Do More With Less—Not!: Investment-Based Budgeting Is the Antidote to Unreasonable Expectations


by N. Dean Meyer


Cost pressures, plus ever-increasing demands for your services...do you feel caught between a rock and a hard place, and set up to fail? The good news is, there’s an answer, and it’s not all that difficult to implement.

The Challenge

Sure, budgets are constrained. That’s one reality.

Another reality is that demand for your services continues to increase. New applications are being deployed. Infrastructure-based services are more diverse and more complex. And expectations for quality of service continue to rise.

As a good corporate citizen, you respect the need for cost control, and you sincerely want to satisfy the needs of the people who depend on you. But accepting the "do more with less" challenge is promising something you can’t deliver, and it sets your entire organization up to fail.

You’ve been driving waste out and costs down for years, right? And you’ll continue to do so in coming years, right? The truth is, your staff can’t magically do more with less. (And what a cynical view of management, to believe that unreasonable expectations are the only way to get you to manage your costs!)

The "do more with less" demand won’t make your organization more productive. You’ve already plucked the low-hanging fruit; greater efficiencies depend on investments in new processes, new technologies, and new training. Sure, a year from now you may be more productive. But right now, things are what they are.

Put simply, expectations exceed resources. In the short term, your organization will do less with less, or more with more. So, what happens in this impossible situation? In the futile attempt to deliver more than resources permit, your entire organization gets weaker:

  • You rob Peter to pay Paul, so everything comes in late and you get blamed for being unreliable.
  • You cut corners on quality, and are criticized for poor service.
  • You take inadvisable risks, and gain a reputation for shoddy work.
  • You demand more of your staff—more hours, more productivity, more routinization—and your best people leave.
  • Teamwork collapses when managers don’t have time to help one another.
  • Staff resist taking on anything new, even if it’s highly strategic.
  • You divert time from critical sustenance activities such as training, innovation, and internal process improvements, and find that your skills, infrastructure, and service quality are no longer competitive.

The bottom line: An imbalance between expectations and resources leads to lack of alignment with the business, widespread ineffectiveness, deteriorating capabilities, and a failing reputation.

The Solution

At some point, you have to stand up and say "no." But to avoid being seen as uncooperative or, worse, incompetent, you need a solid platform of facts to explain to senior management that you need more resources to meet increasing expectations.

How do you make your case? It’s all in the way you present your budget.

Think of your organization as a business within a business. As a business, nobody gives you money (budget) to pay your expenses, any more than you give your grocery store money to pay its rent, electricity, and compensation costs. As with the store, the enterprise gives you money to buy your services.

In that paradigm, your budget is really prepaid revenue: money deposited with you at the beginning of the year. This is the checkbook your customers use to buy your services throughout the year.

Of course, your services have a cost, and while your rates may drop over time as you invest in productivity improvements, at any point in time, things cost what they cost. If your checkbook shrinks, then your customers won’t be able to afford to buy all they’d like from you. It’s not your "job" to deliver more than they can afford; you can’t. Instead, it’s your duty to help them decide what they can do without, in a rational, business-driven manner.

Strategic cost-cutting means showing clients all your available products and services, and then helping them make some tough business decisions. In the "keep the lights on" world of business today, some lights may have to be turned off even as new ones are turned on: marginal projects may be postponed, although new strategic projects may be funded.

Once clients decide what they can do without, you can remove the costs of eliminated services, redirecting funds to the things you need to do well.

Of course, if your customers really want more, they’ll have to supply incremental funding. This can take the form of fee-for-service revenues (chargebacks) or support for an increase in your direct budget. If they can supply the money (through either funding channel), you can expand your delivery capabilities (through contractors and outside service providers, if not hiring) to sell what they’re willing to buy.

Essentially, this is a demand management process that empowers (and requires) your customers to manage their demand to fit within the level of funding they can afford.

It’s a simple, basic truth: You get what you pay for. This approach keeps expectations in line with your resources, and ensures that you have the necessary funding to do the things your customers really want and need you to do.

The Mechanics

Your ability to stand up to the impossible "do more with less" demand depends on two prerequisites:

  • You must be very clear about your services and what they cost, with no fluff built into the numbers.
  • You must be "the best deal in town." That is, you must continually focus on processes, technologies, sourcing strategies, and skills improvements, and you must prove your competitiveness by setting comparable rates.

Both of these prerequisites are founded on service costing (i.e., associating your costs with your services). There are two views of a service-cost model, correlating with the aforementioned prerequisites:

  • An "investment-based budget," which forecasts the total cost of each of the services you plan to deliver, as well as any incremental services your customers are asking for. It’s essentially a sales forecast of all the specific deliverables to specific customers (such as support for a specific application or infrastructure service), along with the cost of each.
  • A service catalog with rates (unit costs), used to benchmark your costs and to estimate the cost of additional services during the year.

These are two views of the same data, and they’re mathematically related: a budget is the total cost of a service, calculated as rates times volume plus reimbursable pass-throughs.

In both these views, you must associate all your costs with your products and services. Don’t ask clients to approve your overhead; they won’t! Every deliverable must cover not only direct costs but also its fair share of indirect costs (such as training, tools, and time). This way, you’ll never ask for money for things people don’t buy (and don’t want to pay for). This is termed "full cost."

In practice, the investment-based budget is far more powerful in addressing your resource challenges than just rates. But the good news is, with an integrated business planning process, you can do both at once. The steps are straightforward:

  1. Define (or refine) your service catalog, and decide the units of rates (cost per what). This isn’t too difficult if you have clear, documented principles and industry templates that are consistent with the business-within-a-business paradigm.
  2. Forecast your "deliverables"—that is, specific sales of catalog items to specific customers, both business clients and peers within your organization, including both probable sales and speculative sales.
  3. Develop your fulfillment plan, beginning with the billable hours needed to produce each deliverable.
  4. Enter costs, both compensation costs and external (vendor and enterprise) costs.
  5. Link indirect costs to your planned deliverables through a cost model.
  6. Let your planning tool do the rest. It should be able to produce both the budget and the rates, as well as many other reports for analysis and auditing that will build your credibility through transparency and elucidate the value you deliver.

Note that we are not talking about after-the-fact accounting—transparency in the form of invoices for services delivered. This is a planning process, done annually when you prepare your budget.

Investment-based budgeting—the cost of what you plan to "sell," not just what you plan to spend—is the basis for rational discussion during the budget negotiation process, leading to funding based on the needs of the business. And it engenders a clear understanding of what your final budget does and does not pay for, bringing expectations in line with reality. This annual planning process also produces your catalog, with rates that you’ll adhere to throughout the year.

The Motivation

Doing a great job of delivering services while failing to deliver all that’s expected of you isn’t good for the customers who depend on you, your organization, or your career. Whether under the guise of ITIL v3 or governance, a rational, businesslike, investment-based budget that portrays the full cost of your services is essential to your success.

As a leader, it’s incumbent on you to get your business and budgeting process right. Doing so will ensure that your funding is sufficient to meet business needs, that your budget is spent on the right things, that your organization sets a sustainable pace, that expectations and resources are in balance, and that relationships with the business remain positive and focused.

 

Dean Meyer is one of the original proponents of running IT as a business within a business. For more than thirty years, he’s advised CIOs and senior IT leaders on organizational issues such as structure, culture, and resource-governance processes. He’s a former columnist for CIO Magazine and the author of seven books, including Internal Market Economics . To learn more about full-cost planning tools or to contact Dean, visit www.NDMA.com .

Tag(s): costs, supportworld

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