Managing to the Budget

The company, its officers, its employees, and its shareholders are relying on the IT manager to meet his or her budget. If the department overspends the budget, both the company and its employees may be adversely affected. The corporate budgeting process and its subsequent success is dependent on all budget managers managing their share of the overall corporate budget and performing according to plan.

There are a variety of approaches the IT manager can take to help manage the budget on an ongoing basis:

Schedule a regular monthly meeting with the CFO, controller, or finance analyst to review actual versus budget numbers. During this session, variances should be investigated, and the IT director should develop a list of key actions to improve any negative variance. After the meeting, the director should delegate the action items and get them completed quickly, to experience the benefits in the subsequent months numbers.

Give senior direct reports (usually operations and applications managers) budget responsibility for their areas and hold them accountable to hitting the numbers.

When large variances occur, take fast action, as it takes time for changes to be reflected in the numbers. For example, if a vendor agreement is modified, it may take 30 days to finalize the agreement and another 30 days for the charges to take effect.

Dithering and delaying decisions and ignoring high variances is a recipe for disaster. The IT director has a fiduciary responsibility for the department and must make the necessary corrections to perform as promised to the rest of the management team. Delay may lead to senior management or the IT steering committee making unilateral decisions without the involvement of IT.

If you are anticipating a large negative variance in the budget, enlist the CFO as soon as possible to work with you to help correct the situation and explain it to senior management and the IT steering committee.

Handling Out-of-Budget Business-Unit Requests

After the operating budget is set, business-unit requests that might impact the operating budget need to be discussed in the face of other investment decisions the company is trying to make. While, as noted above, meeting the committed budget is important, over the course of the year budget assumptions may change and some common sense and flexibility can be necessary.

Business units will often request projects that were not on their agendas when the budget was completed. As outlined in Chapter 15, projects should be evaluated on a business case basis and, if approved, executed. Large projects will likely hit the capital budget if approved and not affect the operating budget. Business-unit project requests should be documented, along with a business case, and sent to the IT steering committee for review and approval. Every new request must be considered in relation to the current operating budget and the capital budget. Possible outcomes include:

Project is covered by the current capital budget and approved.

Project is not covered by the current capital budget but is higher priority than another project. Downgrade the priority of the second project on the list of backlog projects and replace with the newly approved project.

Project is not covered by the current capital budget. It is a high priority. There are no other projects to displace. New funding for the IT group is needed. The business case is sound, so additional funds are approved to complete the project, and the ongoing negative capital budget variance is approved (i.e., the capital budget is increased or some other nontech-nology investment is displaced).

Project is not a priority and has a substandard business case; therefore, it is not funded and further consideration is not necessary.

IT budgeting and cost containment practices are critical skills for the IT manager to master. Developing a sound budget, which provides a road map for managing the department and can withstand business changes and economic changes, is a challenge. Additionally, anticipating, understanding, and forecasting the known variables about the business distinguish an average IT director from a star performer. The average performer is reactive to the environment while the top performer has assessed the reliability of key assumptions and the associated risks and planned contingencies accordingly.

Concepts presented in the chapter, such as prioritizing discretionary spending areas and keeping this prioritized list handy, encourage the IT manager to act quickly and decisively to negative budget variances. Finally, ensuring that IT assets are deployed against revenue generating and customer-facing activities help ensure that budget dollars are flowing to the highest value activities. Companies whose IT managers routinely ensure this, as well as the business value of IT investments, see much higher productivity and profitability from IT investments.

IT Steering Committee Concept

The IT steering committee is composed of senior IT management and senior business leaders who meet on a regular schedule to review, discuss, prioritize,

and resolve IT projects, issues, and strategy. Used properly, the IT steering committee is one of the most effective tools for creating the high-performance IT department. The steering committee conveys business priorities to IT so that IT management can direct resources to the highest priority business functions in real time. The committee provides approval, oversight, and high-level steering of projects, as well as finalizes project priorities based on IT demand management analyses. It also reviews proposed operating and capital budgets, IT operations service levels, and IT performance metrics. The committee has the membership and authority to facilitate the resolution of any organizational roadblocks to IT effectiveness. Perhaps the most important responsibility of the committee is to improve communication and business relationships between key line personnel and IT managers, facilitating better informal communication between groups outside of the committee. This chapter outlines the typical charter, responsibilities, membership, and ongoing operations of a properly functioning IT steering committee.

Exhibit 17.10 illustrates the communication flow and outcomes of the committee. Exhibit 17.11 displays the demand management process. The IT Steering Committee meeting is on Tuesdays.

Business Units

Business priorities

New programs

Results of business

Technology needs

IT Steering

Project updates

Project requests

Capex requests

Competing priorities

Outcomes

Business and IT alignment

4-8 week game plan

Project approvals

Solved issues

Reprioritization of work

Exhibit 17.10 IT Steering Committee Communication Flows