IT Budgeting in a COVID-19 World
Let’s begin with the assumption that a vast majority of readers did not anticipate this year’s economic downturn when they prepared their 2020 IT budgets in 2019.
The economy was humming along for most industries and companies. Some of you may have been told to be cautious in anticipation that the economy may slow in 2020, but who could have predicted and prepared for a global pandemic essentially shutting down the world economy for several months and possibly triggering a prolonged downturn or recession? So, what should you do now in the midst of a once–in–a–lifetime event?
While more pronounced, I would argue the impact on IT budgets and cost models is not all that different than a general business downturn or past macroeconomic events such as the 2008 financial crises or the .Com bust and ensuing recession. Who among you foresaw those events? One difference I do see is the Covid-19 pandemic may require a significant investment in IT infrastructure and Help Desk services to support a large number of remote workers. Most organizations already had the capabilities to support remote workers, but not ALL workers simultaneously!
Turning our attention to the IT budget, the first inclination is to go after low hanging fruit: training, travel, meals & entertainment, miscellaneous expenses. I suggest tackling one of the two most difficult areas first: cost reduction/containment for IT Projects.
Why is this difficult? Because it must be done in concert with the business and politics that are certain to come into play. However, decisions on IT projects will drive most of your budget revisions, including Staffing – the second most difficult area to address.
During the evaluation of IT projects, the strategic value of each in flight and future project in the budget must be examined. Emphasis should be placed on projects that will maintain or grow revenue, or that are required for regulatory compliance. Of course, scope and schedule should be examined for each project designated as strategic. Can scope be reduced, and the schedule extended to reduce short term costs?
Now that decisions have been made on IT projects, you are ready to examine all other budget areas: staffing, hardware and software purchases, services. All expenditures should be tied to a strategic project, even the first budget line items that are typically pared back: training, travel and meals, and entertainment. Of course, an analysis should ensue to determine if any of the expenditures can be scaled back (c’mon, admit it, budget estimates are always padded. Your boss knows this too). Many of you may be thinking, “Well this applies mostly to new stuff, but I have to operate and maintain IT as well”. I will have a few words to say about that in a moment.
Staffing warrants a closer look. A typical knee jerk reaction is to put all open staffing requisitions on hold and eliminate all consultants. However, if a skill set does not exist in an organization to accomplish a strategic project, the new hire or consultant is still needed. In addition, many organizations rely on consultants to handle the “surge” that is often required to accomplish a project within schedule. The schedule may have been extended in the earlier project analysis so some cutbacks may be warranted.
We have talked about project staffing, but the analysis would not be complete without looking at “Operate and Maintain” staffing. Are current staffing levels appropriate for all IT departments? Is now a good time to rebalance staffing across some departments or terminate low performers? Always keep in mind the strategic projects that will be deployed and operationalized in the short term – they will need to be supported. Now may also be a good time to examine an outsourcing relationship with a vendor for skill sets that are typically not strategic (e.g. Help Desk) or skills that are in high demand and difficult to keep staffed appropriately (e.g. cybersecurity, database). You may be able to secure more favorable pricing as vendor business may be impacted by the pandemic as well.
There are other expenses involved in operating and maintaining an IT department; most organizations devote money to regular technology refreshes (which may or may not be one of the formal IT projects evaluated earlier). These are typically reduced or put on hold. However, the operational risk of the assets being replaced must be considered. If the risk of a production outage is high, then it is typically wise to move forward with the refresh, especially if customers will be impacted. Other areas to look at that may require negotiations with vendors include hardware & software maintenance, communications, and cloud services contracts to name a few. You may be able to negotiate discounts, or they may have alternative services available that you may not be aware of that are cheaper.
Up to this point I haven’t used two familiar terms in financial budgeting: Capital and Expense.
The strategic IT projects we discussed first are often times capital expenditures (your finance department will decide the dollar threshold, above which a project is classified as Capital, otherwise it is an Expense). The “Operate and Maintain” budget items are Expense expenditures. Under normal circumstances organizations will Capitalize as much as possible because the expenditures appear on the balance sheet, not on the Income statement; therefore, they do not impact Earnings before Depreciation and Amortization (i.e. EBIDA), a financial metric commonly used to measure a company’s financial performance from quarter to quarter, or year to year. They are subtracted afterwards as Depreciation or Amortization (the D and A in EBIDA). The full amount of Expense expenditures is subtracted when calculating EBIDA and therefore lower earnings in the current quarter. In times of crises, cash is king. No matter whether an expenditure is Capital or Expense, it is cash out the door – and the idea is to conserve cash. Therefore, less attention is paid to how the expenditure is classified versus the size of the expenditure. Consequently, I didn’t consider it in the discussion above – though it is worth mentioning for completeness.
Cutting budgets is never fun. However, if done in a methodical fashion it may not be quite as painful. I hope you found this discussion useful. Stay safe and be well.
Jim Oddo is a Senior Associate with Olenick & Associates. He has held many IT management positions, including Vice President and Chief Information Officer. Jim has managed annual IT budgets up to $9MM.