revenue on the P&L sheet, it may not be so cut and dry as to simply pull resources from this cost center to give to one that can affect the bottom line more directly.

Cutting money from your computer budget today may allow your company to capitalize on an opportunity. This can be, and often is, a sound business decision. It’s a fact that IT operates at the expense level of the operation. But your job, as an IT manager, is to make sure that the business leaders recognize the value of the expense!

Older computers often mean slower computers, slower computers don’t run the newest software. If you’re not careful with your expenses you can find yourself in a situation where your critical software is no longer supported and the cost of upgrading to supported software requires a tremendous investment of hardware and software to get it current. Remember your job as an IT manager is to add value. And like mom used to say, “A stich in time saves nine.”. No one enjoys getting stitched. But remind your leadership that while it might seem painful to cut from another project; your team supports the whole business and without the proper tools everyone, even your customers, will suffer.

Utilizing these 7 simple steps can change the business paradigm and make your company operate more efficiently and more competitively. So the next time budget season rolls around, you might just be able to capitalize on a new way of doing business.

-Special thanks to C. Black input and insight during the creation of this series.