IT Budget Reformpost by Chris Curran on December 3, 2010
Nearly all companies do some kind of annual budget at both the business unit and corporate levels. While many find the process unsatisfying and frustrating, little has been done to challenge this outdated approach. One source of frustration comes from a long planning process that doesn’t match our rapidly evolving business environment. Today’s companies require heightened financial flexibility, visibility, and precision from both their business and IT functions in order to remain competitive. As a result, planning and budgeting reform has become a top priority for many leading finance executives and CIOs.
What is Rolling Budget Planning?
Rolling planning is simply a budgeting process whereby future spending forecasts are submitted on a less than annual basis – typically quarterly. This distinction may seem minor but the benefits this process are significant and should be carefully considered.
Key Considerations for Rolling Planning
|Length of Planning Window||Need to balance between need for financial visibility and organization’s ability to effectively forecast into the future|
|Frequency of Planning||Highly dynamic organizations can consider monthly, but quarterly is recommended in more cases given the amount of churn caused by monthly re-forecasting|
|Planning Emphasis||More time should be spent on earlier quarters than later ones to maximize the annual budget. This greater emphasis on forecasting and estimation competencies, frameworks, processes, and tools, and incentives should be considered to drive forecasting accuracy|
|Culture and Mindset||Budget forecasts are meant to inform key decision makers to help shape future outcomes, not to predict the future, Moving toward a rolling planning and forecasting model represents a big cultural shift that will require extensive organizational change management, and senior management should be engaged early-on to secure buy-in and champions|
|Metrics||Focus on the small set of key drivers of benefits and costs that factor into the forecasts (i.e., too many too soon will complicate rollout and adoption)|
|Tools||Spreadsheets are prone to numerous issues and complications to support planning due to poor version control, constantly changing assumptions, and consolidating data from numerous sources|
|IT Delivery Management||Cost of activities to ensure effective management, governance and support of work that makes any changes to the technology environment, including activities generally considered development, engineering, and maintenance|
Rolling Planning in Practice
For a Fortune 100 health care payer, Diamond designed and implemented a quarterly rolling budget process for its IT organization with $500M of discretionary spend, transitioning the organization away from a strictly annual planning and forecasting mechanism. Some of the key benefits of this new process included:
- Time & Cost Savings: Increased rigor around quarterly and annual planning processes reduced resource churn resulting from various right-sizing budget exercises and saved approximately $5-$10M annually (i.e., 1-2% savings annually relative to portfolio size)
- Improved Financial (SG&A) Foresight into Portfolio: Increased visibility provides more consistent portfolio & project run rates and resource demands
- Improved Estimate Accuracy: Quarterly submissions provide increased focus on estimates (i.e., “reality checks”) and ensures tighter alignment to annual budget parameters
- Increased Cross-enterprise Collaboration: Successful rolling planning process enables transparency, cooperation, and alignment across many functions (e.g., Finance, P&L Owners, and IT) which is often lacking during an annual budgeting paradigm
- Enhanced Control Points and Accountability: Funding owners must produce quarterly forecasts and are held accountable for last quarter’s actual on a rolling basis