By Damani Short
Thinking Differently About Budgeting Helps Companies Thrive, Not Just Survive
Reflecting on the recent budgeting process, the specter of the pandemic loomed largely, adding yet another layer of uncertainty for executives to manage. In the fiscal year ahead, some executives may make a defensive play to ride out the storm, especially if the company has been significantly impacted by COVID-19. Other leaders may decide it’s the right time to take a different approach and invest in the future, get ahead of the competition and position the organization to capture market share in a post-COVID world. That takes a new approach to budget planning that can be used to continuously evolve plans, no matter what happens in the year ahead.
Silver Lining: A New Way of Thinking
In prior years, there was more money available and the risks were better understood. Organizations often defaulted to a “this is how we’ve always done it” approach – typically assigning technology budgets as a set percentage of revenue. But in a world turned upside down, it’s critical that businesses look at things differently. This is an opportunity to use the crisis to drive a new way of thinking going forward.
Five Steps Forward
So how does a company take these bold steps? Taking into account the company’s 2020 performance and long-term strategic plans, as well as the current political and financial macro-environment, here are five steps executives and their teams can take when it comes to managing their technology investments:
- Revise your enterprise strategy in a post-COVID world
Nine-to-12 months ago is ancient history. Leaders need to update the business strategy with the impact and foreseeable implications of COVID-19 in mind. The updated strategy will inform leadership where to make investment decisions that will strengthen weak points and better position the organization for the future, however uncertain it appears to be. With the uncertainty in the world today, it is critical that the strategy includes documented ‘triggering events’ that if happen; would cause a review of the strategy and underlying tactics.
- Prioritize in order to go after growth initiatives
Take a look at non-value generating initiatives and either stop or ramp them down. That will begin to create the resources, attention and capital to enable initiatives that will truly transform and grow the organization. While this approach hasn’t varied from years past what has changed is the critical nature of freeing up organizational oxygen to enable investment that aligns to the updated strategy and maintains a reserve to adjust for any ‘trigger events’ that have been established It is key that as part of this process you are analyzing the growth drivers and align technology solutions to them for investment, and be ready to pivot quickly.
One of the areas of focus is talent, which can be looked at in three ways: 1.) Optimize your workforce. This includes evaluating your corporate and functional structures, performance, work practices, partnering options, etc. as an area of focus to make room for growth initiatives. 2.) Revisit your virtual workforce operations and address measures that need to be adjusted, like security. 3.) Look at your talent sourcing strategy, as the virtual workforce has created a geography-agnostic candidate pool that is now viable to level up your organization’s talent.
- Take an investment portfolio approach to your technology spend
Hard decisions must be made in any budget planning process. Asking the right questions with an investment portfolio mindset can help provide clarity to leaders. What is the return profile of this investment? Does this technology solution align to our business objectives and strategy? How does this return on investment (ROI) compare to the ROI of other proposed initiatives? How does it impact other critical priorities such as compliance and risk reduction, revenue growth, and other key performance indicators (KPIs)?
These questions can only be answered if there are metrics demonstrating a proposed initiative’s performance. If there are no metrics showing ROI, then no investment should be made, period. While some investments may be required to ‘keep the lights on’; even those should be evaluated to ensure they are aligned to the core business needs. Just because a function has been historically offered; does not mean it should be continued. If it doesn’t align to the core functions or strategy; it might be time to turn that function off, creating more ‘oxygen’ for the organization.
Meanwhile, any initiatives in flight should be rationalized and any initiative not started should be off the table to make room in the company’s portfolio for new investments, unless it can show the right level of ROI or alignment to strategy. How to go about this is through Enterprise Process Ownership (EPO), which is a means to developing a systematic and sustainable approach to improving the organization’s processes and systems to drive measurable impact on critical KPIs. EPO identifies the work to be done at a business-level first to then uncover how to invest in technology.
EPO achieves these improvements by aligning around – and optimizing – cross-functional business processes that adhere to the way companies operate. Rather than improving function by function (e.g. HR, Finance, Marketing, etc.), a cross-functional value stream approach has proven to enable much larger and more sustainable impact over time. It also better aligns with technology solutions providers who structure their solutions around these business processes. Ultimately, this enables a company to simplify and structure technology enablement to better help optimize critical business processes.
- Invest in capabilities, not projects
Instead of investing in technology projects in their silos, look at your business’s capabilities to determine where to shore up, where to support and where to redirect your technology investments. This capability analysis and mapping can provide deeper insight into the capability and suitability of your technology initiatives based on the business objectives of the organization.
Capabilities-driven questions for leaders to ask themselves when presented with a technology investment opportunity include:
- What capabilities are core/non-core?
- What capabilities are high/medium/low priority?
- Where do we invest core competency development?
- Is the capability strategically aligned with objectives?
- What capabilities do we partner at a cost versus investing to build ourselves?
- What types of investments should we make? (e.g., investing in speed to market? Operations to improve customer experience?)
From here, categorize prospective investments as what will:
- Run the business;
- Grow the business; and
- Transform the business.
The benefit of taking a capabilities-driven approach to budget planning is that the organization’s investments are in the right areas at the right size. These investments actually contribute to business outcomes rather than acting as overhead. And as a bonus, the technology function transforms from an enabler to a contributor of business outcomes in the process.
- Stay on strategy by creating and following a roadmap
While there is opportunity to be bold, leaders can’t be reckless, either. Approach this revised enterprise strategy with pragmatism and discipline and execute through a multi-year roadmap. This roadmap serves as a multi-year investment strategy based on developing capabilities. It outlines when, why and what technology solutions will be implemented to help the organization move forward while avoiding costly mistakes.
Now more than ever, leaders need to take a different look at budget planning through the lens of what will deliver value to the organization. The usual approach of using a percent of revenue to determine next year’s spend has never been truly effective in driving business outcomes, and the pandemic has upended that once and for all, especially with next year’s revenue up in the air. Strategy should inform budget, not an arbitrary percentage of revenue or last year’s budget.
This capabilities-driven approach through the lens of the organization’s investment portfolio goes beyond aligning your budgets to the understood business objectives and outcomes. There’s also a broader value delivery for the business that looks at projects at a deeper level. Think of what the organization needs to grow and advance. Plan with intention, not recklessness. And think about opportunities, not just about revenue.
If you want to take a capabilities-driven approach to your investment planning, contact Lexico.