I am always surprised by the lack of sophistication in the way companies budget for technology expenses. I was reminded of this by a recent client of mine. They didn’t engage me to talk about budgeting but I got into a discussion with the CFO and he was focused on the annual budgeting process. So, we chatted. These folks spend seven figures on technology and are budgeting like a firm that has total revenue in the seven-figure range.
What follows is something I prepared following that discussion. As I said, I wasn’t engaged to deal with tech budgeting, so I was just getting something off my chest rather than producing formal work product for a client.
First, it amazes me that most companies benchmark their technology spending against the average for their industry. This doesn’t make sense on several counts:
- If you are looking to be exceptional does it make sense to target your spending at the average for your industry. At the very least, one might want to (if it were possible) to figure out what the top performers in their industry are spending. I will wager it is substantially more than the “average”; and
- Even more fundamentally, looking at averages doesn’t really answer the question of what should we be spending on technology? I worked for a company that serviced the construction industry and I can tell you that the construction industry, in general, underinvests in technology—so any statistics on spend are likely to be biased downward. And, the ones that do invest (even though they probably should be spending more) are generally the leaders in the industry.
That said, I generally organize my thoughts about budgeting into four categories:
- Ongoing operating expenses (or keeping the lights on)—these are the built-in expenses that are necessary to maintain the current functionality at the current level-of-service. I generally think of these a being reviewed zero-based budgeting methodology, i.e. I believe that they should be justified their proposed spend during each budget cycle. The reviews and resulting findings might generate project requests that are designed to improve the efficiency or effectiveness of current ongoing operating expense outlays.
- Improving my people—this isn’t a big expense, but I like to keep it top of mind because it really pays off. When I was at PwC, there was a AICPA training requirement for all professionals. It was 40 hours per year. That training requirement was really an investment and it helped to define the level of excellence that we delivered to our clients. It forced busy professionals to invest in their future and made sure that they had the skills to do their job.
During my tenure with PwC Consulting, we probably totally retained the staff 3 times to meet the changing demands of the marketplace. It kept us (both individually and as a Firm) relevant and able to successfully adapt to a changing marketplace. Sometimes the money is spent on routine maintenance training other times sea-change in the business landscape requires more extensive investment. Nevertheless, Continuing Education should always have a prominent line item on any technology budget.
- Projects—these are driven by your strategic systems (and/or product) plan. That plan defines your future state of technology (and/or product) and the steps you need to take (by year) to get you from where you are to where you want to be. The projects represent the investment and effort necessary to accomplish the steps outlined in the strategic systems plan. These projects address every change you want to make in your technology profile whether it be a CRM implementation/upgrade or an effort to revamp your quality management processes or provide support for the development of a new product offering. These projects often involve large expenditures and it is important that the multiyear strategy is in place (and well understood) so that senior executives understand the need and timing of these projects well in advance of the current budgeting cycle.
- Support for Functions (Finance, Administration, Customer Service, Product Development, Product Delivery, operations etc.)—this is really just a representation of the technology budget in terms of what it is really doing. We don’t spend on technology for technologies sake, we are spending money on technology to support business functions and those functions should both accept responsibility for those costs and support the case to spend the money. Breaking down the spend helps to achieve that accountability.
I reiterate: It is a bad idea to base your technology budget on an industry average. Your budget should be based upon what you want to achieve. If that budget differs significantly from the industry average, there is reason to question the variance, but the variance might just be due to initiatives that are designed make your business perform better than average and the calculation should be an ROI and the decision based upon whether the ROI exceeds the threshold for investments and not whether it puts the spending budget over the average for the industry.
I can say from my experience at Textura that there are enormous pressures not to deviate from the averages. I can also say that the success we had delivering technology-based products that were game changers was dependent on significant investment. Amazon has periodically run into the same issues of not conforming to the averages, but I would argue that their performance speaks for itself. That said, if you are going to buck the averages, make sure that you have a good story to tell your investors. They will be watching.
I close by mentioning that my thoughts are a reaction to many years of seeing the subject areas I presented being mishandled with bad results. There is obviously a lot more to successful budgeting than covered here—like tracking and holding budget keepers accountable. So see this for what it is, a fairly narrow coverage of my technology budging related pet peeves and no more.
Copyright 2017 Howard Niden
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