A step-by-step process for an IT rolling forecast
The time for an IT rolling forecast has come.
Annual budgets and forecasts are not agile enough to support today’s constantly changing business environment. An annual budget makes assumptions about spend but doesn’t replace assumptions with actuals once the year is underway. When the business climate changes, your budget can’t respond to new prioritizations. This puts you at a disadvantage.
Forecasting, by incorporating actuals, is a better option, but it still only looks at the current financial year (FY) in isolation. An agile budgetary process needs to look across multiple financial years and incorporate the most recent periods of actuals.
A rolling forecast offers a complete planning solution, giving organizations the agility they need to respond to unforeseen challenges. This changes planning from a one-and-done exercise to an ongoing process that is always looking forward with the most recent actuals.
Many organizations want or have tried to adopt a rolling forecast cadence—but technical and institutional barriers get in the way. The challenge starts with the shortcomings of the most widely used budgeting tool—spreadsheets. When changing business priorities come into view, and the brittleness of intertwined spreadsheets and nested formulas is rudely exposed, all bets are off on whether a spreadsheet can cope with the needs of an IT rolling forecast process.
All successful rolling forecasts are alike, but every unsuccessful one fails in its own way. Cost center owners who are skeptical of another FP&A-imposed process may just see additional work with little value. Business stakeholders may not understand what’s in it for them and push back. So IT finance has to transform disbelief into advocacy if they are going to gain traction. The common success factor is understanding expected outcomes and communicating them out to all stakeholders.
In this article, we will look at the five steps you can take to build an IT rolling forecast framework.
Let’s start by looking at the biggest challenges to rolling forecast success:
The wrong focus
Many fixed costs are not worth tracking monthly and yet are included in a forecast cadence. There is a pressure for any process to be inclusionary (“Let’s bring all stakeholders together”), but that inclusion can't start with the false belief that all spend is equally important.
Forecasts as “mini-annual planning” events need unsustainable levels of effort. Replicating the annual plan monthly or quarterly is a losing proposition. Without the right focus or a tool to automate this process, IT finance produces something that is just another annual plan.
You want to provide analysis and drive action. But if the forecast is out of sync with the pace of the business (e.g., a vendor contract has a 6-month term, and IT finance leads a monthly process), the analysis can’t lead to action. A badly scoped vendor contract will show up in your general ledger with additional or reduced contract payments every month. But the terms of the contract cannot be changed for the balance of the contract. You get information that you can’t act against.
Many managers believe that taking on rolling forecasts means completing an entire budget several times a year. This is an education issue—and an opportunity to align with management rather than measurement metrics.
When repurposed as a measurement rather than a management tool, stakeholders game the process to align with the annual budget. Analysis and action still happen, but the participants focus on achieving existing (MBO-incentivized) goals rather than responding to events.
Five steps for a successful rolling forecast process
Step 1. Focus on the biggest drivers of variance
This seems counterintuitive. If you want to manage IT spend better, doesn’t it make sense to look at all IT spend? Not exactly. Rolling forecasts identify spend pivots that will have an impact before the next reporting cycle. Fixed costs don’t generally fall into that category. A server array on a 48-month depreciation cycle has fixed costs for four years. There is no benefit to tracking that spend every month or quarter during those four years.
Don’t sweat the small stuff. Focus on large and controllable spend drivers.
Zero in on areas where a change in spend has an immediate impact (e.g., public cloud and/or labor and maintenance agreements that are reaching the end of their contract period).
Step 2. Focus on the right spend at the right time.
Have a (light touch) focus. Most numbers in an annual budget do not change throughout the year. For example, FTE labor with a flat hiring plan will show little uptick month-over-month. Focus instead on drivers that are variable and consumption-based (like support costs and public cloud spend).
The right cadence provides a proof point to give back spend. For example, contracts recorded at the details level surface savings from a renegotiation. Validate financial savings are true and verifiable—giving IT finance confidence to reallocate those dollars.
Prevent misaligned cadence by aligning forecasting at the speed the business pivots.
Step 3. Flag outlier spend driving variance from strategic KPIs
Identify the largest spend drivers and call out drivers that can be altered in a specific forecast period. Public cloud or maintenance agreements reaching the end of their contract periods are better areas to focus on than on-premise infrastructure that is midway through a depreciation cycle.Shrink the size of spend you wish to focus on. Fixed costs are less relevant for forecasts and removing them cuts down effort. You can also be more selective about your cost centers. If specific cost centers have a limited scope for forecast course correction, they should be cut from the process entirely (e.g., high fixed/variable cost ratio or a low total fixed cost spend).
Step 4. Build CC owner accountability with planning agility and an implementation strategy
Stop no buy-in by empowering cost center owners to be accountable for spend by giving them the agility to respond to a changing business climate. This includes the use of resource planning capabilities so CC owners can plan for the resources they manage rather than obtuse account numbers.
Save your sanity (and weekends) by building sustainable rolling forecasts that automate low-value work to free up capacity for analysis and strategy.
The right tool automates the low-value data entry work. For example, when IT finance knows the purchase order or contract number aligned with a cost center owner, terms can be automatically extended.
End unsustainable effort by automating low-value work to free up capacity for analysis and strategy.
Step 5. Limit the KPIs to build rollout buy-in
Take your top KPIs to see the bigger picture, rather than obsessing over the details. A KPI-focus shrinks the real estate for analysis and pulls the audience towards non-technical language (e.g., spend vs. plan and/or application and service total costs).
Business stakeholders need visibility into the lack of agility in annual investment decisions. The business cares about outcomes and tangibles—a locked investment agenda cannot respond to the speed of the business. Finding room in the budget to fund activities is not a one-time activity. It’s ongoing. It crosses financial years. A rolling forecast cadence is a mechanism to continually align IT spend with innovation.
Monthly budgeting and annual targets are less important for rolling forecasts. IT management and business stakeholders need to understand what is taking their place. Each forecast must focus on high-level KPIs that can point to further analysis. For example, a project portfolio has a falling KPI (% of project spend on customer-facing initiatives) that needs further analysis. This KPI alone isn’t enough to postulate action (Is our approval process broken? Are we not prioritizing the customer experience high enough?), but it guides next steps (“Let’s bring in the project owner for customer application projects and discuss the approval process.”)Rolling forecasts build credibility with the business on measuring KPIs for IT value. They empower cost center owners to be accountable for spend by giving them the agility to respond to a changing business climate.
To set up your organization for rolling forecast success, you should:
- Focus on the biggest drivers of variance
- Focus on the right spend at the right time
- Flag outlier spend driving variance from strategic KPIs
- Build CC owner accountability with planning agility and an implementation strategy
- Limit the KPIs to build rollout buy-in
Apptio IT Financial Management Foundation is a new product that offers collaborative budgeting, forecasting, variance analysis, and multi-year planning purpose-built for IT. It incorporates resource-based planning into standard, IT-relevant areas of spend like: labor, hardware, software, and vendors. Apptio IT Financial Management Foundation provides confidence that every IT dollar is spent and spent on the highest priority items for your business. As a result, IT finance leaders spend less time working in spreadsheets and more time delivering valuable insights about how and where to best support the business.
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