Avoiding The IT Death Spiral Wed 02 Sep 09

Four Tips For Better IT Budgeting

Many pundits are indicating the economy has hit bottom and we are starting to come out of the recession. I don't know if this is true, but I certainly hope so. At the same time, no one seems to expect a rapid climb back, which means controlling costs will remain an important factor in our operations.

As you prepare your budgets for next year, you'll no doubt go through many iterations. You may start out with plans for new systems only to be told to come back with a budget that stays flat. Top management doesn't like what it's getting for their money--or believes it is out of sync with what the company is trying to do. Or management may simply not understand IT, and so demand you lower your costs. To appease top management, you produce a number of different plans that include more and more cost reductions.

Budgeting this way, however, can easily lead to a classic death spiral. We dutifully reduce our costs by cutting services where we think prudent; this leads to more dissatisfaction and more demands for reduced costs--and so on and so on, until the cost that is ultimately reduced is you.

Fortunately, there are ways to avoid this.

Be Realistic

There is a school of thought that your first budget should be high, so when it's inevitably cut, you'll end up where you wanted to be. This is really very foolhardy and dangerous. It forces your boss, in effect, to take control of your budget and make the cuts for you--usually without much input from you. If you want to control your budget, demonstrate that you can develop a realistic one on your own.

The "go in high" method also destroys your credibility as it highlights how out of sync you are with the business' conditions and needs. Although they may not say it when explaining (no doubt with some exasperation) that your proposed budget is unacceptable, your boss is probably thinking "What was he thinking? Doesn't he understand what we are trying to accomplish here?" And it's never a good thing when your boss has that kind of impression of you.

Be Transparent

Most people don't fully understand, nor do they really want to understand, all of the things IT does and the different skill sets it requires. Many people believe our IT resources are a fungible commodity: Everyone in IT can fix a PC, write code, design the network and rebuild a server, can't they?

Break down your budget into meaningful areas so they understand where the dollars are going. Explain the various functions and why each is important. Include a breakdown of to project portfolio your applications group is working on, and confirm that these are the projects management wants. Don't forget to show the types of support you're providing, too.

Give Options

As you look at ways of cutting costs and services, lay out the effects of those cuts for your bosses. Get their input on what they are willing to give up. Involve them in the process so that they understand and are comfortable with a decrease in service to achieve a decrease in cost.

If they aren't involved, you set yourself up for the "I didn't know that's what would happen" or "I didn't intend to approve that" type of response. As a result, you may have boxed yourself in to a corner and need to continue the same service level but at a reduced cost.--a prospect that's often impossible and always unpleasant.

Align Your Time Horizons

Find out what is the driving force behind the upcoming budget and make sure that you're in sync with it. If your company is concerned about breaking even over the next two quarters, plan on projects with a quick payback that can contribute to making that happen.

Keep in mind that the recession has not affected every company the same way. Low-cost providers such as McDonald's and Wal-Mart are faring better than most, and to some extent, prospering in the recession, while automakers are clearly struggling. Get involved in the planning process and make sure your IT plans support the company's overall plans.

Show the value IT can bring, whether it is helping the company gain market share and grow revenue or to operate more efficiently and reduce costs. If you can demonstrate how your budget supports the business, it's more likely to be approved and suffer fewer cuts.

"Death Spiral" photo by glovsky225

This article is also posted on Forbes.com.  Feel free to join in the discussion either on this site or at Forbes.com

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