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It may be too soon to gauge the economic future, but it's not too early to build strategies to safeguard key projects. Find out what you can do now to handle the full spectrum of IT budget scenarios.
When 2016 began with a selloff in the stock market and growing trepidation about just how bad the situation in China really was, investors weren't the only ones taken aback. Key enterprise decision makers who had just laid in revenue and spending plans for a new year were stunned as well. At the same time, prognosticators continued to forecast steady growth in the 2016 worldwide economy, this time fueled more by developed than emerging economies.
It is far too early to know how either economic scenario will play out, but for IT managers with newly minted 2016 budgets, it is not too early to start thinking about lean budget scenarios in case the call goes out to cut expenses. CIOs and other leaders who are charged with technology budget responsibilities should be especially concerned, because in many organizations IT is seen as an internal cost center whose existence is hard to justify by revenue gains. This makes IT a natural target for the CFO when it's time to look at belt tightening.
To be forewarned is to be forearmed. So before you hear the knock on your door, consider the following proactive strategies that could help you preserve as many of your IT projects and initiatives as possible if you're asked to cut expenses.
Also see: Year-round IT budget template
1: Think about the budget in every scenario
At the beginning of the budget planning process, IT managers should develop a malleable plan that includes expanded, average, and reduced IT expenditure scenarios for the budget. They should vet the IT strategic plan and objectives against each of these budget scenarios.
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The human tendency during this process is to imagine what IT will look like if a worst-case IT budget scenario evolves, because an IT manager is always cognizant of what IT must accomplish no matter what happens to the budget. However, IT managers should also imagine an inverse situation, where business revenues boom and it's possible to ask for more IT budget than was originally requested. If the IT budget is considered in every possible business scenario, there is inherently more flexibility when it comes to working with it. Managers will have comfort and knowledge levels in budget expansion, contraction, and stay-the-course scenarios.
There are elements of the IT budget that can't always be shared with everyone. But whenever possible, managers should share the IT and strategic planning and budget process with both IT staff and with other C-level managers. This gets everyone in step and comfortable with the best- and worst-case scenarios for IT, as well as with an IT scenario that unfolds at an average rate of spend. If circumstances do evolve that require IT budget cuts, such communications also leave open areas of negotiation with other managers in the business who have a vested interest in certain IT projects being completed and who might be willing to contribute some budget from their own areas to keep important IT projects in motion.
Also see: New Equipment Budget Policy
3: Clean out the attic
The specter of budget cuts is always a good time to review IT assets and to see whether maintenance, energy consumption, licensing agreements, etc., can be cut from operating expenses. Shelfware--the phenomenon of software being purchased by IT or end users who then determine that the software is not a good fit for the business after all--is one area to look for savings. In many cases, companies forget about this useless software and continue to pay subscription and maintenance fees for it, even though they never intend to use it.
If the software is likely to never be used, now is the time to get rid of it--and stop the fees. The same goes for hardware that has seen its day and is now just taking up space in the back room. In the telecom area, it is also very common for telephony trunks and services to be left idle--long after users have stopped using them The best way to find idle telephony trunks is to engage a telephony auditing company to review your bills (which often are very convoluted and difficult to interpret) so these idle assets can be identified. This will enable you to cut the services and also the costs. What is the net impact to IT operations? Nothing! You've simply eliminated what you weren't using anyway.
4: Review discretionary expenses
Not much can be done with fixed costs like facilities and amortized hardware and software. So if budget tightening is required, you may need to look at discretionary expenses that are not baked into the budget and that can either be moved out or eliminated.
Within the IT budget, the categories of discretionary expense are usually staff, contractors/other third parties, training, new hardware and software buys that are being expensed instead of being capitalized, and outside subscription services. From a morale and a baseline labor standpoint, the goal when it is necessary to reduce or delay discretionary expenses is to preserve staff at all costs. Consequently, if you must look at labor cost reductions, the logical places to look first are deferrals in expenses in outside services, subscriptions, contractors, and temporary help.
Other places to seek out savings are planned expenses for trips, conferences, and training and certifications--with the caveat that training and certifications that are absolutely essential so that staff can keep up with IT and business needs should the last to be delayed. If you find that you have to look into staff savings when you retroject the budget, start by looking at overtime hours for hourly staff, where you might be able to temporarily reduce service levels without losing people on layoffs. In some cases, companies have even frozen salaries or gone to four-day work weeks to reduce staff costs--again, with the goal of preserving jobs.
The other area to look, which is explored in greater depth under the next subtopic, is deferrals in projects that require additional funding. IT budget managers should also consider what is being spent on IT for remote offices. This is easy to overlook, since the IT in outside offices is not always a front and center expense that gets IT's attention. In many instances, there are unused communications lines, wasteful service subscriptions, support costs, and subscriptions for hardware and software that aren't being used in remote offices. It may be possible to streamline IT expenses by considering whether some of this remote office IT can be economized through either physical or virtual consolidation.
5: Be aggressive with projects
Project work is also a discretionary expense--but since projects carry so much visibility and expense, they deserve their own focus. At the start of each annual budget cycle, a bit of negotiating often occurs between the CFO and the CIO. Both individuals understand that major projects can add significant expense loads to operating budgets. Let's say for example, that the total operating costs of a new project are $100,000. If the CIO schedules the project to start in the first quarter, the company will incur the full $100,000 expense for that fiscal year. However, if the project isn't started until third quarter, the total annual operating expense for the project for the fiscal year would be only $50,000. Understanding this, the CIO's goal from a budgetary standpoint is to schedule the project early, because if they have to cut the budget to reduce expenses, a project can always be deferred so that other more painful budget cuts can be avoided. CFOs also understood this dynamic, so they will push the CIO to schedule a project for later in the budget year at the onset of budget planning to get the savings upfront--with the caveat that if the company does really well, the project schedule can be moved up.
If you're sitting in the CIO's or the IT budget manager's chair, the goal in this process from a purely budgetary standpoint is to aggressively schedule your projects so you have project deferrals you can schedule if you need to cut budget. Of course, there are many other considerations that go into project planning and scheduling besides budgeting, such as when staff and/or other resources will be available for the project.
6: Track projects in progress for results
Just because you have an IT budget doesn't mean that you should spend it all, even if times are good. This is especially important in the IT projects area, where prototype and proof-of-concept efforts may not work as planned--or worse yet, if an important project begins to fall behind and it is necessary to stop work and reevaluate.
In a project reevaluation, managers should look for expenditures that can be trimmed or suspended while the project is being assessed and put back on track. (The most common IT project to fall behind schedule and require reevaluation is generally one that involves a high level of system integration.) In prototype and proof-of-concept projects, enough time should be given to see if the project is going to work. If the project isn't working and enough time has been put into it, you should pull the plug. One of the riskiest projects in the proof-of-concept area today is the big data/analytics project, because this is still relatively new technology for most companies. It's likely that at least some queries or analytics algorithms won't yield the results that companies hope for in their initial implementations.
7: Delay hiring plans
For the same reason that projects can be aggressively scheduled and/or deferred, so can hiring plans. Since delaying hires may affect business or project plans, the CIO or budget manager must clearly communicate the repercussions to others in roles of executive leadership--as well as to key staff in IT.
IT management can also help mitigate situations like this with creative strategies such as collaborating with local colleges and universities that have IT programs. In these collaborations, companies can offer revolving internships to students, enabling them to get practical experience in IT while providing additional staff for IT projects that need it. The extra staff costs nothing beyond what it takes to train students into the projects they're assigned to. By offering temporary internships, companies also put themselves in a position to review young talent. This gives an organization the first shot at making an offer of permanent employment to a strong performer.
8: Talk to your vendors
Vendors understand the potential for fallout from budgetary cuts and how these cuts can affect them. In many cases, vendors can help in a shrinking budget scenario by renegotiating contracts for services or developing attractive financial options that can keep IT services and projects going in tough times. In some cases, vendors might even offer to repurchase equipment and convert a site into a cloud-based user of the vendor's system, which might help expenses. In most cases, IT leaders do not talk as often as they could with their most trusted vendors and business partners when the IT budget is imperiled. Keeping the communications channels open is critical. In many cases, a vendor can step in, strategize an alternate solution, and help with the budget challenge.
9: Consider pooling your resources
Small and midsize companies in a common industry are especially good candidates for pooling resources. In the financial services industry, this sharing can come from cutting a deal with an IT audit firm or a training company that gives everyone a discount on services if multiple companies sign up as a group. Other areas that are noncompetitive in nature and that can be cost-shared are data center resources for storage and processing, green IT initiatives, and training and service subscription costs.
Keeping the IT budget in perspective
The prospect of cutting an IT budget is always stressful, so one of the best steps an IT budget manager can take at the start of each fiscal year is to think of the budget as a malleable financial artifact that can be stretched, contracted, or performed to target as the business dictates. At the same time, IT managers must be cognizant of which projects and services absolutely have to be delivered to the business, no matter what the financial picture is--and they should actively, openly, and frequently communicate with staff. The latter is especially important in tough budget times, when staff members as well as management are likely to be anxious.