Wednesday, November 08, 2006

Seven Steps to a Highly Successful Budget Presentation: Proving Past Success

IT spending is expected to grow again for the third straight year, with average 5-8% increases expected again for 2007. As a result, the IT budgeting process should be easier than in years past. Corporations have cash to spend, and for some businesses such as finance, technology, professional services, retail and others where IT is an essential component of competitive advantage getting executives to invest more in IT will be easier than ever. But this certainly does not mean that CIOs will get what they want and that the process will be easy.

Budget growth likely consumed by infrastructure requirements

This year security and business resilience spending needs to be increased once again in light of increasing frequency and severity of threats, and renewed awareness as to the impact of disasters on the business. Infrastructure upgrades are still sorely needed in many organizations where technology refreshes have been delayed to help reduce costs. Corporate and IT compliance programs require extra spending as well. Shadow projects, stealthily hidden by the business units because formal IT spending wasn’t available to for essential business projects, are emerging from the business units and are in need of central IT support, evolution and integration.. And then there’s the project backlog where many IT groups are still not close on catching up to business unit requirements for new solutions, enhancements or upgrades. Unless IT executives put together a compelling case, these projects will easily consume the increase in IT spending and then some.

The Seven Steps for Setting the Stage

Justifying the IT budget and getting the right spending increase will take some careful measurement, collaboration and a great presentation to win a fair share of corporate spending. Unfortunately, many IT budget presentations fall short of the mark, with slide after slide of project plans, technical architectures and spending requests without nary a mention of prior successes, proven business value contribution, peer comparison or risk analysis.

Like a storyteller, a good CIO will first lay out a compelling reason to invest in the future by documenting the successes of the past. It is essential that the team have faith that prior investments have been managed successfully. Proving a solid foundation of prior success, here are the questions that most Cx level executives expect to have answered at the start of any budget presentation to prove prior performance and justification, before requests are made for new project funding or additional spending requests:

1) What is the current IT spending and trends? – As the first part of the IT budget presentation, IT executive should lay the groundwork for the board by documenting how much has been spent on IT over the past three years. Most organizations, particularly larger corporations where spending is spread across operating units, formal IT and business units, do not have a good handle on their IT spending totals. By documenting the total spending, and spending by operating unit, as well as spending trends, the CIO will demonstrate a responsible awareness and management of the total spending picture.

2) What has this spending been on? – Many organizations do not understand the full scope of spending, such as which projects consumed the most budget, or how much it costs just to keep the lights on. To help visualize the investments, IT groups can analyze and present the spending using different taxonomies to provide insight that the team might not have had prior. Here are some suggested analysis groupings:

* The average company typically spends only 10% of their IT budget on innovation – new business functions or IT enabled businesses. The highest performers spend almost 20% per year while the laggards approaching only 5% on innovation. Measuring the percentage of spending on innovation investments vs. migrations / upgrades vs. on-going operations and support can shed light on how IT cost reduction programs have been helping to reduce IT TCO, reallocating spending to innovation.

* Determining how much is being spent on business operations versus the customer is often useful. Analyzing spending on front office versus back office can be insightful and can help the team focus on a healthy mix of driving revenue through customer facing applications while reducing operating expenses through back office solutions.

* Determining how much spending has been contributing to specific corporate / business goals can show how IT is aligned with the business. By goal, listing the major projects and spending over the past three years can show how IT is focusing on business success.

* With the focus on optimizing scarce resources, IT executives should document the current mix and trends in spending between in-house versus outsourced.

* The average company often spends too much on IT infrastructure projects and not enough on business process improvement or higher-order investments. Analyzing a mix of investments according to a hierarchy of needs from a solid foundation and low cost IT infrastructure and set of Mandatory/Compliance projects to Process and Transaction Optimization projects, to Information Optimization projects and at the pinnacle, Business Transformation projects. The best performers build upon a foundation where they seek to lower the cost of ownership while maintaining solid service levels in the IT infrastructure, investing in competitive projects to help reduce business operating expenses and turn information into actionable advantage.

* If you have an executive team that likes the details, understanding the mix of IT Spending according to traditional TCO categories can provide insight into where the majority of IT spending is going – capital, services, labor or overhead. Categories to analyze spending on include: data center servers and client computers, purchased software, purchased services, data and voice communication, application and software development, IT operations and administration and facilities and overhead.

Categorizing the spending can help the team realize why certain requests are being made, why certain limitations exist, and the strengths of the current plan, and weaknesses that require addressing. By proving that the team has been good stewards of past investments, justifying current plans will be easier.

3) How risky have the investments been in the past? – Spending more on IT will require that the team be able to manage more projects effectively. Proving project management performance is key to successfully getting the most from each investment and assuring that incremental spending will not get squandered prior to project launch. Measuring and presenting past project success is essential. At a minimum, it is recommended that the team measure project success / failure rates using the following allocation categories: On-Time Project Delivery, On-Budget Project delivery, feature complete project delivery, achieved or exceeded value targets versus plan (subjective if not measurable).

4) How have prior investments contributed to corporate value? - Unfortunately according to IDC Alinean surveys, 6 months after project approval less than 80% of companies do not go back and measure how well they performed versus plans. Of the ones that do, most only measure actual costs versus budget plans, with only 5% measuring whether the project delivered expected cost avoidance, productivity improvements, incremental revenue or meeting other expected business value improvements. The best budget presentations focus less on spending and more on value contribution. For each project it is essential to put in place simple measurements of performance – key performance indicators which can help determine whether value goals have been met. For example, if a cost avoidance is expected, the team should measure that the expenses have been reduced. If a productivity improvement is expected, there should be a measurable reallocation of staff, staff growth avoidance or staff reduction. To start with, the team should demonstrate how several key project met value goals.

5) How does current spending compare to peers? – Inevitably, the best budget presentations are often met with skepticism because the Cx level executives are not aware of what other companies are doing. Many times budget presentations are stopped by an executive who claims that the company is wildly overspending, at 4.6% revenue on IT for example, compared to reported average IT spending, for example according to Gartner’s average of 3.6% of revenue on IT. A good budget presentation will clearly show how the companies three year spending trends compare to peers and specific industry averages. For an average manufacturing company the executive would be correct in saying the company is overspending when the average spending is only 2.6% of revenue, but if the company is a financial services company where averages are 5.6%, or a brokerage where averages are over 6%, the spending would be too low. It is essential that the company compare to names peers with similar business models, industry leaders that the company would like to emulate, and precise industry averages for their segment of the market.

6) How does current performance compare to peers? As important as understanding spending, is understanding how competitors are performing in light of their investments. Comparing ratios of IT spending to key business measures such as EVA, Return on Equity, Net revenue and income growth, return on assets can provide insight into whether the company needs to scale up spending to improve particular business performance metrics, or reduce costs because prior investments have been successful. Graphing comparative companies in a quadrant analysis where IT spending and performance are platted in a matrix with peer averages forming the X and Y axis. This mapping can help drive perspective on competitive positioning and challenges. Providing competitive perspective can provide the team with the competitive knowledge to see that prior spending and proposed plans are driving correct improvements – either throttling up spending to drive competitive advantage, or reducing spending to bring it in line with competitors.

7) How has the team performed against subjective performance measures? – Many IT organizations are using subjective measures to help prove performance. Measures such as ITIL capability and maturity improvements, user satisfaction surveys, business unit manager surveys, and customer surveys are used to prove that the organization is trending towards improvement, or needs help.


The Bottom Line

Very rare is the CIO who is happy post the budgeting process. This annual right of passage for IT executives is fraught with strife, struggles and an occasional victory, but more often than not its one of the reasons why CIO tenures are so short. If a CIO uses the first part of the budget presentation to set the stage for the incremental request by proving responsible management of prior budget requests, highlighting opportunities for improvement, and demonstrating business value success, the budget process will be smoother. And although there are no guarantees for a budget increase, presenting past success in the language of Cx executives and the board can help drive needed increases or justify allocations to improve weaknesses.

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