The challenge of accurately forecasting IT spend starts with the shortcomings of the most widely used budgeting tool—spreadsheets.
When changing business priorities come into view, and the brittleness of intertwined spreadsheets and nested formulas is rudely exposed, all bets are off on whether a spreadsheet will deliver accurate forecasting. You deserve better than this.
Traditional budgeting success is measured by negligible spend-to-budget variance and manageable true-ups. Today, expectations are different. Business partners need IT to offer agility, accountability, and choice. Forecasting maturity offers an incremental approach to meeting these expectations.
The IT forecasting maturity model discusses the four stages of forecasting maturity and how (and when) IT organizations should move from one stage to another.
The four stages:
- an annual budget without forecasting
- an annual budget with quarterly forecasting
- an annual budget with monthly forecasting
- and rolling (continuous) forecasts.
This article looks at organizations using annual budgets without forecasting; their challenges and the signs that indicate you are ready to adopt a forecasting cadence.
Why do organizations use annual budgets without forecasting?
The annual budget asks organizations to rise out of the day-to-day and think in the long-term. It forces a re-evaluation of priorities, aligns resources to business initiatives, and defines key performance indicators (KPIs) that align to your IT strategic planning process.
What type of organizations use annual budgets without forecasting?
An annual budget with no forecasting serves organizations who look at IT spend as overhead. When IT isn’t seen as an enabler of business value, organizations want to stay on budget and avoid surprises. In this view, IT is seen as a cost center, not a value creator. IT isn't expected to be a business differentiator; it’s a utility. CIOs in these organizations don’t drive c-suite strategy conversations. They are measured against keep the lights on success and trimming costs. They deliver value—just not strategic value.
What challenges do you encounter by not forecasting IT spend?
Complexity. Management of IT spend-to-plan defaults to spreadsheets, corporate performance management solutions, and email, which is not a good way to manage the most complex domain in your organization. IT Finance spends too much time wrangling complex, error-prone spreadsheets and too little time delivering financial agility.
Too much effort. You endure annual budgeting with poor tools as it’s seen as the cost of doing business. But there are limits to what IT finance will put up with. Without a purpose-built IT planning solution, no-one has the time (or tools) to elevate the annual budgeting process beyond an act of governance. Complete the budget process first, and (if there’s time) layer in strategic value later. Which, to be self-aware, there never is.
Poor strategic value. The limitations of annual budgeting reinforce the view that IT spend is overhead. Budgets in spreadsheets hide composite IT costs and do not give business units levers to control their spend. Business partners aren’t happy with their lack of options. When they don’t know a better way or are skeptical there is a better way, they suffer in silence and accept the (annual budgeting) status quo.
No agility. A spend-to-budget analysis shows the execution of your plan. But plans change. IT must respond to unexpected events by repurposing resources (while still meeting other commitments). Annual budgets do not give IT Finance the necessary way to course-correct spend surprises. The business needs IT spend agility not provided by annual budgets.
You have matured out from annual budgets with no forecasting, when:
Keeping the lights on isn’t enough. Business partners need IT spend to align with business priorities and quickly adjust to changes. Annual budgets are fixed historical documents that don’t deliver the agility your business partners are asking for.
The department of “no” needs a make-over. IT Finance’s poor line of sight into actuals drives overly conservative spend commitments. Under-spend surfaced at the end of a year drives hasty use-it-or-lose-it procurement.
Uninformed emotional decisions rule. Year-end true-ups eat into IT Finance’s credibility. An annual plan doesn’t help you control the size of that true-up. You are flying blind—absent of facts, emotions dictate.
Forecasting with Apptio
Organizations trust Apptio for their forecasting process. Apptio IT Financial Management Foundation automates IT planning and variance analysis, enabling IT organizations to accelerate the budget and forecast process, foster accountability of budget owners, and increase plan accuracy.
Apptio IT Financial Management Foundation supports every level of forecasting maturity--from monthly and quarterly in individual financial years through to continuous forecasting across multiple years.
HomeAway, a market leader in vacation rentals, runs very lean at .5% budget variance and captures $10M (10%) in operational cost savings each year. Jeff Blume, Technology Business Management Analyst with HomeAway, said, "Apptio allows us to maneuver and manipulate data quickly, to identify areas to redistribute the budget, and provide budget owners with the confidence to make decisions with the data to back it up." IT finance looks for opportunities to save money and then makes those savings available to the CIO to allocate to un-funded budgets.
This “give and ask” process updates their quarterly forecast up to 50 times per month. They are constantly changing funding between cost centers and releasing “approval to spend” dollars that align with strategic imperatives. It ensures that they use all the dry gunpowder in their arsenal so that every dollar is spent and is spent on the highest impact areas.