With some of my clients in the midst of their 2021 Budget season, I thought it would be timely to share this McKinsey article.
While the article talks about the overall challenges related to the ‘General & Administration’ components of the budget, I felt it missed out some of the specific challenges of the IT budget.
Most organisations tend to prepare their IT budget on the following basis:
FY21 Budgets = FY20 Actuals + inflationary uplift +- ajustments for major projects
Note: 'FY20 9+3 Reforecast' could be used instead of 'FY20 Actuals', as the full year actuals is not likely to be ready.
While I understand this is certainly an efficient way to approach the budgeting season, it carries forward a number of ‘hidden sins’, lacks transparency, ultimately, contributing to misaligning investment relative to Business Strategy.
What is the correct approach?
The correct approach is to build a budget bottom-up.
What are the typical gaps?
There are 3 key components to the IT Budget:
- 3rd Party Vendors
As the typical distribution of costs across these components are: Staff (c40-45%), Vendors (c40-45%) and Depreciation (c10-20%) – effort must be placed on all these components.
- 3rd Party Vendors: While most organisations tend to have a reasonable control on their top vendors that approximately contribute to 80% of vendor costs, there is little to no understanding of the remainder 20%. Even for the 80% where some detail is available, there’s little understanding of the product or entitlement level detail – attributes that are essential to determine if these are necessary and if so how much. Further, there’s little understanding of how the products provided by 3rd party vendors correlate to products offered by the company to its end clients or internal users.
- Staff: As working from home is the ‘New Normal’ in IT departments with no imminent return to the office, it is critical to have a clear understanding of how staff skills align to organisational priorities. Further, as many IT staff are multi-skilled and tend to work across multiple BAU tasks and Projects simultaneously, it is important that the budgets capture this level of detail. It is also important that the timesheet system is enhanced to ensure automated comparison of actuals.
- Depreciation: While organisations tend to capture the Fixed Asset Register at a project-level, in many instances, there’s little alignment to IT Applications or IT Infrastructure.
How can these gaps be closed?
- In one word – discipline!
- To expand on that, organisations need to get 3 things right:
- Data: Having the data, even if you start off with a simple spreadsheet (anything is better than nothing), is an essential first step.
- An IT Tool: A tool that can consume this data, automate the modelling and generation of metrics and reports.
- Process: Improving the surrounding processes around data governance, maintenance and control to ensure that once these data gaps are closed, they can easily be regularly refreshed periodically to allow for comparisons vs budgets.
Sounds like a lot of work – is it worth it?
As per the McKinsey article, at least half of the executives said that at least 25% of their organisation’s SG&A was invested in the wrong areas – this amounts to a lot of money. The rewards for getting these basic disciplines sorted is large.
building budget transparency, therefore, builds decision transparency, making managers and leaders at every level of the organization more effective - McKinsey article referred above
Other key benefits include:
- One system, one truth
- Benchmarks for comparison (internal, external and historical)
- Enable conversations
For a fuller description of the benefits, I’d strongly encourage reading the original McKinsey article.
Wishing you all the best for your Budgeting Season – I know how strenuous it is even in normal circumstances, let alone for the challenges that the ‘New Normal’ brings.