July is a perfect time to take stock of your spending and begin planning for next year. But what guidelines should you use for budget planning in an unpredictable economy? In this article, we’ll discuss a few realities you should consider before creating a budget, and we’ll examine the parameters three high-level IT managers have established for their company’s budgets.

Budgeting through uncertainty
The current economic climate brings with it a few realities you should take into account when planning your budget, cautions David Orr, chief economist at First Union Corporation, the sixth-largest bank and brokerage firm in the United States.

First, forecasting spending is difficult because the future is uncertain. “Even though Fed Chairman Alan Greenspan keeps lowering interest rates [it was recently dropped a quarter point to 3.25 percent] and many analysts are projecting a turnaround in the fourth quarter or the first quarter of 2002, no one knows for sure what lies ahead,” he noted.

Second, budget planning is especially difficult in a cyclical industry like IT, where expenditures such as those for hardware and software can’t be forecast with confidence because sales have dropped appreciably compared to prior years.

“In good times, unit volume will go up approximately 25 percent, maybe more,” Orr said. “But in an economic downturn, unit volume will be at least 10 to 15 percent lower. Many CEOs are saying their unit volume has dropped 30 to 40 percent quarter to quarter.”

Finally, even if the economy turns around, it will never return to the heights it reached over the last three years, according to Orr.

“We experienced an economic bonanza that was a once-in-a-lifetime experience,” he said. “It was largely due to Y2K, availability of free money, and the ramp-up of the Internet.”

With that as backdrop, IT managers ought to be cautiously planning their budgets. We found that the three high-level managers we interviewed have already pared spending. Beyond that, what will they do? Here are the tactics they will use in formulating their budgets for next year.

Budget plans of three decision makers
BigBand Networks is a Fremont, CA-based router manufacturer. Chief Operating Officer Bow Rogers plans to use the following tactics in creating next year’s budget:

  • Hire contractors rather than full-timers. “Using contract techies for projects keeps staffing costs down to a minimum,” Rogers said. “Most projects have a finite time frame, so it makes little sense hiring a full-time person when it’s impossible to forecast the number of projects we’ll be undertaking.”
  • Change the compensation package. When Rogers hires a full-time person, he plans on offering more stocks and less salary.
  • Avoid using search firms. Search firms are paid 30 to 40 percent of a new hire’s first-year salary. “Now we’re hiring through employee referrals,” Rogers said. “The incentive is a $5,000 bonus if we hire the person.”
  • Cut food perks. Last year, Rogers provided his staff with exotic coffees, bagels, croissants, and doughnuts. This year snacks will be limited to soft drinks and fruit.
  • Phone audits. “We’ll cut phone costs drastically by doing frequent phone audits,” Rogers said. “This will restrict staffers to business calls and limited personal calls.”

Harry Gruber, CEO of Kintera Inc., a San Diego-based Internet marketing firm for nonprofit companies, will be planning his budget along these guidelines:

  • Cautious equipment purchases. “Last year we upgraded our equipment every six months based on expected demand,” Gruber said. “This year we’ll buy used equipment and try to keep it as long as possible.”
  • Monitoring budgets on a short-term basis. Gruber will be monitoring expenses every quarter rather than on a yearly basis to track revenues against expenses.
  • Cut salary costs. New hires will be paid 30 percent less than current market rates and usually less than they were paid on their last job.

However, David McDonald, academic program director of the computer information systems department at Georgia State University in Atlanta, cautioned against Gruber’s policy of paying new hires under-market salaries.

“It’s a cost-cutting tactic that will come back to haunt IT managers,” warned McDonald, who serves as a consultant to technology companies. “When the economy starts moving again and companies start beefing up staffs, underpaid techies will be the first to leave.”

Great people are the lifeblood of a company, according to McDonald. “They can mean the difference between putting a company out front with new innovation or just hanging in and doing what everyone else is doing,” he said.

Finally, David Inglis, chief financial officer for Flashline.com, plans to monitor product launches carefully at the Cleveland-based manufacturer of enterprise application software. Inglis plans a “skin and bones” budget, dramatically cutting costs in these areas:

  • Travel and entertainment. “We’ll only spend money on T&E for live prospects,” Inglis said. “We’ll also qualify customers before making sales calls so potentially fruitless trips are avoided. When possible, we’ll do Web presentations rather than live ones.”
  • Hiring. “Staff will be kept at a bare minimum,” he explained. “We’ll hire someone only if absolutely necessary.”

The bottom line for all three: Spending wisely and avoiding excesses is the smart move in the current economy.

What are your parameters?

What will be your guidelines for creating next year’s budget? Post your plans below.