Business Mentor: CIOs Behaving Badly -- the Rite of IT Budgeting

Learn how CIOs can avoid common pitfalls during the IT budget process.

One of the most frustrating rituals CIOs take part in, year after year, is the IT budgeting process. This has been especially true since the excessive technology spending of Y2k and the dot-com boom led to a business backlash and an overall decline in IT credibility. CEOs and CFOs look back and remember how IT cost them tons of money.

No time of year brings back those unhappy memories like budget time.

At many companies, the guidelines are not always clear, and the budget process itself isn't well-defined. This creates bad behaviors in executives -- and it sinks into company culture, as well. For example, as the budget process kicks off, nobody starts out with real numbers anymore. They know it's a process, like giving blood, and that the finance people or the CEO will be back asking for more expense cuts. Sales and marketing people come up with 100,000 excuses for why they can't hit proposed revenue targets.

IT people usually end up in a defensive posture, unable to communicate the business value behind their spending. Instead, they talk about the pain points that budget cuts will produce. Bad idea.

Business people hate it when you say that customer service will suffer or development will slow down on an important project. It doesn't help IT credibility, either.

Other pitfalls I see CIOs encountering today -- all of which lead to bad budgeting behaviors -- include:

Business mandates that IT staffing remain flat

I've always tried to establish standards around volume metrics and productivity metrics. If it takes 10 people to produce 100 of something, and the demand rises to deliver 200, I would need to add 10 people. Now, a lot of business people will argue that you're not giving them the option of getting productivity increases from the same level of staffing. My response is that they shouldn't worry about staffing; they should worry about the dollars. Give me a dollar target to meet and let me worry about how to get there.

Failure to consider the 'rich and poor' cycles

I'm seeing a lot of this today in my consulting work as companies start out assuming it won't be a good year for them. The first quarter is always the poor cycle, with spending held tightly and hiring frozen. Then by midyear, the rich cycle begins as sales start exceeding expectations. The big problem for tech people is that once the business does start picking up, it's too late in the year to hire enough good people and bring new projects up to speed. You can't make nine babies in a month.

Capitalization of software investments over several years

A lot of people do this, and spreading the cost of a large software project over three or four years may be okay. But don't mortgage the future, and don't control your budget by shifting expenses into capital.

What so many CIOs overlook is the reality that budgeting is about your performance as an executive. The biggest budgeting problem for CIOs isn't a numbers game at all. It's the communication divide between IT and business executives. Don't wait until budgeting season begins to start your dialogue with the CFO or CEO. Make it a regular part of your relationship. Talk about what's right for the company, not what IT needs for a given project. Speak up about the capacity you have to accomplish business goals, but keep the conversation centered on company priorities.

Be the first executive on your CEO's team to break away from the budgeting behaviors of the past. That's what IT leadership is all about.

About the author:
Jerry McElhatton, CEO of Virtual Resources in Dallas, is the former president of Global Technology and Operations at MasterCard International.

This was first published in June 2005

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