Banking

Targeted communication drives the budget process

A key element to successful financial planning and a smooth budgeting process with other business units is strong and clear communication. The first step is developing a consistent set of financials that are tailored for each stakeholder.


It is a rare CIO who has never had problems with planning and budgeting. Annual budget and planning sessions present annual challenges and headaches. But you can increase your chances of crafting an accurate and useful budget if you put a premium on information sharing.

To reach that goal, you need to organize and distribute financial information to three key stakeholders in the process: IT managers, business unit executives, and senior corporate management (i.e., CEO, CFO). Although the communications with each should be tailored to the stakeholder, all communications should be based on a consistent set of financial information.

That set of financial information reflects the nature of the communication required for each stakeholder. I’ll examine that communication strategy and then look at how to provide the financial information to support it.

Communicating with IT managers
Communication with your IT managers must provide a complete understanding of four major points that will also help you effectively communicate with the other stakeholders (see Figure A).

This communication will identify whether your managers understand their budgets, make continual efforts to maximize efficiency, grasp the budget-business objective link, and effectively engage the business.

The financial information required for these discussions includes traditional budget information (i.e., budget by expense category with year-to-year growth), committed vs. discretionary budget, and a portfolio budget view (i.e., budget by project and/or application).
Figure A
Budget composition What makes up the budget?
What is committed vs. new spending?
Budget efficiency What spending is growing and why?
What ideas/efforts have we identified to reduce spending?
Business drivers How does the budget align with the business objectives?
What is the budget by activity and/or project?
Business engagement How did you engage the business in order to develop the budget?
Four budget elements require special attention

Communicating with business unit executives
Discussions with business unit executives will focus primarily on the alignment of the IT investment with their business objectives. Executives want to understand what resource maintains the existing operation and what resource develops new initiatives.

They will also want to know what portion of the new initiatives is driven by tactical needs (cost reductions, response to mandatory demands) vs. strategic objectives (drive revenue growth, develop competitive advantage). This information is critical for prioritizing resource allocation and ensuring alignment with business objectives.

These discussions can’t occur without the availability of financial information that effectively portrays the application portfolio. That portrayal must show the resource allocation to portfolio maintenance and development (both strategic and tactical).

Communicating with senior management
Senior management discussions will also focus on the alignment of IT investment with business objectives, but the perspective will be enterprisewide. The CEO and/or the CFO will want to see the entire enterprise view in order to answer the following questions:
  • What is the enterprise IT investment and year-to-year growth?
  • How is it allocated by the business unit?
  • Does that allocation align with our strategic objectives?
  • How much of that investment is allocated to new initiatives?
  • What is the impact of new initiative investment on future operations?
  • Do the business unit managers understand these dynamics?

Supporting financial information
The prior review of communication needs identified the components of a consistent set of financial information that IT units require to communicate effectively. Those components consist of the traditional financial view and the portfolio view depicted below (see Figure B). The final component is the linkage of the portfolio view to the business.
Figure B
How the views link up

At a minimum, that linkage should tie the project/application financial information to a business owner. More integrated linkage relates that information to the actual business process the project/application supports. Linkage to the business process then leads to linkage with business objectives at the operational level.

To help illustrate how to build the financial information set for stakeholders, I’ve created this budget model spreadsheet. The document provides three tabs: financial data, a project listing and identification sheet, and a graphic of spending by project type over the course of several years. The first tab presents financial data for a cost center in the traditional expense category view and then converts it to a project view. Both views are across three years. The second tab lists the projects and identifies their types. This tab sums up the financial data by project type across years. The final tab provides a graphic of the spending by project type across years.

The steps in providing financial data
Providing the traditional and portfolio financial views requires several steps. The first step is to ensure that the traditional financial view generated by your financial system reflects a robust cost model (see "Follow this model for effective IT cost management"). The next step is to develop a portfolio inventory.

Begin developing that portfolio by listing all the existing applications/systems. Then list all your new projects. The combination should provide a good initial cut of your portfolio inventory.

Next, identify the business owner of each application/project. If possible, identify a single business owner for each application or project.

Then assign an identifier for the type of application/project. You can develop your own set of application/project types, but one simple set is the maintenance, tactical, and strategic combination mentioned earlier. This set allows you to differentiate between maintenance on an existing application, tactical development on an existing application, and strategic development projects.

Once you’ve developed this portfolio, you must establish a process to distill your financial data into this view. The sophistication of this process can vary widely, but one key is assigning people costs to each of the applications/projects in your inventory.

This is straightforward on a budget basis. Your IT managers simply divide their headcount among the applications/projects they manage. It is more complicated on an actual reporting basis.

If you want to report actual financial information in the portfolio view (the business will demand it if you provide budget information in that view), then your options span the spectrum from executing a monthly allocation process to implementing time-tracking.

It all reduces the pain
CIOs often find corporate planning and budgeting processes painful due to the absence of meaningful financial information. Creating and delivering targeted financial information helps the CIO drive the communications with the process stakeholders and reduce the pain.

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