In today's operating environment, businesses must vigorously control costs. This blog post describes eight practical things you can do to make better decisions on cutting projects to save money over the long term.
Let's say the mandate from the CFO comes down to shave costs from the technology budget. They say business performance is not doing so well and savings must be made. What to do? The worst case scenario is where any form of strategy is simply substituted by "keeping the lights on", whereby critical services and support are kept, and any other forms of investment or planning are cancelled. Costs will be cut, whatever approach is taken. If you had a budget of £50m and now it's £35m, you'll find £15m savings by hook or by crook.
Feast or famine.
The ability of the technology function to plan ahead is directly related to the ability of the business to plan ahead, too, so if the business lurches from one year to the next from growth to cost saving, the technology function will inevitably follow suit. This approach presents a feast or famine that can force debilitating cuts for the long-term sustainability and investment in the organisation.
Think cashflow and business model.
It all comes down to the cash flow and debt the business generates; if the cash flow is seasonal or dependent on a portfolio of new products in the market, then there can be rapid budget changes; if the cash flow is more stable, then you can plan with more certainty over several years. The other consideration is looking at the balance sheet and how much debt the company has to service as a proportion of its revenue. Debt becomes even more of an issue during periods of high-interest rates. Typically, apart from the sale of new shares, businesses of any scale finance their investments through bank loans or the sale of corporate bonds, which have to be paid off or rolled over periodically. The interest rates and repayments of bonds and loans directly affect the calculations for return on investment and set the stage for the rules the Finance department set on using OPEX / CAPEX funds.
Why am I saying this? It should be no surprise for a person who understands the business model, market and industry as to why cost-cutting must be made. Indeed, the planned technology enablers should explicitly reflect these business aspects in the technology strategy document. The best case scenario is where the technology enablers generate cash and reduce debts for the company rather than being considered just a cost centre that only consumes cash.
Observations.
Having gone through many financial planning and project planning cycles over the years from within the technology function, here are some of my observations:
The yearly budgeting cycle often does not reflect the long-term IT strategy.
Often, the technology strategy bears little relation to the business units' strategy.
The business unit-level strategy may espouse the same corporate objectives but conflicts in the approach across the business.
Beyond decisions about operational expenses, decisions on shaping the portfolio of projects at worst are made by those who shout loudest, at best done on estimates of return on investment, aligned to one of several strategic themes.
The more pressure the business is under to cut costs, the more chaotic the project prioritisation/cutting becomes.
What to do.
These are complex problems to solve, and if we were to act on these, we could reduce project costs whilst reducing long-term business impact. How can we do this?
Typically, the primary tactic to save project costs is to delay the start of it until the next financial period. However, review the strategic context at that time to ensure the project is still relevant. For example, consider whether a new technology has rendered the original solution obsolete or market conditions no longer require that product.
Consider the net cash flow a project contributes into the business as a project selection criterion. Those projects with the highest net positive cash flow should be kept at the expense of those without.
Ensure that representatives of the technology function raise the overall level of business and financial awareness in the technology team. This positions the team to respond positively to the change and help find ways to save money within the project.
Understand, where possible, the personal incentives of the divisional unit heads. For example, understand what their bonus is based on, as this will drive the behaviour and decision-making regarding project selection. This knowledge helps your negotiation with them to align with the long-term corporate objectives.
Ring fence time or resources to articulate business unit-level strategy and reflect back to the business leaders to show the opportunities, conflicts, and duplication of technology requests on a quarterly basis. While this may not seem to be the technology function's job, it provides the business rationale downstream when prioritising, merging, rescoping and cancelling projects.
As a minimum, ensure you can align projects to corporate strategic themes. These could be 1) investing to grow sales/market share, 2) reducing business operational expenses, 3) fulfilling compliance/regulation requirements, and 4) creating new sources of revenue. You can then filter those projects which generate cash, save cash, and do neither, making it easier to decide which project to cut.
Have a conversation with the CFO about long-term planning. Does the business always hit its profit targets? Are sales trending up or down? Does cash flow vary substantially? This insight will explain the risk of your budget changing over the next few years. Ask what can be done to stabilise budget plans over a 5-year cycle. Provide options on what the technology function can adjust in the budget to reflect this uncertainty.
For highly volatile environments, focus on projects with quicker return on investment, say less than one year, lower investment costs and lower risk. Phase much more expensive projects into several years while ensuring that there are meaningful business outcomes for each financial period.
Conclusion.
We need to move away from changing the strategy from business growth to cost-cutting on a cyclical basis to have a strategy that allows for smoother cost-pruning over subsequent 5-year plans based on business performance. Understanding how the business makes money can inform you of the risks to your budget in the long term. So, while it may seem counter-intuitive, saving money on time and resources allocated to strategic thinking now (i.e. implementing these steps above) increases your risk of cutting the wrong project or missing an opportunity, putting your technology team and business in a worse position for the next financial year.
