Budgeting in a Recovering Economy
(Article taken from Management Guidelines 330 Budgeting in a Recovering Economy)
It will have escaped nobody’s notice that this has been a tough year. Consequently, anyone who is in the process of or about to start the forthcoming year’s budget planning round may be considering the prospect with some trepidation. Despite the ‘green shoots’ of media fame, governments, economists and business leaders remain locked in debate about the likely speed and pattern of economic recovery. Side debates about the impact of V-shapes, W-shapes and dead-cat bounces abound.
Those of us in the IT industry maintain one eye on the global and national economy, but probably pay more attention to those forecasts which tend to influence us more directly. We know that recommendations and predictions from industry analyst houses have a direct impact on the behaviour of business decision making, and pay attention to their spending predictions. These, unfortunately, give us less reason for cheer – because most forecasts remain quite gloomy.
This year the economic landscape of all companies is fundamentally different. The massive changes in the wider economy have cascaded down and will dominate business for a long time to come. This directly affects decision-making styles and trends. Understanding how this works will be critical for anyone hoping to secure IT investment in the coming months and years.
What started as a slowdown two years ago became a standstill and then reversal last year. Now that there is some growth returning in some European countries, confidence is growing and that growth will return to the UK in due course. Business confidence studies show some improvement. But while confidence might be rising it is still pretty low. Why?
The recession came as a horrible shock to businesses and business leaders after an unprecedented period of growth and profitability. Complacency and confidence once they start to grow are quite robust forces, and it seems every organisation fell victim to these to some degree during the past decade. In contrast, the sudden withdrawal of lending, shockwaves from major name collapses in banking and other ‘gilt-edged’ industries have left many feeling bruised. Consumer and business spending both contracted at an unprecedented rate for several quarters, forcing companies into difficult positions. Many slashed their margins for survival, creating a cycle of cash-flow squeezing which put many positive plans on hold. Worse, it forced companies that had been motoring ahead with headcount growth to slam on the brakes. Major corporations and small businesses alike faced the nasty inevitability of shedding jobs and staff. All the evidence indicates that this process is ongoing.
IT spending reductions
Industry analysts predict a global reduction in IT spending this year of between 6 and 10 percent. Forrester predicted in June that global IT spending for hardware, software and services across public and private sectors will drop by 10.6 percent to $1.53 trillion (30/06/09 The Register). Gartner stated in July that it was expecting to see IT spend total $3.2 trillion in 2009, a 6 percent fall against the $3.4 trillion it saw in 2008 (07/07/09 Gartner newsroom). In the UK, IT spending is dominated by the public sector and financial sectors, both of which are coping with significant change and spending squeezes. According to a forecast by analysts Pierre Audoin Consultants (PAC) and TechMarketView (TMV), spending on software and IT services will fall by 1.5 percent this year to £39.5 billion, and next year will remain relatively flat. The report indicates that spending cuts are likely to occur across industries, with retail, services and manufacturing industries likely to make cuts.
So far we have spoken about larger organisations, but arguably the SME sector is more vulnerable still. With fewer defences against macro-economic storms and far less robust cashflow models, the smaller the company the more likely it is that IT and other spending will be reduced this year, and in greater proportion than within their larger enterprise counterparts. According to Forrester, 32 percent of SMEs are reducing their IT operating budget this year with 28 percent also lowering IT capital budget, compared to 27 percent in both cases for larger businesses.
Whatever the expert predictions may be and whatever size of company you work within, the fact remains that the outlook for securing your IT budget for next year, looks decidedly more challenging than in previous years. With stringent and scrutinising decision committees to convince, IT managers will need to have a very clear understanding of their companies’ specific needs and aims for next year and build a water-tight case for investment in their chosen technologies.
Fight Battles that can be Won
Initial major decisions about what investments to incorporate into your budgets are fundamental. Before committing anything to paper, you need to take on board that many businesses simply cannot afford to invest in anything unless it protects the business from failure and increases potential margins. Times have changed, and you need to change your approach.
The criteria that will be used to decide what is and is not business-critical have altered. Investments made in order to keep up to date – or to keep up with the ‘Jones Corporation’ – are now less important than those which keep the sales engine going. Management’s awareness of the options for this is also heavily influenced by media, so you need to incorporate and manage their perceptions and misconceptions too.
The management of most companies never did care much about technical detail or functionality, and have always wanted to know more about what it does for the business. Now they care even less about technical benefits and are wholly focused on cost, value, tangible deliverables and how it will help shape the company’s return to growth. Your business case will therefore need to highlight clearly how investment in your chosen technology will help deliver cost savings, efficiencies and business benefits. There are several areas that offer potential to do this.
Do more with less
Solutions that can fundamentally offer ‘more for less’ are going to be regarded very favourably by those in charge of allocating budget this year. Headcount for many companies will have been reduced this year, but the workload will have stayed the same – and for many it will actually have increased as pressure on the business to survive and succeed has increased. There may never have been a more critical time for businesses to understand and have control over all the projects they are working on and how they are being resourced. Few companies will be able to afford to waste money on resource silos or on staff that are working on tasks that are beneath their level of expertise.
A company that regularly evaluates the use of its resources and challenges assumptions that it has the right people in the right place to do the job will achieve greater synergy and a better balance of skills on projects, resulting in a superior and more cost-effective outcome.
Use resources more efficiently
Companies should also look at the use of resources across different projects and across departments. Although teams can be working on different problems, different clients and different challenges, there is value to be gained through having a macro view of these projects. Imagine this scenario: two different teams are working on two different clients, each with their own set of problems and challenges. Within each team there is a high probability that one team member is working on a remarkably similar micro problem or component as a member in the other team. By investing in project and resource management software that enables you to see staffing levels across all projects, you can identify duplication of effort in terms of problem solving and take steps to avoid or reduce this.
For IT managers to succeed in securing budget for next year, they must first carefully consider which technologies to back and ensure that they are starting from the strongest possible position before working out the best strategy.
Deliver ROI in the right timeframe
For many companies, it is now impossible to make concrete plans long term. Survival and recovery are the only games in town, which will sometimes make it hard to convince executives of the value of investing in long-term solutions. When talking about ROI, decision makers need clear pictures and timeframes. Even for those who do appreciate the longer-term benefits it is not always only about rapid ROI. Many businesses are now just as concerned about achieving continuing ROI that fits with the company’s specific term of vision. You will have a better chance of securing budget if you support investment in technology that will deliver ROI in the right timeframe.
The media this year has been full of the buzz about Cloud Computing and softwareas- a-service. If you are attempting to integrate this into your models, this could work in your favour by predisposing the audience positively – but although it carries potential for some cost-reduction and resource-efficiency benefits, many executives are sceptical about security and dependence on the internet. You therefore may not be able to predict the reaction to a proposal around cloud solutions. You will need to plan for both reaction types and consider both the value that a conventional client-server set up can continue to have as well as thoroughly prepare your ground for promoting a Cloud-based application.
Careful preparation of your IT budget proposal is fundamental. However, of equal importance is your ability to argue your case and stand up effectively to the management team at the budget meeting to get the outcome you require. Negotiation skills are fundamental to getting the decision you want. Almost every decision made by businesses involves negotiation of some kind. And unless you have been on an expensive training course, most IT managers aren’t experienced negotiators.
Unfortunately many financial and business decision-makers have been on those negotiation courses! That may make them tough adversaries, and before you enter into your budget discussions or go before a budget committee it is smart to learn a few basic negotiation techniques. Knowing how to negotiate better may be make or break in getting your budget proposals through unscathed, or help you gain a larger share of precious budget versus a competing proposal.
There are many different styles of negotiation. The more aggressive ‘play hardball’ approaches aren’t right for this situation – because you have to keep working with these managers over time. Game-style tactics which aim to score points off the opponent using tips and tricks to get the upper hand are also not a great idea. For logical, financial decisions the approach which will be likely to work best focuses around honesty, clarity and openness in negotiation. That should be your negotiating philosophy.
The overall aim of any negotiation is to reach a fair compromise, which means a little give and take on both sides. The goal to have in mind is not to get everything you want, but to create a win-win scenario in which the decision-makers know that they have made the best decision for the company, while you feel it’s the best decision for the infrastructure.
As the expert in your specialist area, you want certain things which may conflict (or appear to conflict) with what the other party wants. Your job is to work through this maze and leave each party happy, including yourself.
You can purchase Guidelines 330: Budgeting in a Recovering Economy (pdf)
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