Attention all CIOs: the 2022 budgeting season is already underway

Like death and taxes, the annual budgeting season is inescapable. Whether you realize it or not, the 2022 budgeting season has already begun.

As Ben Franklin so aptly pointed out, the only two certainties in life are death and taxes. However, as a CIO, you can’t escape death, taxes and the annual budgeting season. For many, the budgeting season is a bad dream (nightmare?) that is readily forgotten or mentally repressed until it becomes absolutely unavoidable. 

The timing of the annual budgeting season is obviously determined by a company’s fiscal year. Many companies align their fiscal year with the calendar year. Others start their fiscal years on February 1st to avoid end-of-calendar-year distractions associated with holiday sales and employee vacation schedules. Companies in either of these categories will begin their formal 2022 budget discussions roughly six months from now, in the fall of 2021.

 The budgeting dance

The length and mechanics of the budgeting process can vary significantly depending upon a company’s size, growth prospects, competitive pressures and internal culture. Small fast-growing companies tend to minimize the duration and complexity of the process. CFOs in such firms typically assign budget targets to individual functional teams, including IT. Each team has an opportunity to argue for a little more funding or a little more headcount. In rare circumstances they may succeed in shaking some marginal resources from the CFO’s money tree. IT leaders in small, growing companies rapidly learn that there’s little point in over-investing time, energy or emotional capital in the formal budgeting cycle because their business partners will always find additional resources for things they really want to get done throughout the fiscal year.

Larger companies – whether they’re growing or not – tend to develop much more ponderous rituals for constructing their annual budgets. The cycle starts with a series of consultations with IT’s business partners to determine the projects or support they require (desire?) during the next fiscal year. These conversations, in turn, trigger a series of estimation exercises to forecast the cost of their requirements (wishes?). The fun really begins when senior business executives try to reconcile the IT spending priorities of different functions. For example, how do you prioritize a new sales tool, a customer support center upgrade or a supply chain optimization system if the ROI calculations in their respective business cases are all roughly similar?

It’s not uncommon for the consultation, estimation and prioritization process in large companies to be performed on an iterative basis, maybe two or three times, before some type of agreement or truce is reached regarding a final prioritization of IT spending plans. The irony of this public dance is that it’s frequently conducted to create the appearance of fair play and objective consideration when, in fact, a small handful of senior executives such as the CEO, COO and CFO, knew exactly what they wanted to fund at the beginning of the process. 

That’s not intended as a cynical observation. In most instances these C-level executives are the only ones who can look beyond the parochial horizons of individual departments and determine spending priorities that are in the strategic interests of their overall company. The alternative is actually worse. If the C-level leaders of the company are unable to align IT spending with their company’s strategic needs, money may be wasted by spreading funds too thinly across multiple business functions (aka the ‘peanut butter’ budgeting strategy) or placating one or more functional leaders who have been most outspoken about their IT needs (aka the ‘squeaky wheel’ budgeting strategy). 

 It’s never too early to start

The 2022 budgeting season may seem as if it’s far away but that’s wishful thinking. It’s actually already begun. The efficiency and effectiveness with which IT teams are spending their 2021 budgets will have a direct – perhaps overriding – bearing on the funds they’re likely to receive next year. Here are some tips on how to prepare for the 2022 dance. 

Find ways of expressing IT spending in business terms your CFO can understand. It’s usually fairly easy to apportion application support costs to individual functional departments because most business applications are supporting the needs of clearly defined groups such as Sales, Finance or HR. PC, smartphone, service desk and LAN/wifi expenses can be aggregated, expressed on a per employee basis and portrayed as an essential workforce expense. Enterprise-wide productivity tools such as O365, Zoom and Slack can be aggregated and normalized in a similar manner. 

CFOs may not completely understand the ways in which you’ve mixed and matched these support costs but if you can prove that you’re managing them downward on a year-over-year basis, you earn a gold star and potentially a justification to spend more in these support categories next year.

Do more financial planning instead of less.  This is probably counterintuitive but consider conducting a detailed midyear review of current spending. By the end of the second quarter, you’ve probably got a pretty good idea of areas that are likely to overrun their original budget targets and areas that might undershoot their initial spending plans. It should also be relatively easy to forecast spending on a detailed level during the remainder of the year. 

Report results to your CFO to start shaping her perceptions about where you’re likely to need increased funding next year. Who knows, you might even find some areas of savings that allow you to make investments that didn’t make it into the budget plan for the current year. If she’s impressed by your financial diligence, your CFO might actually have some hidden reserves salted away that she’s willing to use to restore projects or activities that didn’t make the initial budget cut.

Don’t ever forget that your CFO doesn’t consider your existing 2021 budget to be a guaranteed IT annuity stream and neither should you.  At a minimum, a detailed midyear review may provide the ammunition you need to fend off the expropriation of IT funds to solve problems elsewhere in the corporation during the remainder of 2021.

Become your CFO’s favorite co-conspirator. CFOs get a bum rap. They’re perennially characterized as penny pinching cost cutters who have a genetic aversion to any form of IT spending. That’s typically more of a reflection of a CIO’s failure to understand their CFO’s strategic concerns and spending priorities. 

What are the financial issues that external stock analysts are using to torment your CFO during quarterly earnings calls? What financial performance issues are being discussed by the Board? Does your CFO think she’s spent too much enhancing back office capabilities the past two years and want to focus future IT spending on front office productivity instead? Is she seeking innovative ways of improving customer experience due to concerns about customer retention and declining net promoter scores? 

If you can’t answer these types of questions, you can’t really craft a 2022 budget that will make sense to your CFO. In marketing parlance you’ll simply end up throwing a bunch of spending ideas up on the wall to see what sticks. That’s unlikely to garner much interest or enthusiasm for your proposed spending plan.

 What not to do

Don’t ever, ever build a financial business case demonstrating the value of IT.  The true value of IT is in the eyes of its customers. It cannot be proven mathematically. Sincere public praise from business unit leaders or functional department heads will do more to convince your CEO, CFO and COO of the value of IT than any set of numbers you can construct. 

ROI calculations inevitably employ a variety of assumptions and frequently include hard (financial) and soft (nonfinancial) benefits. Furthermore, many major initiatives are accompanied by organizational changes, staffing plans, physical plant investments and other business decisions for which IT can take little or no credit. Aggregating ROI predictions or outcomes across multiple activities requires a lot of work. The results of such analytical exercises are uncertain at best. IT value calculations may be politely discussed in public conference rooms but they’re invariably treated with deep skepticism behind the closed doors of your business partners’ offices.

Avoid external benchmarking studies if at all possible. C-level executives have an unquenchable curiosity about IT spending in other companies. IT leaders are frequently asked to compile information concerning IT spending levels in other companies as a percent of revenue, percent of opex, percent of gross profit, normalized per employee, etc. 

The results of these surveys are highly unreliable because IT spending occurs in so many different ways in different companies and it’s reported inconsistently as well. As in the case of IT value discussions, the results of benchmark studies can stimulate a great deal of interest and intellectual curiosity and (God forbid) requests for additional benchmark data. However, it’s universally true that no CIO has ever had their annual spending proposals increased simply because they demonstrated that their company was spending less on IT than other firms within their industry.  

IT groups that are asked to demonstrate their value or prove that spending levels are in line with industry norms are implicitly on the defensive, seeking to justify their existence using data that is inherently flawed. Groups may not be able to reject direct requests to perform such studies but they should never, ever volunteer to do so.

 Don’t take it personally

Annual budgeting exercises sometimes feel like Roman gladiatorial contests. CIOs are thrust onto the floor of the budgeting arena with nothing more than a set of spending proposals and accompanying justifications. Their business partners may serve as spectators, taking great interest in their CIO’s ability to parry questions and respond to challenges. Partners may come to the aid of a CIO in defending a project or program that advances their agendas or they may be outspoken opponents because IT’s proposed spending plans will adversely impact their budgets or their business unit’s profitability. 

On the other hand, members of the CIO’s IT team view him or her as their champion, fighting for an expansion of their power and prestige. It’s quite understandable how CIOs interpret the failure to sell their spending proposals as a personal judgement, calling into question their credibility, influencing skills and leadership capabilities. 

In most, if not many situations, nothing could be further from the truth. The game was essentially rigged from the start of the process. The ability to increase IT spending was marginal at best. Avoiding significant cuts may have been the best possible outcome. In reality, the CFO’s thinking about the proper level of IT spending in 2022 probably crystallized – consciously or unconsciously – right about now, six months before the formal budgeting cycle has even begun. 

Under these circumstances, it doesn’t make much sense to take failure personally and besides, you’ll always get another chance. Death comes but once. Budgeting and taxes happen every year!

Originally posted on Forbes.com CIO Network