Projects. They’re both the crux of your technology growth strategy and the bane of your IT planning existence.
Why? Maybe this is a familiar scenario: the cost manager of the data center knows your project team is planning to deliver a brand-new marketing application. She plans for the capacity and associated cost of the project during the build phase. It arrives (ta da!) but in the rollout, she suddenly discovers that she will need to add 20% more capacity she didn’t plan for.
Oops. There goes all the discretionary budget she had set aside for other investments she was going to make in the coming year. Why? Because the financial plan didn’t cover the transition of project costs to the operating budget when the project flipped to a service.
There’s no shortage of advice or products to help run and manage projects effectively during the build phase. But often overlooked is what comes after. What are the steps necessary to ensure project costs transfer seamlessly from the build phase to the run phase?
Project financial planning
Technology projects are the lifeblood of the business. A key element of modern strategies, these projects are critical to competing in markets where every business is a technology business and innovation offers clear strategic value.
But many organizations have a gap in the project financial planning process. Projects are initiated as an investment, and even though everyone acknowledges there will be ongoing costs, they often don’t specifically plan for them. Capitalized labor is a clear example. That’s a build cost, right? But the labor you put into something now becomes an asset on a balance sheet that’s going to come back to a cost center budget later.
Project run costs can represent a significant chunk of your future operational budget, likely 15-30%. If you don’t plan for these costs at a strategic level, they are guaranteed to surprise the business.
People talk… don’t they?
IT Finance tries to manage project financial planning in a couple of ways:
- They hope people talk to each other
- They pad budgets, hoping to absorb run expenses as they arrive
- They rely on the project management office (PMO) to incorporate future run costs into the business case for the project
Why doesn’t this work? Well, sometimes people don’t talk. They’re too busy. Padding budgets is ineffective, as spend sits idle or isn’t enough to cover actual costs. And really, the PMO isn’t any better at guesstimating than you are. They need a Finance-level understanding of cost centers to build an accurate business case.
One of the primary challenges we face in IT financial planning is creating a single view of our investments across resources, services, and innovation. Today, for instance, we can't provide a combined view of operational and investment costs for both projects and services.
Director of Finance, Information Management, CHRISTUS Health
Many IT Finance and PMO teams don’t have a way to note in the financial plan that there are additional costs that will be borne by someone else on the operational side. Even when these costs are estimated as part of the business plan, they’re often stored in email or a one-off spreadsheet and they don’t get factored into the books, which means they don’t make it into the operational budget forecast. Someone has to remember that they approved these estimated costs.
You’ve got to admit: this isn’t an optimal strategy.
Get proactive: delegate your run costs!
The key to closing this gap is explicitly delegating and reporting run costs in the financial plan so that Operations understands the impact to specific cost centers on subsequent years budgets.
Sounds easy, but what’s missing is the automation. There are specific use cases that incur routinely, like labor capitalization or equipment purchases, that can be baked into projects. Those are assets—they go on the balance sheet and the depreciation has to hit someone’s budget.
For project budgeting your IT Finance managers are already doing today, run costs must be projected and associated with someone’s budget. IT Finance is trying to do this, plotting these things out in their spreadsheets, but accounting for the transition of project costs from build to run phases requires a debit and credit methodology that is time-consuming to design and tough to implement. An automated system of record can make this a routine part of project budget development so that your operational budget is optimally updated for subsequent years.
Getting to this level of transparency is a win-win for both IT Finance and project management functions. All of those assumptions and decisions that were made in a project’s business plan get carried forward and embedded into future planning assumptions. The impacts of the investment decisions you’re making today on the operational budget next year are visible and accessible. At any time, you can see how much the budget will go up next year based on project run cost impact. The outcome is the ability for both teams to make better ROI decisions when they look at the total impact of the portfolio.
Those 9 steps I mentioned…
Line of sight is ALWAYS the answer
Ultimately, this exercise rewards its creator. Implementing a project financial plan that incorporates the nine criteria above provides the following outcomes:
- A complete view of investment and operational budgets
- Trust in the accuracy of the project budget and forecast, compared to actuals
- The ability to plan the complete cost life cycle over subsequent years
The moral of the story is that creating a line of sight is always the answer. The more you know, the better you can plan.