Now is the time of year when most IT executives find themselves stuck in budget hell. Their lives are made miserable by endless rounds of service-level negotiations, project prioritization, transfer-pricing games and last-minute expense cuts – all aimed at closing the gap between seemingly unlimited demand and increasingly constrained supply of their function's services.

For the typical IT organization, the passing of Y2K was predicted to free up resources for many of the critical application and infrastructure investments that were put on hold during much of 1998 and 1999. The reality, however, has been much different. As the new century opened with barely a hiccup, infrastructure and application projects were sidelined, this time by a headlong rush to e-enable just about everything. Everyone, from the newest dot-com start- up to giants such as General Motors and General Electric, is furiously retooling their IT organization to capture the promise of the Internet. For many, the pressing needs of yesterday have been forgotten as attention turns to the next silver bullet. (It seems like only yesterday when client/server and ERP were held out as the panaceas to all enterprise information challenges.)

Unfortunately for most companies, their planning and budgeting processes offer little help with identifying and prioritizing information technology needs. Our benchmarking highlights the gap:

  • The average budget contains 230 line items and takes four months to prepare.
  • Only 20 percent of planning time is actually spent planning, with the rest devoted to data collection, validation and manipulation. (Source: Hackett Benchmarking & Research.)

Perhaps the biggest disconnect is the inability of the vast majority of companies to link IT budgets to their strategic objectives. Company strategies typically talk about things such as innovation, customer attraction and retention, quality products and services, new markets and the like. But how many IT budgets can tell you how much of next year's IT spend will be dedicated to attracting or retaining customers?
IT budgeting processes are largely dictated by the way financial statements are prepared which, in turn, is dictated by the way external reporting has to be done. Let's think about this for a moment. Doesn't it seem strange to organize corporate planning around how regulators want to see the data, rather than around your strategies and tactics?

Of course, there have been attempts to provide an alternate view. Many companies have introduced activity-based costing mechanisms or other similar processes that attempt to match resources to work performed. Other tools, such as economic value-added (EVA), attempt to provide another view by coupling business performance and value creation more directly. While they do provide some link to the actual work being done, these tools fall considerably short of directly marrying IT initiatives to the strategic intent behind the investment.

Leading companies are recognizing the shortcomings of the current situation and are completing a fundamental transformation of their planning, budgeting and reporting processes. In many cases, the traditional budget as we know it today is in the process of disappearing, only to be replaced by a more integrated rolling forecast and reporting process that focuses on a continuous reassessment of resource allocation in light of changes in the external and internal operating environment. They're matching the level of detail in their plans to that which reflects both the materiality and risk of the investments they are making. For instance, budgeting a reasonably predictable expense such as data center costs, which requires less detail and effort, is likely to be far more accurate and reliable than attempting to anticipate call center support costs and other variables associated with a major new product launch.

Likewise, world class companies are also learning to vary the level of detail to match their predictive ability. It is much easier to forecast detailed expenses for next month than for 12 months out, so leading companies are simply budgeting less detail in the out periods. In so doing, they both reduce the effort required and avoid the possibility that wild guesses or arbitrary trending of budget numbers for time periods well into the future will ever take the place of rigorous and accurate prediction.

Matching detail to both risk and predictive ability reduces the level of detail while shortening its cycle time and directing management's attention to the more important matter of prioritizing initiatives. Coupled with advances in core IT skills that are centered around rapid prototyping and systems management, leading IT organizations are adopting a much more dynamic approach to planning ­ helping their IT managers to escape the artificial, calendar-driven process that serves only to constrain the essential flexibility that IT needs in order to be both fast and responsive.

The products of this shift in planning focus are budgets completed in shorter cycle times that recognize external factors (such as customer behavior, new technological innovations and competitor action) as well as forecasts that are focused on the key drivers of the business and linked to the company's strategies ­ in other words, useful management tools.

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