Have you ever gotten a package from an online order that is just way too big for the product inside? And when you open it, you find most of the space inside is just padding to protect your small item? The packaging is very inefficient and the waste is obvious, right?
Many IT budgets have this problem. IT cost center owners add extra padding to protect their projects and programs. Not sure if they can make adjustments mid-year if their calculations are wrong, they view the annual planning process as their one chance to pad their budget to ensure it arrives intact at year end. Not unlike your package, this creates a lot of extra waste that now has to be “taken care of,” whether it’s recycled, returned or thrown away.
But how big a deal is budget padding really? Is it all that common? And is it really as bad as all those online shipping packages with egregious air pillows and protective paper waddings?
To answer these questions, we started an informal poll of IT Finance professionals from around the world. Each time I get a chance to present to that audience, I ask a series of questions and then share the cumulative responses with them. Mostly so they can see that they aren’t alone—many IT Finance organizations have the same struggles.
From that informal poll, with 70+ respondents and growing, we can see those budget variances are very high and very common. The average respondent has an 8% budget variance. Assuming that variance represents conservative budget padding at an annual level and a typical IT budget of $100M; that represents up to $8M tied up in padding each year per IT shop!
Where does budget padding come from and why do we care?
The horror story is about starving innovation. IT budget cost center owners often aren’t confident in the fidelity of budgeting, especially if it’s only done on an annual basis. They build conservative budgets, viewing it as their one chance to go to the well for resources to support green-lighted projects. Then at year end, they realize they had so much padding, they underspent. Now they and the CIO are engaged in a last-minute scramble to spend unused budget and have regrets about the projects that could’ve been. They end up with too much dry gunpowder and race to fire it all off before starting the cycle all over again.
Ask yourself these three questions
How do you know if the time is right to address budget padding in your organization? There are great questions that every IT Finance person should answers for the CIO on whether or not budget variance is an issue to address.
- Are you maximizing every dollar allocated to IT to drive business value?
- Do you lack strong governance and oversight into capital and expense planning?
- Are you unable to fund key business initiatives and projects, yet still have budget centers leveraging “discretionary” dollars?
If the answers aren’t satisfactory, then it’s probably time to do something about it. Automating your IT budgeting process increases budget planning speed and reliability. Completing fast and accurate monthly budget-to-actuals variance analysis each period will help you incent & capture cost savings, while forecasting more frequently will put hard dollar savings back to work.
We estimate that a typical IT organization faced with conservative budget padding would put $4M (4%) back to work every year by switching from spreadsheets to Apptio for essential IT budget, forecast and variance processes. Assuming $100M in IT spend and 8% padding, automating planning conservatively reduces that by 40% ($3M in savings). Fast and accurate variance analysis captures another $1M in savings, assuming 1% operational efficiency gain across the organization. But is that realistic? Do we really see those gains?
IT Planning allows us to maneuver and manipulate data quickly, to identify areas to redistribute the budget and provide budget owners with the confidence to make decisions with the data to back it up. Jeff Blume TBM Analyst, HomeAway
For example, HomeAway, a market leader in vacation rentals, runs very lean at .5% budget variance and captures $10M (10%) in operational cost savings each year. How do they do it? IT finance looks for opportunities to save money and then makes those savings available to the CIO to allocate to un-funded budgets. This “give and ask” process updates their quarterly forecast up to 50 times per month. They are constantly changing funding between cost centers and releasing “approval to spend” dollars that align with strategic imperatives. It ensures that they use all the dry gunpowder in their arsenal so that every dollar is spent, and is spent on the highest impact areas.
»Related video: Hear how Micron reduced budget variance
Extra protection comes at the expense of considerable inefficiency
In short, there’s an immense amount of IT budget tied up in padding each year, protecting critical projects at the expense of considerable inefficiency. Best in class IT Finance departments will seize the opportunity to put that padding back to work by improving foundational budgeting, variance, and forecast processes.
A reliable and accurate planning process designed specifically for IT will give cost center owners the trust they need to budget accurately and for IT Finance to incent cost savings. This ultimately allows you to fuel innovation or return dollar savings back to the business.
Now, if we could just apply that same thinking to all those packages we order online.
Download the eKit for additional resources on this topic, including the 7 Deadly Sins of IT Budgeting and Forecasting eBook.