As many successful corporate executives will attest, effective leadership requires asking the right questions at the right time. When it comes to technology budgeting, the field is moving and developing so quickly that planning for technology costs and changes can be a challenge. This is where the right questions become imperative.
To help you with this challenge, we’ve outlined five essential questions CEOs need to ask their technology leaders when considering capital investment plans and annual budgets. Using these five questions as a framework for making budget decisions will help CEOs maximize technology’s impact on growth while minimizing the risk of falling into a longer-term spiral of “technology debt.”
Begin by asking the following:
- Are we balancing spending on RUN versus GROW versus TRANSFORM?
- What are our technology spending benchmarks telling us?
- How does my three-to-five-year business growth align with the technology spend?
- Are we retiring old technologies on a timely basis?
- Are we investing in attracting and developing the best staff?
These questions simply establish the framework of the discussion – let’s dive into each area and explore how to use these to develop effective technology investment strategies and budget scenarios for your organization.
Balance spending on RUN versus GROW versus TRANSFORM
Think of these terms as the three pillars of a portfolio view of your technology budgets. Careful consideration of allocation across these pillars will minimize the cost of running your existing technology footprint. It will also allow you to apply appropriate levels of investment in the critical areas of growth and transformation.
A target ratio for mature companies using the RUN/GROW/TRANSFORM model is 55/40/5.
Common mistakes include not reserving a portion of investment for experimentation with cloud services, machine learning or RPA (TRANSFORM), not understanding the business growth that is enabled and which depends on the GROW spending and excessive spending on the maintenance category (RUN).
Benchmark your technology spending
A strong, actionable benchmarking process involves defining your business and mapping the industry and competitive ecosystem in which you compete and operate. Each technology area of investment should be aligned with business and user needs.
This vetted approach to technology benchmarking will help you determine which new investment opportunities will yield the best outcomes.
Use these five steps to develop your technology benchmarking process:
- Define your industry as narrowly as practical.
- Map the industry leaders, followers, mainstream and laggards and map your own place on this continuum today and in the future.
- Define each of your technology spending platforms and categories to benchmark (e.g. end-user computing, security, networking, e-commerce, CRM etc.).
- Obtain benchmark data from one or more sources such as Gartner, Forrester, IDC or other.
- Avoid just benchmarking. Analyze where in the range your technology budgets fall, and where the opportunity may be to make allocations both more efficient and effective for growth.
Align technology spend with three-five-year strategy and growth plans
One of the hardest parts of technology budgeting is aligning it to business growth. Scaling technology is a well-understood need and is becoming easier to accomplish with the relative “instant capacity” of outsourced cloud computing.
The challenge of budgeting for tomorrow’s technology comes down to meeting the requirements of the business with more than just “step-up” investments. This becomes especially tricky when business growth requires developing technology solutions beyond scaling existing platforms.
Effective technology budgeting requires determining what business growth requires beyond scaling existing platforms.
This requires teamwork between operations, finance, product, technology and service departments. A reserve, or a flexible approach to reallocate budgets based on changing priorities may be necessary to create future products. This may also be necessary seize new market opportunities and improve the customer experience in a changing competitive landscape.
Alignment means anticipating and analyzing future technology requirements and mapping these into the strategic plan timeline.
Retire older technology systems in a timely manner
It should be no surprise to both business and technology executives that older systems are costly to run. However, many remain in place because they deliver a few essential legacy functions. Executives must overcome the fear of change. Instead, an active system retirement plan, updated every year, needs to be part of every technology budget.
This technology retirement plan needs to be challenged (why not earlier/sooner?) and actively managed. We have seen retirement plans take lower priority over several years. Unfortunately, the impact accumulates to create severe budget problems down the road. Imagine if the budget allocated to running these older systems were re-allocated to your GROW or TRANSFORM pillars in the technology investment portfolio – what a difference that would make!
Attract and develop great technology staff and talent
The core operating model of corporate technology groups is PEOPLE-PROCESS-TECHNOLOGY. Without the right people from the outset, technology will not meet the company’s needs.
Consider how the PEOPLE factor is reflected in your current budget and make sure it is sufficient to power your critical staffing needs in the following areas:
- What is our technology culture, how is it funded?
- Which investments make our company a great environment for the next generation of talent?
- What are our recruitment budgets, and how are we attracting new people to join?
- Are we investing in training and development, and is career-pathing/coaching available?
- What are our criteria to leverage outsourcing? Are we offshoring the basic functions that are non-differentiating, and investing more highly skilled and specialized differentiating positions?
Know the whole story of technology budgeting
For 25 years I have been responsible for technology P&Ls. Working with so many organizations and technology budgets, I’ve seen the gamete of do’s and don’ts.
Too often, budgets and reviews are focused simply on line items such as hardware, software, security, networking, datacenter and staffing costs. But these line items don’t tell the whole story of the business. Or, the rationale for how technology investments are supporting the business today – as well as growth and transformation for the future.
An appropriate way to develop a budget warrants detailed review and mapping of the business, user, and customer needs for investments. Asking these five questions and following-up with appropriate analysis should provide the insight you need to develop technology budgets that are tightly aligned with your corporate objectives and business goals.
Digital Prism Advisors helps clients with technology budgeting all the time. Let us know if you want to set up a chat.