You might be surprised that many companies go through what I call a “tradition” every year, a “cycle of events” you might say. You can almost gauge the time of year based upon what comes down from the executive wing.
The cycle of events (assumes a calendar year budget and operational plan)
- In August or September we start developing our operational budget for the next year.
- In December (hopefully, but not always), we finalize the budget for the new upcoming year.
- The first three months of the new year, it’s smooth sailing. Or, as they say in Australia, “No worries.” 🙂
- In April of the new year, the first quarter results are released to senior management and Department managers.
Now the fun begins
Budgeting is not an exact science; any CFO or CEO will tell you that. However, many managers (including IT managers) try to be so exact that they budget much too tight to have the possibility of achieving their financial forecast for the new year, , , they leave no wiggle room or buffer to deal with unexpected surprises that might occur.
Another cause is that during the budgeting process, the departments are squeezed by upper management to reduce their budget expenses in order to achieve the forecast number the company wants to show for growth and profitability in the company.
I won’t go into how to budget so you avoid the problem of budgeting too tightly (that’s another article), but the message here is that what often happens after the first or second quarter results come in is: senior managers wake up to find they are already “behind the 8-ball” in terms of meeting the company’s financial projection, , , they are at risk in achieving their budget.
Fairly quickly, the CEO and CFO begin to strategize the “corrective actions” the company can take to meet the year’s financial objectives. These financial objectives are the main drivers for the two highest executives of the company, and essentially the scorecard for their performance. So, you can see why they are very interested in doing things to insure the company will “make its numbers.”
It’s an uphill climb to make the budget numbers for the year if they are already getting “behind the 8 ball”, , , so they have to do something tangible and do it quickly.
The easiest decision and often the decision made is to estimate the budget deficit problem and then go require each department to cut a certain percent of its ongoing operational expenses to help the company achieve the number. Additional approaches might include simply cutting “discretionary spending” for the remainder of the year. This usually includes things like stopping or limiting new hires, training and education, travel, contract work, optional projects, etc.
To employees of the company, this change of plans can be unsettling and appear to be caused by a lack of planning in the company. The actions result in issues that prevent their professional growth or impede their ability to be successful. It’s viewed as a “real bummer” and can adversely affect morale.
Anyone who has been in a company where a unilateral directive comes down to cut 10% of your expense knows the feeling of “having to do more with less”. What I forgot to mention is that even though the expenses are slashed, many companies still expect to accomplish the initiatives planned for in the original budget, , , truly a “get more done with less” scenario.
Get ahead of the power curve
Failure to anticipate this typical cost cutting cycle to pop up is a mistake. There are a few things you can do to offset this cycle of events:
1. Place budget buffers in your plan. It will help you make your financial commitment every year. Surprises always occur in every operational year, and it gives you room to find cost savings in your department without having to cut muscle when the “cut costs” call comes down, , , and it will.
2. Be proactive in implementing a cost saving strategy in your company. Companies always need to find cost savings. As an IT manager or CIO, you are in one of the best seats in the house to create change that can improve profitability and productivity. IT is literally a lever that can affect significant financial improvements within the company.
3. Begin now in creating a management track record of prioritizing initiatives that improves profitability. As an IT manager, your actions create one of two images of you for senior management of your company. The first view is of a manager who understands business needs and proactively seeks ways to do things that provides tangible business value results. To the CEO and CFO, tangible value is almost always translated into some sort of financial impact.
Or, you are viewed as a manager who probably performs well and who is sharp technically but who doesn’t necessarily understand what it takes to run the company profitably. The right business decision often does not coincide with the right technical solution.
Let’s put it this way, the primary responsibility of senior management is to create and maintain a viable business. In most companies, that means they have to be profitable. There are many parts of the company competing for a limited company asset called cash. Your company executives have to make tough decisions when the numbers aren’t being met. More often than not, the decisions end up impacting IT negatively because IT is viewed as a cost center and not an organization that can create financial leverage for the company.
CIO’s and IT managers who establish track records of prioritizing IT initiatives that improves profitability have a very good opportunity of being hit less or even passed over when budget reduction requirements are passed out.
When you gain the trust of the CFO and CEO to make prudent decisions that are consistently cost justified and add value to your company, they view you as a business partner. Believe me when I say that they need internal partners who can help them achieve the company’s objectives, , , they need their IT department to be a true business partner.
Establishing a track record where you become known as a manager who understands the business comes first and helps target prudent technology initiatives that provide business value is extremely important.
Those who establish these track records tend to get more leeway when cost cutting measures are handed out. Put yourself in your senior management team’s shoes. Wouldn’t you be more lenient with someone who has consistently helped the company reduce costs or deliver some type of business value over time as opposed to the manager who always needs more money for technology projects that aren’t fully understood or appear to have little to no value?
I’m sure you would, and so would I.
1. Why did I write it? I developed the material for my IT Manager Institute class because I wanted to include a session that would provide insight and tools to help each participant recoup more than the cost of the entire program (registration fee, travel, lodging, and other expenses) within a short time of returning to their company.
Initially, I was going to discuss my “Top 20” list of cost saving opportunities. After spending time on the idea, reviewing my “archives”, etc., I had over 50 cost saving strategies that I have used to save companies hundreds of thousands of dollars. Granted, I didn’t create all of these strategies myself, but I’ve used them successfully to save money, some of them for many companies.
2. Why is the book priced so high? Simple answer. I’m very confident in these 50 strategies because I’ve used them and I completely guarantee you will identify more than enough cost savings from the material to save your company thousands of dollars, no matter what level of IT management responsibility you have.
The book is intended to be a “thought catalyst” to help you start thinking aout possible cost saving opportunities in your company. The material can also be beneficial in developing your thinking about how to find cost savings, how to estimate the savings and how to go get the savings.
Not every strategy will apply to every company but every company will find multiple opportunities from the list of fifty strategies in the book.
All companies have cost saving opportunities. Some of the opportunities lie in “low hanging fruit” situations that are easy and inexpensive to get to. Other opportunities require investment and time but can reward you handsomely when the project is completed.
I have used several of these strategies in past CIO roles to save hundreds of thousands, even millions of dollars in companies. Yes, that’s right – millions of dollars in company expense reductions potentially lie in a few of these strategies for you just as they gave me the opportunity in past companies.
Remember, we are going after company expenses, not simply our IT expenses. There is much more opportunity throughout your company than in your IT budget. That’s why savvy executives will spend more in IT because they know there is more opportunity in other parts of the company than say a 10% reduction in the IT department, , , but they only recognize it if the IT department has displayed a sense of working on things that make a positive impact for the company.
Want to see your CEO or CFO’s eyes “light up”? Make a recommendation that costs very little but has tens of thousands of dollars in cost savings potential, or a technology initiative with a reasonable payback period that can improve EBITDA (earnings before interest, taxes, depreciation, and amortization) by half a percent or more and you will see what I mean.
IT managers and CIO’s who know where to look for cost savings, understand how to quantify the opportunity and how to go after it have a big edge on other IT managers who know how to spend the money but don’t appreciate the need to always be looking for cost savings in their company.
The need for reducing company costs never goes away, so I encourage you to take advantage of the need all companies have in this area. You may find as I have that your management team will ask you to actually spend more in IT if it allows the company to go faster because they value the leverage impact IT can have on the company’s financial performance.
Take advantage of the leverage your IT organization offers your company and “heads will turn”.