Budgeting Like A Couple
Aligning business and IT priorities through the annual budgeting process
Every successful couple eventually faces the need to take steps to balance individual priorities with joint goals and short- and long-term financial objectives. Since today’s new television comes at the expense of the down payment on tomorrow’s new home, couples must strike a balance appropriate to their lives.
In the corporate world, businesses must strike a similar balance between the various elements of the complex, interconnected value chains that make up the company. The problem is that, unlike a successful couple, the complexity of the relationships and associated priorities makes organizational alignment during the budgeting process challenging. This is unfortunate since, in our experience, the flurry of activity around the budgeting process is an excellent time to leverage the financial imperative to drive business and IT alignment. Given the nature of most corporate budgets, any misalignment now is likely to play itself out in hallways and conference rooms throughout the year—destroying value in the process.
In this article, we will outline the six key steps necessary to turn the budget process into an active tool to achieve alignment and create corporate value. These steps are:
- Start the cross-departmental dialogue early.
- Ensure that IT does not get ahead of the business in the budgeting and prioritization effort.
- Tie all IT projects to individual business initiatives or to a strategic technology investment.
- Plan for a series of prioritization conversations that require the business and IT to jointly present a business initiative and its supporting IT projects.
- Have a consistent approach for dealing with multi-year projects.
- Have a transparent process that allows the organization to deal with changing business priorities within the fiscal year.
The first four steps address the process itself, while steps five and six are geared toward addressing the key timing issues that will require attention as the organization seeks to improve the process. By following these steps, companies can avoid becoming a prisoner of the financial orientation of the budgeting process by leveraging it to harmonize business and IT priorities.
STEP 1: Start the cross-departmental dialogue early.
One of our major transportation clients came to us in a panic. At the beginning of the budgeting cycle, one of the business units had come to the IT organization and said that it had no IT projects. As the dialogue continued, it became clear that the business unit believed the IT organization was so consumed by current projects that it simply could not see how IT could address the unit’s additional needs. The business was not communicating its priorities, and, as a result, IT was not communicating its ability to increase capacity to meet the objectives of the business unit. Instead of planning together, each department was basing its budgeting and prioritization decisions on assumptions—fortunately, they realized they could do better.
We have found in situations such as these that much of the challenge comes in moving from assumptions to a dialogue. Often the budget process itself has no owner to ensure that the correct communication is taking place. Without a central point of contact responsible for directing the dialogue, the budget cycle becomes a process of re-hashing the initiatives from last year (which may lack relevance to the current business environment) or a process of identifying projects that will address the current hot button, tactical issues.
KEY LESSONS: Assign an owner to the budget process early on. Develop a communication process that moves in a stepwise fashion from high-level idea to a more mature set of high-level requirements with some business and IT cost-benefit information. Also work to ensure that the business understands the true capacity constraints of IT. If there is a plan to support additional capacity requirements, IT must accurately communicate the extent of this capability so limits are known without creating an artificial barrier to the ideation process.
STEP 2: Ensure that IT does not get ahead of the business in the budgeting and prioritization effort.
This statement seems almost silly to even bring up, but this simple concept is at the center of what plagues many large-scale organizations. What we have seen is that IT frequently operates on a different calendar due to issues such as the need to support a more detailed budgeting process and the need to draw a line in the sand on which business objectives to pursue. One example of this is a major automotive manufacturer whose IT organization begins its budget process a full two months before the business begins its cycle. Why? The IT organization argued that in order to get the “right level of detail” to accurately determine the budget, it needed more time than was possible based on when the business started coming up with its list of initiatives. As a result of this lead time, IT begins to pre-judge which priorities are truly critical.
KEY LESSONS: First, business groups must have calendar discipline. If calendar discipline is culturally impossible, consider contingencies in IT budgeting. Second, IT should limit detail—specificity doesn’t necessarily equal accuracy. Project estimation is the key to the budget cycle, not a project plan. One way of determining good high-level estimates is to transform your project history as a historical estimation tool. IT and business organizations that have moved to Portfolio Management and Project Estimation processes should make sure they have an archive of all previous estimates—whether they led to a project or not.
STEP 3: Tie all IT projects to individual business initiatives or to a strategic technology investment.
Once again this seems like an obvious statement, but one typically fraught with challenges. Strategic IT investments only make sense in the context of specific business objectives or large-scale organizational change (growth or contraction). We have seen that IT organizations can sometimes make illogical strategic technology investments, but most of these missteps come from poorly anticipating the business strategy, not technical incompetence.
After the business plan is known, give IT a chance to come back with supporting strategic initiatives. One of the great potential strengths of an IT organization should be its ability to think about the business need and respond with a portfolio of possible technical solutions that can be evaluated based on a variety of factors (e.g., time to market, cost, complexity/maintainability). This capability is further enhanced if IT is able to look beyond one or two current business objectives to a broader understanding of exactly where the company is headed strategically. When pundits describe flexible enterprise architecture, they are typically referring to an architecture that has been conceived within the context of a specific strategic direction. The flexibility comes from the ability to adapt within the boundaries of this strategy. A leading manufacturer ran into just this issue as it spent tens of millions on a CRM project that IT had deemed to be strategic but that the global business units felt did not match their needs. A flexible architectural direction would have driven faster innovation and more benefit to the business.
This raises another point. If strategic architecture investments are put into the context of business enablement, the reluctance to fund “IT’s gadgets” evaporates, and they can begin to be perceived as business mandates.
KEY LESSONS: Define the elements of the budget plan in sequence, starting with overall business strategy and leading to business initiatives and supporting IT efforts. From a formatting perspective, keep business and IT initiative justifications crisp. Specifically limiting high-level business case elements (e.g., high-level financials—orders of magnitude in cost, timing relative to the rest of the portfolio of in-flight efforts, business strategy tie-ins) is essential to manage timely completion of the budgeting process. Once the sequence is complete, begin to prioritize which investments most closely align with short- and long-term business objectives.
STEP 4: Plan for a series of prioritization conversations that require the business and IT to jointly present a business initiative and its supporting IT projects.
In many of the companies we have dealt with, a project is either classified as a business project or an IT project. This sort of worldview presents two particularly vexing challenges. First, projects that lack joint sponsorship can easily be perceived as another group’s problem. This leads to a view that if the idea was invented outside the department, it is not worth spending time on. Such feelings lead to the second problem: proper estimation and comparison of projects requires a serious time commitment from all parties and a standardized baseline for comparing projects.
To illustrate this point, ask the executive team to send in a summary of information they used to approve their last big initiative. If you get back a lot of documents containing similar information, your organization is way ahead of the game. Unfortunately, most organizations lack a clear universal decision77making criteria for their projects or standard presentation requirements to make the comparisons as painless as possible. A tier 1 automotive supplier struggled with funding prioritization for years because all project priorities were based on qualitative metrics and political clout. Once its managers were able to include additional quantitative metrics and use these for a baseline, the prioritization process lost some of its political nature, and the decision process was streamlined by a significant amount.
KEY LESSONS: To effectively prioritize projects, the company should create a budgeting committee that publishes the key prioritization criteria and the associated templates for both the financial and nonfinancial content required of each project being evaluated. This approach will clearly demonstrate the minimum amount of information necessary for an idea to be considered.
Key criteria to consider include: a summary of the goals of the project, key project requirements, which corporate strategies the project is meant to address, Net Present Value (NPV), payback, project dependencies, and risk measures.
With this information, as well as others that are crucial to your company, each project can be evaluated fairly against other initiatives competing for financial resources.
STEP 5: Have a consistent approach for dealing with multi-year projects.
Many corporations spend most of their time budgeting for the current corporate fiscal year. Unfortunately, many technology-based projects last longer than a year. How should the organization view those projects?
Giving a multi-year project a guaranteed multi-year budget commitment creates a problem of balance. How does the company scope the cost and commitment relative to the other projects that are under consideration? Single-year projects do not look far into the future, but, as every business has experienced, conditions can change and requirements may need to be adjusted, which can lead to large swings in the business case. This problem is magnified if a company bites off a multi-year effort without properly discounting future benefits and accounting for changes in business need that may render the multi-year effort obsolete even before launch.
KEY LESSONS: When analyzing multi-year proposals, start by questioning whether it must be treated as one project, with one key release, or if it could be treated as a series of phases, each of which is less than one year. If so, the organization can treat most of its largest projects as programs that have one or more releases in a year. An advantage of this approach is that it gives you more flexibility in canceling one or more phases of the effort as business needs change.
If a multi-phase approach is not a possibility, work to create models that balance the potential financial benefits of a multi-year effort with the time-related risks they entail. Pay particular attention to the earliest possible point that some business value could be seen from the effort and work to re-package any multi-year effort that appears only to create business value at the end of the entire effort.
Finally, reserve true multi-year commitments for a set few projects that tie to the company’s core strategies. Even within multi-year efforts, there is generally a level of priority, which could lead to budgetary protections around the money designated for initiatives that have a strategic impact that trumps all other factors.
STEP 6: Have a transparent process that allows the organization to deal with changing business priorities within the fiscal year.
Resources are limited, but any evaluation of how best to deploy the organization’s project funds is only a point-in-time calculation designed to meet the needs of the business as they are seen at that moment. For instance, one leading retailer budgets all project work annually, but IT teams can adjust how funds are spent as old priorities give way to new business requirements. This sort of adjustment is common in environments like financial services that require a high degree of technical innovation or in environments like pharmaceutical firms that require rapid responses to government regulations.
In such cases, it is critical that IT makes these decisions with the business, or the entire budgeting process will be seen as a time-consuming farce. There should be a standard approach to documenting such changes, and that approach should require both business and IT signoff.
KEY LESSONS: As the organization matures, consider creating a mid-year budgeting process that allows business units and IT departments that have good ideas to compete for a pool of funds. This sort of opportunity can serve to reduce horse trading of priorities at the end of the initial budgeting cycle and enable a company to be more responsive to market shifts or strategic refocus. A mid-year process can be either created by budgeting a set sum during the annual process or be flexibly funded based on a key measure such as year-to-date company profitability.
Whatever condition you find your company’s annual budget process in, it is important to view the change process as a continuous improvement effort. The process should become more robust as those involved become more comfortable with the approach. Each of the six steps to a successful budgeting relationship that have been discussed in this article can be improved incrementally to meet the needs of the organization.
By creating the initial process and documentation framework to support budgeting efforts across the enterprise, business and technology executives will put the company on a path to mature the cross-departmental dialogue. The resulting better understanding of business requirements, IT capacity constraints, and budgetary realities will achieve the goal of better decision making and provide a clearer understanding as to why those decisions were made—which is something every relationship can use.
John Lakey is the solution director and Jon Borg-Breen is the executive vice president, both of Acquity Group. They can be reached at firstname.lastname@example.org.